Fall Forum - September 27 2012
UBS hosted EMTA’s Fall Forum on Thursday, September 27, 2012, at its midtown Manhattan offices. Over 125 market participants attended. Speakers at the event agreed that despite their low expectations for the global economy, value could still be found in EM debt.
Javier Kulesz (UBS) moderated the event’s panel discussion. Kulesz started the event by inviting panelists to offer their thoughts on the global economic outlook, while also addressing the state of major Latin American economies.
Morgan Stanley’s Gray Newman described US growth as “clearly weak,” noting his firm’s 1.4% growth forecast for 2013. He didn’t expect any growth in Europe next year; nor could China be expected to provide significant stimulus to the international economy. In contrast to a gloomy global scenario, Newman was cautiously upbeat for Latin America. He specified that Brazil was one country where he had recently adopted a constructive outlook. Newman specified that his optimism was based not on the business cycle in 2013--which he was concerned would be “challenging”--but instead on prospects that both Brazil and Mexico might soon embark on major reform agendas.
Joaquin Cottani of Citi contrasted the current environment to 2010, when the second round of quantitative easing was launched. Cottani believed that the recovery this time would be weaker, agreeing that Asia was unlikely to provide economic stimulus. In Latin America, Central Banks’ over-zealous anti-inflationary rate hikes have led to appreciated currencies, which will dampen growth.
Huge inflows into the asset class have pushed many EM sovereign spreads to levels which offer little value, according to Marco Santamaria (AllianceBernstein) With Mexican and Brazilian sovereigns trading at less than 100 bps over US Treasuries, he viewed EM corporates as a more attractive investment.
Short-term, the greatest risk to the market emanates from the US, asserted Marco Santamaria of AllianceBernstein. Failure to avoid the US “fiscal cliff” could lead to a sell-off, although the market could rally if Congressional action prevents automatic tax increases and spending cuts. Monetary policy would not change in an Obama re-election, while a Romney victory would likely result in a less dovish FOMC, especially after Chairman Bernanke’s expected retirement in 2014. As for Latin markets, Santamaria believed commodity pricing would generally remain “range-bound at current strong levels” and thus would offer support to Latin debt pricing.
On the high-beta credits, Santamaria found it difficult to take a long-term view; “we just trade Argentina and Venezuela, and are quick to pull on the parachute in periods of volatility,” he stated. Cottani observed that the market was pricing in a narrow Chavez victory, while a super-tight margin would boost Venezuelan pricing. Silvani added that even a tight victory for Chavez would help keep the opposition united.
The outlook for Argentina was slightly rosier than that for Venezuela, with Cottani expecting high soy prices and a good harvest. The possibility of a constitutional change (allowing President Kirchner to run for a third consecutive term) had diminished, he believed. Silvani concurred, and wasn’t questioning Argentina’s willingness to pay its debt in the short-term…“, but 2014-15 is too far on the horizon to make calls.”
Despite record low unemployment and record high consumer confidence, Brazil would be lucky to eek out 1.6% growth this year according to Newman, although he sensed important changes in government thinking. Santamaria reasoned that investment and infrastructure spending need to replace a consumption boom.
As for Mexico’s new presidential team, “the markets are rightfully skeptical of any meaningful policy change in the new Mexican administration,” Santamaria asserted. His base case assumption was that reforms were unlikely to be passed.
The panel concluded with investor recommendations. Cottani and Silvani viewed Venezuela and Argentina as short-term plays, while Newman would sell Venezuela at current levels (“it may be getting ahead of itself.”) Silvani also favored the MXP (seconded by Newman) and Cemex (seconded by Santamaria) and saw value in Vietnam and Sri Lanka. Santamaria spoke positively on the Ivory Coast (“credit quality seems to be improving”) and local Dominican Republic and Nigerian bonds.