A Tough Year Predicted at EMTA Forum in Singapore
EMTA’s third annual Singapore Forum on October 23, 2008 was a standing-room only event, as market participants eagerly sought out the advice of industry gurus during turbulent market times. The event, held at the elegant Fullerton Hotel, was sponsored by ING Wholesale Bank.
Tim Condon (ING Financial Markets) opened with the question on every attendee’s mind: Is 2009 going to be a year of "outright misery?" JP Morgan’s David Fernandez responded that "one can’t be bearish enough looking into 2009." Fernandez noted the bleak tone of the recent IMF Annual Meetings, described by attendees as the most pessimistic in a decade. Martin Hohensee (Deutsche Bank) concurred, arguing that a fundamental change in the system needs to take place to change market direction. Hohensee cited huge outflows and poor 3Q performance from hedge funds as adding to bearish sentiment, noting that EM funds have lost one-fifth of their assets under management in the past month.
Would the current market decline mirror the Asian crisis of 1998 or will the region be spared the bloodshed of the last major crisis? Sim Moh Siong of Citigroup argued that Asia is "damaged but not broken," while acknowledging that if global conditions continue to deteriorate, "you will see more collateral damage." Interbank lending seemed to be picking up, he observed, which could augur improvements in the market, although he did not expect a quick turnaround.
Cem Karacadag of Credit Suisse believed that many investors now have cash positions of 25-30%, with some even as much as 90% in cash, with no appetite to take on new long positions. Asked to comment specifically on the outlook for Korea, he opined that headline news is keeping sentiment negative, although corporate issuers were probably positioned to "weather the storm."
Turning to a discussion of the upcoming November 15 global financial summit, for Fernandez the lack of global coordination in addressing the crisis had been obvious. "Recent moves have been more along the lines of keeping up with the Joneses," he stated, as countries mimicked each others moves such as recapitalizing banks rather than working in tandem; while the "natural" leaders—the US, the IMF and BIS—have seemed unable to playing a leading role.
As for Asian currency depreciation, Sim believed that Beijing is attempting to keep the yuan stable, which would help Asian currencies generally. Indonesia was fighting to prevent an excessive devaluation of the rupiah, but "if it goes, it will have ramifications on the rest of Asia."
Analysts were generally hesitant to recommend any long positions. Sim, while noting he was not a strategist, suggested local currency bonds from Malaysia, Singapore and Thailand might perform well. Hohensee predicted there would be opportunities in the corporate bond market but stressed that, generally, institutions remained understaffed in corporate analysts.
Assuming that Asian growth will remain positive despite the slowdown, the region’s dollar-denominated bonds might be oversold, Karacadag suggested, with default rates lower than current levels imply. Fernandez added that when investors’ buying appetite returned, distressed debt funds would be able to make the huge profits they made in Asia in the aftermath of the 1998 crisis.
Caution also reigned on the event’s investor panel, moderated by Lumen Advisor’s Aaron Low. Ashmore Investment Management’s Barry Field was pessimistic on the market’s outlook for the fourth quarter, observing that forced selling continued to be a major market theme, which he anticipated would continue for several months.
Goetz Eggelhoeffer (The Rohatyn Group) agreed that the market’s short-term outlook was not promising. The nationalization of banks will accelerate "ferocious" deleveraging, he asserted, and this will continue for at least another six months. He continued that while the past six years of bull markets were supported on a fundamental basis, "at least some of it was the result of cheap capital looking for yield," and this could take up to 18 months to reverse.
Low offered his assessment that Wall Street had seemed "like a morgue" recently and asked speakers if Asian investors were still more complacent than their US and EU counterparts. Rajeev De Mello (Western Asset Management) conceded that this was probably the case until the past month, although such nonchalance has now come to an end as macro-economic data confirms an Asian slowdown.
Despite the bearish outlook on the immediate future, Field noted that Ashmore’s clients are not deserting the asset class and in fact are likely to increase allocations once they no longer fear "catching a falling knife." Field stressed "we will see the market pick up….the question is when." De Mello seconded the observation that despite nervous clients, his firm had also not seen indications of investors leaving EM.
Government of Singapore Investment Corporation’s Liew Tzu Mi agreed with earlier comments that deleveraging would continue, and would thus make the near-term hazardous, while expecting eventual buying opportunities. She suggested that thereafter the market could remain strong for another decade.
Low guided the panelists into a discussion on the quest for alpha in the current environment. Liew declared that finding alpha was no easy feat with the limited liquidity in the market. "If you want something done, you are told the trader is in a meeting that never ends," she joked. Eggelhoeffer followed up that finding alpha was also not easy in a market that is now highly correlated.
Panelists offered several suggestions on what could prompt investors to dip back into the market. Eggelhoeffer reasoned that as the problems had started with the US housing market, that sector must first show signs of stability. Field also stressed that confidence was likely to be restored by developments in the US –perhaps after the presidential election. He suggested that China and the IMF might also play important roles.
"I am spoilt for choice," Eggelhoeffer responded when asked to name the most vulnerable EM country, before naming Hungary and Ukraine as his greatest concerns. De Mello stated that the most vulnerable countries such as Pakistan, Sri Lanka and Vietnam, had already been punished by the markets. Liew and Field were wary of Latvia’s outlook, with Liew also concerned about the economic future of Romania, Kazakhstan and Argentina.
The investor panel echoed the sell-siders’ limited trade recommendations. With her firm’s long-term goals, Liew viewed Asian local markets as potentially interesting if 2009 proves to be a year of synchronized rate cuts. "You can take your time as the cash market is dead now," she advised. Field would probably buy Russian sovereign debt and, once confidence returns, corporates. For De Mello, some dollar-denominated bonds might be worth the risk-reward ratio, while Eggelhoeffer would continue to short Asian currencies.