EMTA FALL FORUM
Tuesday, September 16, 2014
UBS Offices
1285 Avenue of the Americas (at 51st Street)
14th Floor, New York City
3:45 p.m. Registration
4:00 p.m. Panel Discussion
Current Events in the Emerging Markets
Rafael de la Fuente (UBS) – Moderator
Marco Santamaria (AllianceBernstein)
Matias Silvani (JPMorgan Asset Management)
Rashique Rahman (Morgan Stanley)
Javier Kulesz (Nomura Securities International)
5:00 p.m.
Cocktail Reception
Attendance is complimentary for EMTA Members. The registration fee for non-members is US$695.
Fall Forum Speakers Recommend Central American Credits, Discuss Venezuelan Solvency Concerns
Concerns over Venezuela’s solvency, and the likely results of the Brazilian elections, were among the topics covered at EMTA’s Fall Forum, held on Tuesday, September 16, 2014. UBS hosted the event at its New York City headquarters, with a standing-room only crowd of 150 market participants in attendance.
Rafael De La Fuente (UBS) led the event’s panel discussion through a variety of topics, starting with the global economic outlook. AllianceBernstein’s Marco Santamaria observed that, in comparison to May 2013, when investors were flat-footed-- and “over their skis in risk,” a US rate hike would no longer shock market participants. However, any Fed policy changes would now occur in an environment that was less supportive for emerging countries: EM GDP numbers were overestimating economic strength (with net exports masking weaker domestic demand), Chinese growth surprising on the downside repeatedly, and prior hope for EU growth now replaced by concerns that EU might fall into deflation. The US was doing comparatively well, although its role as a locomotive for EM growth had diminished, he added, citing increasing US self-sufficiency in hydro-carbons as an example. “Taken together, this environment is not favorable for either EM sovereigns or corporates, and while I don’t see any shock like in May 2013, there is a gradual deterioration in EM economic variables,” he concluded.
JPMorgan Asset Management’s Mathias Silvani agreed that the global economic recovery has proven more fragile than expected, and thus he acknowledged he stood in the “longer for lower” [rates] camp. He offered a somewhat more constructive view, arguing that, generally, EM fundamentals were in better shape and solvency was not an issue. However, Silvani stressed that one must not over-generalize EM and that “there will be winners and losers.”
“The market’s focus should be adjusted more to the issue of domestic weakness,” argued Rashique Rahman (Morgan Stanley). Rahman reiterated concerns on decreased domestic demand and increasing leverage, and underscored that that EM domestic risks now surpassed external threats.
Finally, Javier Kulesz (Nomura Securities) criticized Latin American nations for coasting on a period of increased commodity pricing and global liquidity, while doing little to improve infrastructure or increase productivity, and noted even improvements in education “remain pathetic.” Value could be found in EM but much recent growth was illusory, he argued.
De La Fuente requested forecasts on Brazil’s October elections. Should opposition candidate Marina win, chances of a front-loaded adjustment were greater, and had a stronger chance of success, than if President Dilma were re-elected, according to Santamaria. However, Congressional elections would also prove pivotal. “In any case, the process will be painful, and next year growth will be weak regardless of who wins,” he concluded.
For Rahman, the market had returned to a “saner” view of Brazil’s prospects than earlier heightened optimism, with the risk/reward ratio more balanced and that any further weakness in Brazil local markets was a buying opportunity, while stressing that he would not be an aggressive buyer of Brazilian credit at current spreads. Silvani concurred that the market had previously “gotten ahead of itself,” although significant inflows could result in the event of a Marina victory.
Most speakers could not foresee a resolution of the Argentine default until the next administration takes power in 2016, although several predicted that a dramatic decline in the local economy could force the hand of the Kirchner government. Rahman was among several speakers who warned about further downside risk to Argentine debt, with Silvani deemed corporates as increasingly vulnerable.
Argentina’s pronouncements about the RUFO clause preventing their ability to conclude a deal had proven a red herring, in Santamaria’s estimation, and he believed that the current government simply “didn’t want to deal with it, and wants to pass it on to the next government.” CACs reduced the likelihood of the Argentine case serving as a precedent for future debt deals, although investors should remain vigilant in demanding appropriate protection in bond terms. Kulesz referred to Ecuador’s issuance of a highly over-subscribed bond right after the US Supreme Court refused to take the case, as proof that “the market could care less about this precedent.”
The deterioration in the Venezuelan economy caused Rahman to adopt a tactical approach to its debt. “Venezuela is no longer a core overweight with coupon-clipping as in the past,” he stated. Kulesz agreed, warning that “policy continuity will take us to default.” Silvani replied that, for large real money accounts such as his firm, “playing the range” was not the option it could be for hedge funds. He agreed that Venezuela would likely be “hitting the wall…and it wont be a willingness issue, it will be an ability issue.” Santamaria also expressed concern at signs of the government panicking, and feared that “these guys are running on fumes.” If oil were to drop by $10 or more per barrel, the market will quickly re-assess its view of Venezuela, Rahman added.
The greatest geopolitical risk in EM remained the Russia-Ukraine situation, according to Rahman, and investors might be too sanguine in their current assessment. Yet the maturity of EM was again evident as funds flowing out of Russia were being placed into other EM assets, and not out of the asset class.
Central American credits were repeatedly mentioned as panelist recommendations. The Dominican Republic was among Santamaria’s top picks (as well as Brazilian sugar producers). Silvani seconded the Dominican Republic and added Jamaica, El Salvador and Costa Rica. “These countries are highly linked to the US; they just need to get their act together and enact structural reforms,” he commented. Silvani also spoke constructively on Hungary and Indonesia (“could be a honeymoon period after the election with the new government doing some reforms.” Kulesz added Honduras to the Central American theme, and also recommended Brazil on a tactical basis.