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Spring Forum - May 1, 2012

EM Still Offers Value, Speakers at EMTA Spring Forum Agree

Speakers at EMTA’s Spring Forum in New York believed that EM debt continued to offer value to investors, while recognizing that the Eurozone continued to pose a risk to the asset-class.  The event was hosted by HSBC Securities USA, Inc., on Tuesday, May 1, 2012.  135 market participants attended.

Pablo Goldberg (HSBC Securities USA Inc.) moderated the event’s panel discussion, leading off with an overview of such factors as the EM-DM growth differential, inflation worries, and capital flows into the EM asset-class.  The Eurozone continued to overhang the markets, and “clearly we are not out of the woods, with the UK entering a double-dip and concern over Spain as well” he stated.  

Panelists were polled on their thoughts on the Eurozone going forward.  “Europe is still a problem,” replied Paul DeNoon (AllianceBernstein), who believed that the US, LatAm and Asian growth should offset a decrease in European demand.  Societe Generale’s Benoit Anne rationalized that, as other EM-specific risks recede, the Eurozone stands out as the most prominent remaining issue for the asset-class.  “Otherwise, EM is in much better shape this go-around,” he stressed.

Alberto Bernal (Bulltick Capital) asserted that politics trumped economic logic in the Eurozone.  “Let’s be fair, Greece cut the minimum wage by 22%, and passed pension reform that raised the retirement age…but we are in uncharted waters because they can’t devalue their currency.”

Speakers concurred that EM still offered value to investors.  “There is always room for some spread compression,” according to DeNoon.  He reasoned that insurance company need for long-term high-grade assets provided an underlying bid for many EM instruments, and that the diversification of the asset-class in terms of issuers and investors was “good news for all.”

“Generally EM currencies are cheap,” according to Anne, who believed there was potential for appreciation during the remainder of 2012.  “No one understands why the MXP is at 12, or why the Korean won remains undervalued.” 

Denise Simon (Lazard Asset Management) saw value in frontier markets such as the naira, and other African and Central American currencies.  “But it isn’t a one-way bet, and short-term, you will have volatility,” she cautioned.  BRL at 1.88 is “a huge buy” advised Bernal.  “Eventually they will have to accept in Brasilia that the BRL should be appreciating because so much money is being invested in Brazil,” he stated.  He also predicted MXP appreciation, and confirmed his 4.2% GDP growth forecast.

Political risks for the market were also debated.  “I welcome political risk because it usually leads to buying opportunities,” stated Anne, predicting an aggressive Romanian Central Bank purchases of the lei following government collapse in Bucharest. 

Brazilian rates could fall to 8¼ or 8½% in Simon’s view.  “It’s all about growth, they will keep cutting rates to promote growth,” she affirmed.  Bernal thought a SELIC rate of 8% as possible with a change in the rules; yet a hiking cycle would follow in 2013 in order to attack subsequent inflation (“back to 10 ½ or 11 percent”).

Panelists concurred that a political transition seemed to be priced into Venezuelan assets.  Bernal noted that there were many unanswered questions (“What would the military do,” etc.), but that a potential devaluation and an end to unprofitable oil deliveries to Cuba would boost the Venezuelan economy.  “You need to be involved in that case, but you need to protect yourself, probably with CDS,” he rationalized.

The panel concluded with investment selections.  Cote d’Ivoire debt was recommended by both Simon and DeNoon.  Anne voiced enthusiasm for the PLN, while cautioning investors on the HUF and ZAR.