EMTA FORUM IN MIAMI
Tuesday, January 21, 2014
The Ritz Carlton Hotel
One Lincoln Road
South Beach, Miami, FL
3:30 p.m. Registration
3:45 p.m. Panel Discussion
Prospects for the Emerging Markets
Alberto Ramos (Goldman Sachs) – Moderator
Anne Milne (Bank of America Merrill Lynch)
Alberto Bernal (Bulltick Capital Markets)
Tony Volpon (Nomura)
Alejandro Estevez-Breton (Santander)
5:00 p.m. Cocktail Reception
Sponsored by MarketAxess
Additional Support Provided by Bank of America Merrill Lynch, Goldman Sachs, Nomura and Santander.
Attendance is complimentary for EMTA Members / US$495 for non-members.
EMTA Miami Panelists Believe Brazil Pessimism Overdone, Split on Argentina
EM analysts reviewed the global economy, the out look for Latin America, and implications for EM assets at EMTA’s Third Annual Miami Forum. The event was held on Tuesday, January 21, 2014, and drew 100 investors, analysts, private bankers and other market participants. MarketAxess served as the event’s lead sponsor.
Alberto Ramos of Goldman Sachs opened the session by contrasting the brighter global outlook compared to the prevailing market view one year prior. This was driven chiefly by expected growth acceleration in the US and other developed markets. Tapering had commenced, but G-3 monetary conditions were expected to remain largely accommodative. EM countries, on the other hand, could face headwinds such as softer commodity pricing, reduced capital inflows (and potentially even outflows) which could likely lead to weaker growth and FX depreciation.
Bulltick’s Alberto Bernal boldly predicted 10-year US Treasury bonds would yield 2.9%, at year end, a view he acknowledged to be outside of consensus (e.g., forecasts of 3.25% by Goldman and 3.75% by Bank of America Merrill Lynch). Bernal based his forecast on lowered inflationary expectations, a result of weak wage pressures, which remained depressed due to US unemployment rate and spare capacity in the US economy. Tony Volpon (Nomura) concurred that wage inflation would not be an issue in 2014, while speculating that a rise in rents, which compose a large part of the CPI, would surprise financial markets.
The Eurozone was judged to be not “totally out of the woods yet,” according to Santander’s Alejandro Estevez-Breton, while progress had been made since Eurozone Central Bank President Draghi’s “whatever it takes” speech. Estevez-Breton spoke positively on Spain’s success in reducing labor costs and boosting exports, and noted anecdotal evidence that some firms were discussing relocations from France and Italy to Spain. Bernal underscored that, in contrast to views a year ago, Europe had become an overweight recommendation, though Volpon cautioned attendees that political risks related to the rise of fringe parties in several European countries should be monitored.
The panel also reviewed the challenges for Latin economies. After four years of being frustrated with Brazil’s sub-optimal growth, Volpon admitted to a potential conversion to optimism. In his reasoning, the government had realized some of its mistakes, and the Central Bank was finally being allowed to hike the SELIC to appropriate levels. “There has been a change in the government’s attitude, and a recognition that inflation matters; but they are still not getting respect from the marketplace,” he stated. Volpon advised investors to wait to add to Brazil positions until it was clear that President Dilma would be re-elected. At that time, he reasoned, there would be the highest degree of local investor pessimism, and thus the best buying opportunity. Volpon did not expect meaningful policy prior to the vote, while expressing hope for progress following the election.
Estevez-Breton seconded the view that investor pessimism on Brazil was overdone, and questioned Brazil’s inclusion as a member of the “Fragile Five.” Excess pessimism on Brazil translated into a number of investment opportunities, he reasoned. Ramos attempted to explain local pessimism by suggesting that there was a sense among Brazilians that their dream of a better future had been destroyed by the authorities’ poor cyclical management of the economy. For Ramos, fair value for the BRL was 2.9 to 3.0 per USD, but steady daily Central Bank intervention was preventing the currency from self-correcting.
Argentina was Bernal’s top overweight, based on expectations of a change in administration. He saw Argentine asset prices as “dirt cheap,” based also on the expectation of massive capital inflows in a post-Kirchner regime. In Volpon’s assessment, Argentina and Venezuela faced similar problems, insofar as both had inconsistent policy frameworks that were depleting reserves; however Caracas’s ability to increasingly control parts of the economy (which he termed the “Cubanization” of the country) translated into more stability in Venezuela than in Argentina, and he predicted underperformance by Argentine assets in 2014. Anne Milne (Bank of America Merrill Lynch) noted that her firm’s only overweight recommendation was currently in Venezuela, and suggested that Mexican spreads were among the tightest in Latin America.
Milne, the panel’s corporate expert, offered her rationale for EM corporate investing in 2014. Fundamentally, she indicated that the her firm predicted 4.5% EM GDP growth in 2014, with her corporate team estimating an 8% increase in EBITDA for the basket of 100 EM corporates they follow, with the biggest returns coming from Latin America. Crossover interest in EM corporates should continue to support the asset class “because yields simply can’t be ignored relative to developed market yields,” and crossover portfolio allocation was still well below a recommended 14-17% allocation. Large companies such as Pemex, Petrobras, Gazprom, CNOOC and Vimplecom were among the larger issuers which had benefited from crossover interest, with an estimated 50% of their new issuance snapped up by crossovers. On a technical basis, the case for EM corporates could be made by the fact that 40% of expected new issuance of $330 billion in 2014 could be purchased with just upcoming EM interest and coupon payments, helping offset the negative funds flow from retail investors.
On the other hand, defaults in 2014 were estimated to rise to 4.2%, an increase from 3.7% in 2013 (based on the number of issuers, rather than face value). Milne also acknowledged that corporate downgrades were three times the number of upgrades in 2013, and expected that trend to continue this year.
Speakers suggested possible downside risks for 2014. Estevez-Breton judged that Mexico could be vulnerable to deterioration in the homebuilder sector, a poor execution of the budget, and uncertainties related to both the Fed tapering and the telecom and energy reforms. Volpon feared an “outbreak of civil war in the Turkish government.” Potential social unrest in Brazil and Colombia was something that Bernal would monitor. For Milne, “the speed and flames surrounding the OGX bankruptcy” could prove a concern, and a high-profile default in EM Europe or China (“perhaps in the shadow banking industry?”) could derail EM corporates.
Speakers reiterated their recommendations on Brazil (Volpon and Estevez-Breton) and Province of Buenos Aires bonds (“I recommended it last year and I’m sticking with it,” noted Bernal). Chinese high-yield and property bonds could perform well despite predictions of their demise, according to Milne, who still considered them to be an as of yet untested segment of the market in a down-turn.