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Summer Forum - June 28, 2011

Speakers at EMTA Summer Forum Expect Lackluster Second Half but Potential EM ‘Buying Opportunities’ Seen in EuroZone Dilemma

EMTA’s 14th Annual London Summer Forum was held on Tuesday, June 28, 2011.  Bank of America Merrill Lynch hosted the event, which drew approximately 150 EM professionals.  The event included two panel discussions and concluded with a cocktail reception.

Alberto Ades (Bank of America Merrill Lynch) moderated the event’s panel by asking investor speakers for their thoughts on second half of 2011.  Jerome Booth of Ashmore Investment Management argued that a Greek default or US downgrade would not be “news,” but what was changing was investor perceptions.  The old rationale of EM investment as a higher return/higher risk play, or a diversification tool, was being replaced by a new understanding that “there is no such thing as a ‘risk-free’ investment, and so investment in EM is a way to reduce risk.”  Booth called it “irresponsible” for asset allocators to hold the vast majority of their assets in developed market instruments.  He urged investors to buy EM debt on any developed markets-related selloff, “and to think of such opportunities as a gift.”

While expressing greater concern for short-term effects, Tom Fallon of UFG-LFP concurred that a EuroZone “blow up” was likely to open up an EM buying opportunity for long-term investors.  One of the lessons from EM debt crises, he noted, was that the longer a restructuring is delayed, the more the situation deteriorates.

BTG Pactual Asset Management’s Alex Garrard opined that a US ratings downgrade could have more unpredictable implications than a Greek default.  He believed that the markets could actually have a good 2H, if US economic data surprised on the upside.

Rob Drijkoningen (ING Investment Management) noted that many investors, including sovereign wealth funds, remained structurally under-allocated to EM, and that inflows would continue as this situation was corrected, and while developed economies remained weak.  “EM is not just a technical play; it has to be part of a strategic play,” he affirmed.

Other topics debated by speakers included the liquidity of the UST market, and how Central Banks might reduce their exposure to a potentially less-liquid UST market (while most participants recognized that a market more liquid than the Treasury market was a “possibility” rather than a “probability in our life time”).  Panellists also discussed the USD, and the need for a dollar devaluation to spur a US recovery.

The discussion concluded with panelist recommendations.  The high-beta credits of Argentina and Venezuela were generally recommended, although each panelist expressed different degrees of enthusiasm.  Middle Eastern and sub-Saharan African credits, Russian banks, and a wide variety of local currency bonds were also recommended.

Chinese growth was debated on a second panel of sell-side experts led by Brett Diment (Aberdeen Asset Management).  Guillermo Mondino (Barclays Capital) estimated that the probability of a hard landing in the People’s Republic could be 35% to 45% and that economic indicators seemed to suggest 7% growth near-term. 

How many EurZone countries would eventually restructure?  Tim Ash (Royal Bank of Scotland) noted that the market generally expected that Greece would restructure, and criticized IMF program assumptions as a “mirage” that merely “kicked the can down the road.”  Standard Bank’s Samir Gadio believed that other EurZone countries would avoid a similar fate, as Greece’s restructuring was a result of specific structural distortions and a lack of political will to fix them.  Panelist valuations of Greek debt stood at 20c to 30c on the dollar.

Sell-side speakers were “not hugely constructive” on the second half of 2011, a year likely to be “lousy” for most investors, according to Mondino.  Paulo Goldberg (HSBC Securities USA, Inc.) advised that, if US economic data improved, EM equities were likely beneficiaries.

Discussing specific credits, Gadio understood investor scepticism vis-a-vis the Cote d’Ivoire as a result of a decade of government “without strategy or vision.”  There was potential in the new administration, although the President’s own followers could try to block reforms and it remained unclear if debt service was a priority for finance officials. 

Turkey was benefitting from Middle Eastern inflows, Ash commented, as funds that had traditionally gone to Switzerland have instead reached Turkish shores.  An FX rate of 1.70- 1.75 TRL per USD was possible by year-end.

The uncertainty of President Chavez’s health was addressed by Goldberg, who noted there was no clear path for Venezuela should the president become seriously ill.  Mondino warned that should President Chavez fully recover but lose the 2013 elections, he could prove a “nightmare” opposition leader and could thwart attempts to make serious changes by a new administration.

The Summer Forum was one of five events EMTA held in London in the first half of 2011.  In addition to its regular Winter and Corporate Forums in London, EMTA also hosted events on the Dim Sum market and the EuroZone crisis.