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Summer Forum (London) - June 24 2014

Tuesday, June 24, 2014
baml new 

2 King Edward Street

2:00 p.m. Registration 

2:15 p.m. Panel Discussion
Investor Perspectives on the Emerging Markets
Alberto Ades (Bank of America Merrill Lynch) – Moderator
Jan Dehn (Ashmore Investment Management)
Sergio Trigo Paz (Blackrock)
Pierre-Yves Bareau (JPMorgan Asset Management)
Gene Frieda (Moore Capital Management) 

3:45 p.m. Panel Discussion
Current Prospects for the Emerging Markets
Brett Diment (Aberdeen Asset Management) – Moderator
Christian Keller (Barclays)
Robert Burgess (Deutsche Bank)
Ahmet Akarli (Goldman Sachs)
Michael Marrese (JPMorgan) 

5:00 p.m.
Live Broadcast of England v. Costa Rica
Cocktail Reception  

Attendance is complimentary for EMTA Members. The registration fee for non-members is US$695. 


2H Forecasts Made at EMTA 17th Annual London Summer Forum 

Market participants were able to combine sharing views while watching World Cup matches during EMTA’s 17th Annual Summer Forum, held in London on June 24, 2014.  Bank of America Merrill Lynch hosted the event, which attracted over 150 market participants.

Alberto Ades (Bank of America Merrill Lynch) opened the session by polling speakers for views on potential 2H returns.  BlackRock’s Sergio Trigo Paz struck a cautious tone, expressing concern that “a lot of people are being attracted to this asset class for the wrong reasons.”  He suggested that investors might have to “just clip coupons for the rest of the year...though this has never been a good strategy in EM.”  Ashmore Investment Management’s Jan Dehn judged all financial assets to be expensive, while seeing EM as cheaper than DM in an era of quantitative easing.  Because fundamentals in EM economies remained stronger than in their DM counterparts, Dehn recommended investors consider adding to positions during market volatility.

Ades asked panellists to discuss potential causes of future volatility.  JPMorgan Asset Management’s Pierre-Yves Bareau provided an overview of a relatively health asset class, and didn’t see, in the near-term at least, the “anchors of EM going away.”  For him, sell-side liquidity was potentially a greater concern, specifying that Argentine debt had been moving on small volumes.  Gene Frieda (Moore Capital Management) seconded Bareau’s concerns, citing the explosion in EM assets under management as one of the factors creating the situation.

Dehn contrasted the small allocation institutional investors have in EM debt (“most have only 3-4% in EM”) to their share of global GDP (“55% in five years according to multilaterals,” and emphasize d that investors should be “massively” increasing their allocation.  He also expressed concern at a “tabloid” atmosphere of mainstream media, quoting one relatively-limited source of information on capital flows, and the “dumbing down of a very large and diverse set of the complete rubbish of ‘BRICs’ or ‘Fragile Five.’”

On EM FX, Frieda recommended the Indian rupee, while describing concerns on the ruble and Turkish lira.  He also expressed concern over the currencies of commodity-exporters because of both the Chinese economy and eventual US rate hikes.

A discussion of Argentina followed.  Trigo Paz summarized “you never know if they will play well, or do an own-goal.”  He estimated the likelihood of a settlement with holdouts as between 60 and 70%, and believed market prices did not (at the time of the Forum) reflect the risks of forced selling that would likely occur when the end of the grace period drew closer.

Before turning to audience questions, the panel returned to a discussion of crossover investment.  “Crossover accounts will be in EM as long as the Fed signals ‘lower for longer,’ reasoned Bareau, who noted that EM filled the gap of crossovers needing yield while global rates remained low.

Dehn criticized crossovers that fled because of fears of slower Chinese growth, while predicting that an additional problem was brewing for those entering the asset class in anticipation of front-running Japanese pensions.

A panel of sell-side experts followed, moderated by Brett Diment (Aberdeen Asset Management).  Christian Keller of Barclays predicted that US core inflation would be greater than expected, creating some challenges for EM as the US yield curve would likely respond to this.  In general, he expected EM FX returns to remain flat, while seeing greater return potential for local bonds.  Robert Burgess (Deutsche Bank) concurred in seeing little value in FX, while most constructive on EM credit.  Goldman Sachs’ Ahmet Akarli spoke positively on EM equities, especially Chinese stocks.  Finally, JPMorgan’s Michael Marrese cited three anchors supporting EM debt – strong inflows (“everyone complains about their allocations on new issues,” which illustrated demand), a collapse in yields in peripheral Europe, and accommodative ECB policies.

The panel then debated EM economies.  On South Africa, Marrese cautioned that investors may well become convinced that South Africa is moving to sub-investment grade status.  Burgess adopted a “glass half-full” view – “if we are lucky, we might get a couple of reforms, but I don’t expect major changes; and they are likely to be locked into a slow-growth environment.”  Burgess praised the SARB for its credibility and serious effort to stay within inflation targets, and noted that local accounts provide a natural floor for South African asset pricing.

“The fact that not everyone accepts my medium-term bullishness on Turkey is good news for YOU!” proclaimed Marrese.  He acknowledged a problematic political environment in Turkey while stressing it was no different from other countries.  Burgess praised the country’s dynamic export sector and saw Turkish equities appealing on a long-term basis.  However, he expressed concern on the lack of a “serious effort to beat inflation” and suggested that recent easing might have to be reversed.  Keller suggested a tactical approach, expecting vulnerability when US rates were finally coming closer to be hiked.  Finally, Akarli acknowledged he had the most bearish view of all, summarizing that “things are badly broken there” and listing among his concerns a lack of meaningful productivity growth, depressed savings and a highly leveraged economy.

Burgess noted that Russia remained vulnerable to potential sanctions, as the Ukraine situation remained unresolved.  Recent violence in Iraq could help Russia by grabbing headlines and putting upwards pressure on oil pricing, but Burgess remained bearish, adding that that reforms were now less likely than they were six months previously.  Marrese indicated that Putin would likely remain as president for 10 years, and it is not clear he will be trusted by investors, which could negatively affect inward foreign direct investment.  Akarli saw short-term opportunities in local rates.