EMTA Forum in Miami
Tuesday, January 20, 2015
The InterContinental Hotel
100 Chopin Plaza
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$695 for non-members.
EMTA Miami Speakers Disagree Over U- or V-Shaped Recovery in Oil Market
Approximately 100 market participants attended EMTA’s Fourth Annual Forum in Miami, which took place on Tuesday, January 20, 2015. Alberto Ramos (Goldman Sachs) moderated the Forum’s discussion, reviewing recent developments in the global economy, while highlighting that a main theme of 2015 would be the FOMC’s rate decisions.
Bulltick Capital’s Alberto Bernal anticipated that the Fed would wait until December 2015 to initiate rate increases, delayed in large part due to stagnant US wages. Ramos believed that G-3 inflation would remain below desirable levels in 2015, and that would push the ECB and BoJ to additional quantitative easing. He expected the initial Fed hike to occur in September, and that, while starting slowly, over the medium-term the Fed would accelerate the pace, and would move rates to a terminal level likely higher than current market expectations.
On oil, Bernal commented that just as no one had expected the dramatic oil price drop in the second half of 2014, the market would equally be shocked by the velocity of a pricing rebound, predicting that unprofitable drilling operations going off line and China and India acting to build up stockpiles would act to reduce excess supply. In contrast, other speakers foresaw a more gradual U-shaped oil price recovery. Alejandro Estevez-Breton of Santander noted that attendees at his firm’s recent investor conference appeared to anticipate a one- to two-year period of low prices, which would end when high financing costs cause some US shale producer failures. Tony Volpon (Nomura) agreed that a U-shaped recovery in the oil markets was most likely, prompted either by US shale producers becoming unprofitable, or a reversal of Saudi production policy. Anne Milne (Bank of America Merrill Lynch) highlighted that the current situation was generally positive for EM, as EM oil exporter production costs were generally lower than their DM counterparts, albeit with notable exceptions.
Estevez-Breton discussed the political challenges from radical/fringe parties in maintaining EU unity, and contrasted the recoveries of Germany and Spain to the sluggish growth in France and Italy. He expressed concern that the ECB could possibly under-deliver in its widely-expected announcement on QE policy. Bernal saw room to keep Greece in the Eurozone even if parties advocating a “Grexit” won government elections. In any case, he argued, “it will be painful for Greece, but not for Europe,” as Greek banks would suffer deposit flight, while there would be no major contagion effects to other European economies.
Turning to Brazil, Volpon spoke positively on the appointment of Joaquim Levy as the country’s new finance minister. “He is the ‘real deal’….and he has room to implement new measures – not infinite room, but some, at least until pressure kicks in next year if there is no economic growth.” Volpon believed that inflation could be brought back to target levels in 2016 and that the adoption of Draghi-like language by officials was intentional, in order to boost confidence.
Estevez-Breton expressed some concerns on over-bullishness on Mexico following the passage of recent reforms. Risks included an erosion of consumer confidence in the country, as well as security and over-centralization.
Bernal believed Venezuela might be able to avoid a default (by ending discounted Petrocaribe oil sales among other measures), but was convinced President Maduro’s term would finish prematurely, most likely as a result of military involvement. Moderator Ramos stated that Venezuela had “crossed a point of no return and a period of extreme difficulty would now occur,” but stopped short of saying a credit event was inevitable.
Among the biggest risks to the corporate market were the possibilities of Russia or Brazil losing investment grade status, according to Milne, who then stressed that a Brazilian downgrade was not her base case. Argentine corporates (ex-utilities) served as a safe haven to many investors, with the government likely to do whatever was necessary to maintain YPF’s market access. She expected 45% of all EM corporate issues to emanate from Asia in 2015, and predicted that Chinese debt issuance would surpass that of Brazil this year.
Milne was constructive overall on EM corporates. She underscored that 90% of new issue proceeds have been used to refinance debt or for capital expenditures; that 2014 default rates were lower than expected and 2015 defaults should not surpass 3%; and state ownership of many EM oil companies would serve to limit EM energy defaults (with the exception of PDVSA, which she thought was highly vulnerable to a credit event).
The panel concluded with panelist reflections on the most surprising economic events in 2014 (oil pricing, the positive surprise of Levy’s appointment, the Petrobras scandal and Mexico’s economic struggle) and risks and investor recommendations for 2015.
The event concluded with a cocktail reception sponsored by MarketAxess. Bank of America Merrill Lynch, Bulltick Capital, Goldman Sachs, Nomura and Santander also provided support for the event.
Editors note: On February 15, 2015, Mr. Volpon was appointed as Director of International Affairs at the Central Bank of Brazil.