EMTA FORUM IN FRANKFURT
Monday, June 1, 2015
Steigenberger Frankfurter Hof
Frankfurt am Main, Germany
Topics will include:
4:00 p.m. Panel Discussion
Prospects for the Emerging Markets
Kit Juckes (Societe Generale) – Moderator
Andreas Hahner (Allianz Global Investors)
Nicolas Schlotthauer (Deutsche Asset & Wealth Management)
Dmitri Petrov (Nomura)
Frank Ehrich (Union Investment)
5:00 p.m. Cocktail Reception
Additional support provided by Nomura and Societe Generale.
Registration fee for EMTA Members: US$75 / US$695 for non-members.
EM Markets Prepared for US Rate Hike, According to EMTA Frankfurt Panelists
EMTA’s second annual Frankfurt Forum was held on Monday, June 1, 2015 with over 50 EM market participants in attendance. The event was hosted by MarketAxess, with additional support from Nomura and Societe Generale. The panel featured discussions of US rates, the Chinese currency and specific investment opportunities.
Kit Juckes of Societe Generale led the event’s panel discussion. He kicked off the session by inquiring if, two years post-‘taper tantrum,’ the market was now ready for a buying opportunity.
Allianz Global Investors’ Andreas Hahner expected a US FOMC rate hike in September, and argued that the financial markets have been well-prepared for higher rates, “as long as the Fed does it right.” Other speakers concurred - Nicholas Schlotthauer of Deutsche Asset & Wealth Management highlighting as risk scenarios larger-than-expected Fed hikes, and any idiosyncratic issues that arise. Frank Ehrich of Union Investment expected the Fed to move in 25 bp increments, while expressing some concern that the Fed could be overaggressive, and possibly crowd-out high yield corporates.
The panel addressed the Chinese renminbi, following IMF’s recent determination that the currency was fairly valued. Ehrich acknowledged he maintained a small short position, and viewed the renminbi as still overvalued, while moderator Juckes was more vocal in his assessment that the currency was too expensive. As for Chinese growth, Schlotthauer didn’t expect China “to fall off a cliff,” and thus it was unlikely that China could pose a big negative for the market.
On Russia, Hahner did not foresee a lifting of sanctions in the near-term, and believed that the current risk/reward ration was unfavorable. He added that the country was likely to lose its one remaining investment-grade rating. Ehrich found it “tough to be optimistic on Russia, especially with expansion of the banned persons list and the increasing isolation of Russia.”
The Ukraine restructuring process was probably disappointing to the country’s finance minister, opined Dmitri Petrov of Nomura. In his assessment, Kiev would increase the pressure on creditors to accept a hair cut, and he saw the debt trading in the 40s or higher 30s.
Panelists disagreed on their view on Turkey, in the weeks prior to the country’s elections. Hahner discussed Turkish dependence on capital inflows, and deemed Turkey vulnerable to ratings agency downgrades. Other participants had more positive assessments. Schlotthauer thought that Turkish fundamentals were improving, and that opportunities existed. Ehrich underscored that the Turkish current account deficit had been narrowed because of decreased commodity pricing, and ventured that debt could outperform in the second half of 2015. Petrov commented that it wasn’t clear what the next direction of Turkish rates would be.
Latin American countries were also debated. Hahner viewed Mexico as an interesting story, but one which is “postponed” because of oil pricing. “Mexico has to deliver what markets are expecting,” added Schlotthauer. On Argentina, Hahner warned of over-optimism. “The market is expecting too much, too fast after the elections,” he stated.
“The market is expecting too much, too fast…and one cannot rule out the possibility that elections won’t be carried out,” he stated.
“It’s hard to like Brazil,” commented Ehrich. “We are far away from their potential growth rate of 3 to 3.5%...when you go there, you see that not much is going on.” He urged Brasilia to invest more in educating its youth.
Despite the end of the 2014 election cycle, and the reduced political risk in the EM asset class, Ehrich noted that there are always geopolitical situations an EM investor needed to monitor. Currently, North Korea, as well as China’s territorial disputes with its Southeast Asian neighbors, were issues to be followed, in his view.
Turning last to Africa, “sentiments on the continent seem to have ebbed and flowed over the past two years,” noted moderator Juckes. He asked panelists if investment in African debt was attractive. Schlotthauer observed that, for investors who can own non-investment grade paper, Africa probably offered the “last frontier of EM opportunities,” although he rued that many investors misperceive Africa as a continent comprised exclusively of commodity exporters. Recent political developments in Nigeria and Ivory Coast were positive, he added.
In Ehrich’s view, African Eurobonds were no longer cheap, while liquidity could be a concern in the more attractive local bonds. Hahner would avoid South Africa, while Ehrich was “not as optimistic as I had been, but not pessimistic…the question is who will take over after President Zuma?”