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Hong Kong Forum - October 17, 2012

Speakers at EMTA Hong Kong Forum Discuss US and Chinese Political Effects on Asian Markets

EMTA’s Seventh Annual Hong Kong Forum was held on Wednesday, October 17.  ING sponsored the event, which included a luncheon and which took place at the J.W. Marriott Hotel.  100 market participants attended.

Tim Condon of ING returned once again as the event’s moderator, and requested that speakers provide an overview of global economic conditions.  Michele Barlow (Bank of America Merrill Lynch) acknowledged that her firm’s view of 2% US growth in 2012, and 1.4% in 2013, was below market consensus.  The US “fiscal cliff” issue was reason for concern for the global economy, and there might not be resolved until the last minute.  As for Europe, Barlow noted her firm’s negative 0.6% forecast for 2012, with a continued recession into 2013 (at negative 0.4% growth).  “Overall, we are pretty cautious on the global backdrop,” she admitted.

JPMorgan’s Dave Fernandez didn’t expect strong growth in 2013, “but as long as we get ‘good enough’ growth, we can expect EM debt to perform,” he commented.  Asset class inflows continued to be strong, and EM managers would continue to get new allocations.

Stephen Chang (JPMorgan Asset Management) predicted a “muddle through” scenario, pointing out that US economic data appeared to be on a positive trend.  A quick resolution of the fiscal cliff issue could, in fact, serve to potentially bolster the market, he surmised.

State Street Global Advisor’s Hon Cheung went further, predicting that the fiscal cliff would quickly be averted because “no one benefits politically from allowing it to occur.”  Cheung was much more concerned about the Eurozone’s drag on EM, arguing that “there are confidence issues that need to be addressed; and ultimately Germans will need to decide if they are willing to make transfer payments to non-Germans, that is the essence of it.”  On the other hand, Cheung believed that “US numbers look impressive.”

Condon noted that China’s political transition had not “even been on the screen” last year, although was now a key market focus.  Fernandez acknowledged that JPMorgan was not the only firm to cut their Chinese growth estimates, and was predicting sub-7% growth.  He offered that recent downgrades made it less likely that actual growth would disappoint the market.  Chang noted he was more bearish than consensus estimates, which had average growth at about 7% for the next couple of years.

The CNH market included much “froth” for the first 9 months of 2011, Barlow recognized, and there had been a period when investors could “simply close their eyes and buy.”  Investors now realized that this was a maturing, growing market, “although there will be hiccups along the way,” she affirmed.  Cheung agreed, and saw generally improved liquidity after a period of contraction.  Chang noted that, during the initial CNH boom, liquidity was strong while covenants were weak.  “Yields are now at attractive levels,” he continued, assuming currency stability.  Fernandez spoke enthusiastically about CNH market potential, while noting that it remained subject to evolving market regulations.

Condon asked if investors should take profits in EM fixed income.  For Barlow, EM credit was “the place to be,” and she expected continued strong supply.  Chang concurred, and reasoned that QE3 would push investors further out the risk curve.  Fernandez saw greater, and sticky, flows into local markets.

Condon also asked if the “days of buying any Asian currency” were over.  “It has been impossible to get all the currency swings right in 2012, and we expect similar volatility in 2013,” replied Fernandez, who believed that “choppiness” would dominate the market.  He did expect moderate appreciation of the yuan, however.  Other panelists largely concurred, with Cheung arguing that, long-term, Asian currencies would appreciate because of balance of payment and current account surpluses, as well as large Central Bank reserves.

As per tradition, Condon ended the panel by requesting investment recommendations.  Barlow championed investment grade credit on a risk-adjusted return basis, and BB credits for yield-seeking investors.  Chang suggested shorting the Australian dollar as a play on a Chinese economic slowdown.

Fernandez recommended India (despite concerns it was becoming a consensus view) or Indonesia (unless “new irresponsible policies are enacted”), while Cheung spoke enthusiastically on the Asian local currency-denominated bond market.

LCH Clearnet provided addition support for EMTA’s Hong Kong event.