Fall Forum - October 13, 2011
EMTA Fall Forum Cautious on DM Outlook, Identifies Value and Mispricings in EM
Speakers at EMTA’s Fall Forum discussed the global economic outlook, while also offering commentary on specific Latin countries. UBS sponsored the event on October 13, 2011 in New York, with UBS’ Javier Kulesz moderating the discussion.
On the EuroZone, Morgan Stanley’s Gray Newman noted that current concerns are unlikely to dissipate any time soon, and cautioned that market analysts might adjust their economic forecasts down, in line with already-lower market expectations. He compared the current scenario to 2008, underscoring the comparatively smaller pocketbook at the IMF and lower growth prospects for many countries.
Citi’s Joaquin Cottani didn’t expect a double dip in the US, but he did predict a European recession, “even in an arguably constructive scenario where global growth is at 3%.” Cottani thought it unlikely, but would not rule out, a Greek exit from the common European currency, observing that, even with a Greek haircut of 50%, the Hellenic budget deficit would still be 7%.
Marco Santamaria of AllianceBernstein seconded concerns about European growth. He expressed more optimism on China’s economic growth, “they have enough resources to deal with a slowdown,” he stated.
LatAm growth estimates ranged from 3.5% to 4%, although Cottani ventured growth could fall to as low as 2% in a worse-than-expected global context. Newman commented that LatAm was much better positioned than developed markets, and the outlook was better than in recent years.
Kulesz asked speakers for instances of value in EM debt. Santamaria saw emerging European high grade as offering more reward (albeit with more risk) than its LatAm counterpart. JPM Asset Management’s Matias Silvani spoke positively about Peru (“the next Chile in the region,”) and saw value in the Mexican sovereign, quasi-sovereign and corporate sectors. Finally, despite the headline risks associated with upcoming elections, the Dominican Republic also offered potential reward, he added.
Panelists ventured into the debate about whether Brazil’s COPOM was cutting rates prematurely. Newman noted that the strength of the BRL has damaged exports “….but at least we have zillions of Brazilians in Times Square now buying iPads!” Newman expected three additional 50 bps cuts, while suggesting that counter-cyclical policies were being erroneously applied to deal with a long-term structural issue (of BRL strength).
On other Latin credits, Cottani observed that recent Caracas moves, such as repatriating gold holdings, seem to suggest the groundwork for an eventual default. Santamaria saw slightly more upside to Argentina than Venezuela, with small potential post-election improvements and a possible end to legal proceedings from creditors. Silvani concurred, but recommended the Venezuelan risk-reward bet to those not anticipating a default by Caracas in the next twelve months.
Kulesz prodded speakers to identify, in their opinion, the credit with the greatest disconnect between market pricing and fundamentals. Santamaria believed the market was failing to price in enough SELIC rate cuts. Cottani argued that Colombia was under-priced (“they have improved tax collection, and I have faith in their political leaders”). Silvani predicted Mexico would weather the US storm well, with the MXP the most attractive Latin currency.
Concluding with market recommendations, Peru and Colombia were cited by panelists as attractive, along with quasi-sovereigns Pemex and Perobras. Jamaican debt was eschewed by two speakers, citing the island’s economic sensitivity to the US, while attendees were also warned on Belize’s debt overhang.