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Investor Forum in Boston

Tuesday, April 22, 2014  

Sponsored by
The Langham - Chase Room
250 Franklin Street
Boston, MA  

3:30 p.m. Registration  

4:00 p.m. Panel Discussion
Investor Views on EM Challenges and Opportunities
Joyce Chang (JPMorgan) – Moderator
Heather Hagerty (Fidelity Investments)
Tom Cooper (GMO)
Dave Rolley (Loomis Sayles)
Alex Kozhemiakin (Standish)  

5:00 p.m. Cocktail Reception  

Additional support provided by JPMorgan.  

Registration fee is US$75 for EMTA Members / US$695 for non-members. 

EMTA Inaugurates Investor Forum in Boston

EMTA’s inaugural event in Boston was held on Tuesday, April 22, 2014, and drew a standing-room only crowd of 100 EM professionals.  The event was held at the Langham Hotel in Boston’s financial district, and was sponsored by MarketAxess, with additional support from JPMorgan.

Joyce Chang of JPMorgan served as the event’s moderator.  Chang summarized recent market performance, and polled speakers for their assessment of whether the recent rebound in EM was sustainable.  Heather Hagerty (Fidelity Management & Research) noted that, as a crossover investor, the factors she considered in evaluating the market were the global outlook (which she judged “benign” with “not bad, but not great growth in the US”), political risk (“which is never in the price”) and the ability of EM countries to transition to more sustainable growth models.  “We want to see some reform magic,” she underscored, “and we don’t want to miss the rally.”

Tom Cooper (of GMO, who joined EMTA’s Board of Directors earlier this year) suggested that pockets of value remain in EM debt.  “Venezuela is cheap,” he offered as an example, while adding that he also saw value in Argentina’s Euro-denominated par bonds. 

For Loomis Sayles’ Dave Rolley, the markets had been more attractive at the beginning of 2014.  Rolley had reduced his exposure to a number of EM currencies including the BRL, which he cautioned would prove volatile during the upcoming election period, despite a widely-held view that President Dilma Rousseff would be re-elected. 

Standish Mellon’s Alex Kozhemiakin expressed a cautious optimism, emphasizing “the worst is behind us.” In Kozhemiakin’s opinion, EM assets had underperformed even before tapering concerns, as a result of negative growth surprises in EM between 2011 and 2013.  Going forward, he commented that “we expect less negative surprises, that the reservoir of potential issues has become shallower.” 

Chang also invited comments on asset class flows.  “It was no surprise that institutional mandates were frozen last year,” observed Rolley, “but you may not realize that a lot of local currency debt mandates will get greenlighted this year.”  Rolley attributed increased local debt interest to positive carry following rate hikes by many EM Central Banks.  However, positive market performance meant that, while “local currency debt was a great buy 60 days ago, now it is just a good buy.”

Hagerty viewed EM as attractive compared to other fixed income assets, with growing index inclusion of EM debt adding support.  “For us, it is important not only that a country has an investment grade rating, but we also want to have conviction that the rating will be maintained.”  She added that investment-grade ratings are more of a focus for crossover accounts than for dedicated investors.  Cooper and Kozhemiakin acknowledged that they were receiving small, dedicated and “subdued” inflows.

The panel discussed market concerns over potential sanctions on Russia.  Hagerty commented that Russia’s non-inclusion in the Barclays Aggregate Index already represented a “high hurdle” to investment in Russian debt, and she maintained a cautious outlook.  “Domestic structural issues mixed with an antagonistic external political stance have permanently changed the risk characterization of Russia,” she proclaimed.  Cooper saw Russian quasi-sovereigns as cheap, but warned that they would become cheaper in the event of expanded sanctions.
“If I thought the situation was stable, I could be bullish on Russian paper, but I don’t think it is over, and I see Ukraine as a deteriorating story,” advised Rolley.  An incremental expansion of sanctions was his base case.  “Does the West want to characterize Russia as an antagonistic foreign power?  If so, I don’t see Russia as being attractive, but the West is still grappling with this,” he concluded.

Kozhemiakin agreed that the severity of new sanctions remained the critical variable, and that they would be used to deter further action by Moscow, rather than as a punishment for the Crimean annexation.  While he didn’t rule out Russian military action and more serious sanctions, he viewed Putin as fairly risk-averse in his foreign policies, and argued that the geographical, historical and cultural ties that allowed for a fairly simple annexation of Crimea were less pronounced in southeastern parts of Ukraine.  “We are in a negotiation process, and the threat of sanctions is part of this process,” he declared.

Boston event panelists appeared to shy away from the conviction of London Winter Forum speakers who asserted that “getting Turkey right could make your year,” and Chang probed to see if Boston investors had an alternative pick.  Mexico was a “great story” in Cooper’s view, but “it is tight except for the long end.”  Crossovers continue to favor Mexico, Hagerty noted, and Kozhemiakin would include MXP in a 5-year portfolio “because it is long-term undervalued, and will benefit from the US recovery.”

The panel concluded with investor recommendations.  Among the selections, Hagerty questioned if Indonesia could be “the new Mexico…can it really reach a 7% growth rate long-term?  They have the ability, but can they actually deliver?”  Speakers also delivered fairly optimistic calls on EMBI returns, with Cooper anticipating a 6% return, Hagerty at 7% and Chang’s call for a 5-7% return.