EMTA Investor Forum in Los Angeles
Thursday, May 8, 2014
The Ritz-Carlton Hotel
900 West Olympic Blvd
Los Angeles, CA
Topics will include:
3:30 p.m. Registration
4:00 p.m. Panel Discussion
Drausio Giacomelli (Deutsche Bank) – Moderator
Luz Padilla (DoubleLine)
Lupin Rahman (PIMCO)
Blaise Antin (TCW)
Robert Abad (Western Asset Management)
5:00 p.m. Cocktail Reception
Additional support provided by Deutsche Bank.
Registration fee for EMTA Members: US$75 / US$695 for non-members.
Los Angeles Investors See Global Backdrop as Supportive of EM, Pockets of Value Remain in Asset Class
EMTA’s first Forum in Los Angeles was held on Thursday, May 8, 2014. The event drew an audience of 50 EM portfolio managers and analysts, and was sponsored by MarketAxess, with additional support from Deutsche Bank.
Drausio Giacomelli of Deutsche Bank set the scene by polling speakers for views on the global economic outlook. Giacomelli acknowledged that his own firm’s forecast of 4% US growth in 2H 2014 was among the most bullish on the Street, while also suggesting that Chinese economic expansion of 7.8% was “within reach.” Robert Abad (Western Asset Management) agreed that the US economic outlook was supportive for EM, although uncertainty in Europe (including the response to the Ukraine crisis) loomed as a potential negative, and he later suggested the Street might be leaning towards over-optimism. PIMCO’s Lupin Rahman argued that the US FOMC’s interest rate policy (“lower for longer”) was more relevant than improving US growth, and concurred that, while European outlook was more challenging, there were “relatively robust tailwinds for EM debt for the next few months.” Blaise Antin of TCW observed that “we are off to a better start than any of us expected. G-3 policy is accommodative, and there are reduced concerns on inflation.” The panelists’ views on China were less constructive than Deutsche Bank’s, with Rahman highlighting the weakness in economic data and its implications on global trade, while Abad questioned the credibility of China’s 7.5% growth target, which he dubbed “the mother of all forward guidance weapons.”
The panel then moved to EM debt prospects for the second half of 2014. Rahman cautioned attendees not to view EM as a monolith, and underscored that there were dramatic differences between, for example, the South Korean and Venezuelan economies. “I see pockets of value in EM debt, and you have to be much more selective than in the 2012 general market rally,” she emphasized.
On asset class flows, Antin referred to the fact that EM debt accounts for a growing percentage of the global fixed income universe, although many institutions remain under-allocated. “Institutional investors are becoming more comfortable with the EMBI and CEMBI, etc., because they are now investment-grade indices, and every market downturn seems to be met by inflows from strategic investors,” he stated. Rahman agreed, “the worst of the outflows is over; some retail investors sold, but institutional money is sticky.” However, she expressed concern at recent crossover inflows, which could create “pockets of volatility.”
Abad adopted a different outlook on EM corporate inflows. “What do we know about the nature of EM corporate demand? Waning interest in European sovereign and corporate bonds led to greater EM interest during the EU crisis, but there simply aren’t enough human resources to follow all EM corporates.” Abad urged the buy-side to “put up firewalls” and not “allow the ‘walking dead’ into our space.”
While EM elections were a common market theme, Rahman recommended focusing on potential post-election reform possibilities. For her, Brazil offered the most potential opportunity, and some adjustment would occur regardless of the eventual winner in the country’s presidential race. President Dilma Rousseff being re-elected remained the most likely outcome, according to speakers, with Giacomelli noting that the opposition was “starting to bicker, although they would likely unite in a potential second round.”
Antin predicted a market rally if Narendra Modi won the Indian elections (“there is a lot of optimism on his economic accomplishments, though not his social policies”). He cautioned that upcoming EU parliamentary elections could result in increased fringe party representation. “The optics of that would be bad, and people will focus again on issues of European integration,” he warned.
On high-beta credits, Abad stressed that all EM investors “have to be involved [in some way] in Argentina, Ukraine or Venezuela – this is our market!” he proclaimed. Antin argued that the IMF was likely to be flexible with Kiev, as both the West and Russia have reasons to keep IMF funds flowing. He expected the current crisis to be long and drawn-out, although he declared that the risk premium for Russia had changed. “Russian debt spreads won’t go back to where they were; the world is somewhat different from what we had thought,” he commented. Rahman judged that she was being compensated for the risk to own Venezuelan debt (where there are “a lot of unknowns, but they have oil and dollars”), while voicing concern that the market has become too bullish on Argentina’s post-election prospects (“economic fundamentals are dicey, and the new government has a lot to clean up”). She agreed Ukraine was unlikely to default, based on geopolitics.