EMTA FORUM IN DUBAI
Monday, March 10, 2014
The Address Dubai Mall
Topics expected to include:
Which MENA instruments are likely to perform best in 2014?
What role will sukuk play in investor portfolios?
What tail risks should MENA investors consider in 2014?
Is a new Dubai bubble inevitable?
Will Egypt be investable in 2014?
Would a deal with Iran be good or bad for GCC credits?
What does conflict in Syria mean for Lebanese and Iraqi risk?
2:30 p.m. Registration
3:00 p.m. Sell-Side Panel
Prospects for the Emerging Markets
Simon Williams (HSBC) – Moderator
Alia Moubayed (Barclays)
Farouk Soussa (Citi)
Benoit Anne (Societe Generale)
Sayem Ali (Standard Chartered)
4:00 p.m. Buy-Side Panel
Current Trends in Emerging Markets
Dino Kronfol (Franklin Templeton Investments) – Moderator
John Carlson (Fidelity Investments)
Rahul Sharma (Finisterre)
Abdul Kadir Hussain (Mashreq Capital)
Saeb Elzein (Spinnaker)
5:00 p.m. Reception
Additional support provided by Barclays, Citi and Societe Generale.
Attendance is complimentary for EMTA Members. The registration fee for non-members is US$695.
MENA Credits Reviewed at EMTA Forum in Dubai
EMTA’s fifth annual Forum in Dubai was held on Monday, March 10, 2014. HSBC sponsored the event, which drew over 100 EM market participants.
Simon Williams of HSBC led the event’s discussion featuring sell-side analysts. Williams started the event by asking speakers if they saw value in MENA debt instruments, and requested their thoughts on the global economy.
Citi’s Farouk Soussa observed that his firm had recently upgraded its global growth forecast to 3.1%. “While growth is picking up, it is still not particularly strong,” he stated, with “anemic” EU growth dragging on stronger US and UK performance.
“We are more cautious about the pace of the global recovery,” observed Barclays’ Alia Moubayed. She acknowledged that Barclays had started 2014 with a less bearish outlook on EM generally, but believed that country specific developments and the uncertainty due to the tensions between Russia and Ukraine strengthened the case for increased EM asset differentiation.
Societe Generale’s Benoit Anne noted that a recovery in asset pricing had been halted by concerns over Ukraine and Chinese growth. “The real money accounts are itching to get back into EM,” he stressed. Anne believed that the market had previously “over-panicked” because of EM current account deficits, and he argued that ME credits were generally in good shape. “MENA countries are generally not as exposed to US Treasury shocks, a Chinese slowdown, nor do they have large current account deficits; in fact, they look almost like safe havens,” he concluded.
On oil pricing, Soussa saw downside risks. “China is the key risk to the oil markets; any negative surprise in China could push oil pricing below the ME break-even price,” he stated. Soussa argued that increased Iranian supply had not been priced into the markets, and, if the Kurdish situation were solved, additional supply from Iraq would be added. Standard Chartered’s Sayem Ali disagreed, seeing EM growth (especially from China and India) supporting oil prices and suggesting $100/barrel could be maintained.
Williams asked speakers if recent optimism on Dubai was justified. Moubayed responded that it was, citing Dubai’s hosting of the 20/20 Expo, which could result in a “growth dividend.” She added that improving fundamentals, stronger bank balance sheets, more proactive policy and regulatory frameworks in the real estate and banking sectors, and solid Dubai-Abu Dhabi relations supported her view.
Soussa asserted that “we are in the middle of a massive real estate price bubble, with rents going up double digits and housing pricing that is unsustainable.” However, he expressed a lack of concern about a bubble from an economic perspective. “Leverage in the property market is low, and containment to the real economy is limited.” Soussa then concluded with a generally bullish view on the Dubai economy, a view seconded by Ali.
The panel also reviewed a number of MENA credits. On Qatar’s spat with its GCC neighbors, Moubayed observed that “the issues are likely to be resolved behind closed doors and the impact on Qatar’s credit is likely to remain limited, especially that most Qatari exports are destined outside the region”. She added that, “the question is whether the GCC as we have seen it in the past is here to stay, given geopolitical shifts and the potential rise of Iran as a key regional player. “She cautioned that the risk for Qatar in the medium-term remains a potential LNG supply glut as Australian supply comes on stream.
Soussa described his view on Iraq as bullish, and was thus far undeterred by violence. “As long as the oil flows, the sovereign is supported,” he underscored, while conceding that increased turmoil could lead him to change his mind. He suggested that increasing authoritarianism could lead to moves in some Southern regions (e.g. Basra) for greater autonomy along the lines of the Kurdish North, and potential oil flow disruptions.
Moubayed’s expectations for improvements in Lebanon were low. “In addition to the ongoing political deadlock and the spillovers from Syria’s conflict, electoral milestones imply at least a couple of changes of government by year end, which will keep much-needed reforms stalled,” she stated.
Ali argued that Egypt was now “invest-able” and was optimistic that a political transition would happen. “We do think it is the right time to buy, despite a precarious fiscal situation.” Investor sentiment was starting to turn positive after years of underperformance. Unemployment was a key concern for Ali.
Soussa admitted he had begun to adopt a more constructive view of Egypt in the six months preceding the Forum, although long-term structural issues, and downside election scenarios, remained concerns. “I wouldn’t rush in now, but military rule had helped stabilize the economy; on the other hand, an uptick in tourism remains vulnerable to any violence against visitors,” he stated. Fundamental economic reform (e.g. subsidies) would take at least 18 months because a new government will have to maintain its political appeal. As for Anne, “I recommended Egypt too early last year and got burned, so I will wait until the IMF steps in before I go bullish again.”
The panel also addressed MENA debt supply. Ali forecast $31 billion in issuance in 2014, with many potential issuers preferring bank loans to placing debt. Qatar and Oman were likely issuers in 2014, with Bahrain a potential issuer on an opportunistic basis. Saudi Arabia could also issue within 18-24 months, he added. Moubayed expected Morocco and Lebanon to place bonds in 2014 as well.
The panel concluded with analyst’s top recommendations. Iraqi paper was the most frequently cited, with 3 of the 5 speakers including it in their “top picks.”
Dino Kronfol of Franklin Templeton carried out moderating duties on the event’s investor panel. Kronfol reviewed notes from last year’s Dubai event and asked panelists if they would like to elucidate any of their 2013 remarks, with the benefit of hindsight. John Carlson (Fidelity Investment Management) discussed his panning of Egyptian debt last year. “I was right for 2 weeks, and then missed the rally…but I remain concerned and still think that it is not worth the risk at current pricing.”
Abdul Kadir Hussain (Mashreq Capital) noted that his concerns on the development of local markets had not changed. “We are still primarily hostage to the banks for demand, as pensions and real money accounts are a miniscule part of the pie…this remains a major challenge for our industry,” he stated.
In contrast to the risk-on, risk-off swings of the past, Carlson believed 2014 would prove a year of specific EM-event driven market moves. Elections, oil pricing and regional politics would dominate the headlines, and “much of the asset class isn’t priced for the risk.” Hussain didn’t expect any major political event in 2014, although recognizing there was always room for shocks. He expected technical factors to dominate market movements.
Hussain saw fundamentals in MENA countries as positive generally on a near-term basis, and expected total returns of 5-7% for local debt, “mostly coupons and a little capital appreciation.” Saeb Elzein (Spinnaker) considered MENA debt to be expensive versus its recent history, and “back to normalize levels for its credit quality. MENA equities, in contrast, were reasonably valued compared to other frontier markets despite being “over-stretched on a P/E basis for the past five years.”
The panel agreed unanimously that AA credits in the Middle East would always trade at a discount to other AA-rated sovereigns because of geopolitical concerns. Finisterre Capital’s Rahul Sharma questioned the rationale of why countries such as China traded higher. In contrast, Elzein stressed the importance of politics. “The Arab Spring is still very much in play, the GCC-Qatar issue is important, and even Dubai-Abu Dhabi politics are significant,” he commented.
Speakers had varying views on Turkey. Sharma acknowledged Turkish economic issues were being “badly handled,” but he did not expect further deterioration. Part-time Turkish resident Carlson praised improved Turkish infrastructure, while expressing serious concern on the political rift. “I see this as a real struggle on how the country will move forward, and I am under-weight,” he stated. Hussain agreed that Turkish risks were too high to justify current price levels.
Concluding with favorite trades, Elzein would avoid Qatari sovereign debt short-term, and saw Iraqi debt as attractive, with uncertainty priced in. Sharma would short Russian paper and expressed optimism that MENA outperformance could continue. For Carlson, Venezuelan debt remained attractive, while he would avoid Argentina, Ukraine and Turkey.