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EMTA Forum in Singapore - October 21, 2011

EM Will Muddle Through 2011, Predict Speakers at EMTA Singapore Forum

“August and September turned 2011 into an annus horibilis,” observed Tim Condon, moderator of EMTA’s Sixth Annual Forum in Singapore.  The event attracted 125 market participants to the Fullerton Hotel in Singapore and was sponsored by ING.

With a potential Greek –and US—default overhanging the market, Condon noted that Asian equities were down 17%, Asian HY bonds were off 8%, commodities had fallen 7% and Asian currencies were now flat.  Having “dodged a bullet of another Lehmanesque panic, which at times seemed pretty close,” Condon asked his colleagues at the event’s sell-side panel if they foresaw another major market disruption.  Claudio Piron of Bank of America Merrill Lynch largely summarized panelist responses by expecting a “muddle through” scenario in a “purgatory market.”  Standard Chartered’s Will Oswald acknowledged that “we have to get used to lower, steadier returns,” especially as there remained no consensus from the official sector on how to handle the Euro Zone crisis.

Woon Khien Chia (Royal Bank of Scotland) voiced optimism that Asian inflation, which had proven higher than expected, could be tamed in 2012.  Rate cuts were then possible in countries such as Thailand, Indonesia and South Korea.  Piron noted his concern that core inflation would be “stubborn” despite a decline in headline inflation, while also mentioning Malaysia and India as possible rate-cutters.  Condon himself believed the Philippines had been reluctant to raise rates and suggested they would also move to lower rates.

Speakers concurred that the risks of a hard landing in China were low.  “That is very far from our baseline scenario,” observed Oswald.  Sin Beng Ong (JPMorgan) believed that the “Squeezing of the informal sector will accompanied by an unsqueezing of the formal sector.”

Oswald and Chia recommended Asian high-grade credits for 12-month plays as a result of “strong, robust balance sheets”, with Chia specifying she would avoid Indian and Thai issues.  Oswald also favored Asian fx, while explaining that rates were a harder call because the “potential for an official sector policy mistake was significant.”  Piron liked the Philippine ’15 and ’16 bonds.

“Our conviction rates are low,” acknowledged Ong who predicted range-bound trading.  However, the long end of the Indonesian curve could offer more potential than other assets.

Liew Tzu Mi (Government of Singapore Investment Corporation) also led buy side speakers through a global economic review.  Adam McCabe (Aberdeen Asset Management) emphasized the importance of politics, including the US presidential election and the Chinese transition next year, in the international economy.  McCabe warned that political factors translated into a “significant chance of policy mistakes.”  Fortress Investment Management’s Don Hanna concurred, jesting that “our degrees in finance are a lot less valuable than degrees in politics right now.”

Goetz Eggelhoefer of The Rohatyn Group voiced an optimistic outlook for the next 3 months, to be followed in his opinion by a much more negative period.  “An EU recession is assured and may be deeper than expected,” he stated.  Eggelhoefer expected a “more meaningful” Greek haircut than the expected 50% would allow a controlled default, while warning of potential contagion to Italian debt.  “Ride the rally for the next couple of months,” he concluded, while advising that investors be on the lookout for a subsequent sharp downturn.  WAMCO’s Chia Liang Lian described the role of the ratings agencies as being critical.

Panelists largely agreed that Asia would avoid a recession, while Europe would fall victim to an economic decline.  The US would likely muddle through, according to several speakers, though it might get at least “damn close” to a recession in Eggelhoefer’s view.

On rate-cutting, Chia expected Asian tightening was over, and expressed surprise that Indonesia had been the first to cut interest levels (a decision Hanna ascribed to the Central Bank’s lack of autonomy).  Eggelhoefer believed that Asian Central Banks would avoid easing unless a recession appeared on the horizon.

Speakers also discussed the Dim Sum market (“a bit of a lemon” according to McCabe, and one that “investors look at with rose-colored glasses); the S&P’s “disconnect from other markets” (Hanna); and the rationale to continue investing in Asia.