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EMTA Forum in Zurich - June 3

Wednesday, June 3, 2015 

Hosted by


Gotthardstrasse 5, PF 2523
8022 Zürich

Topics will include:

  • Where is the US Dollar going and how should investors position their portfolios? 
  • Have commodity prices bottomed?   
  • Is current oil pricing in a Goldilocks scenario for EM? 
  • How should investors play CEE in a time of a weak euro and low oil prices? 
  • What is next on the Ukraine restructuring and Russian sanctions fronts? 
  • Is it time for EM investors to increase exposure to corporate and quasi-sovereigns? 

3:45 p.m. Registration 

4:00 p.m. Panel Discussion
Prospects for the Emerging Markets
Demetrios Efstathiou (ICBC
Standard Bank) – Moderator
John H. Welch (CIBC)
Gonzalo Borja (Credit Suisse Asset Management)
Bhanu Baweja (UBS)

Luc D'hooge (Vontobel Asset Management) 

5:00 p.m. Cocktail Reception 

Additional support provided by CIBC, ICBC Standard Bank and UBS. 

Registration fee for EMTA Members: US$75 / US$695 for non-members.

Panelists at EMTA Forum in Zurich Debate Effects of US Rates, Chinese Growth and Weak Commodities on EM Assets

EMTA’s Second Annual Forum in Zurich was held on Wednesday, June 3, 2015.  MarketAxess sponsored the event, which drew an audience of 50 market participants.  CIBC, ICBC Standard Bank and UBS provided additional support.

Demetrios Efstathiou (ICBC Standard Bank) served as the panel’s moderator.  The session began with Efstathiou asking speakers for their opinions on recent dollar strength and its effects on EM.

Bhanu Baweja (UBS) had his own take on the strong US currency.  “The pulls and pushes on EM assets would change completely if the stronger USD were to be propelled by higher US rates, rather than lower European rates.”  When US rates went higher, the weakness in EM currencies would also infect other asset classes such as rates, credit and the equity market.  According to Baweja, the Fed, not the ECB, was a driver of EM’s cost of capital.

Luc D’hooge (Vontabel Asset Management) recalled disappointing US growth data in previous months, while acknowledging much of it could be attributed to weather. 

John Welch (CIBC) stressed that Latin currencies had been oversold, and suggested there was value to be found.  Finally, Gonzalo Borja (Credit Suisse Asset Management) predicted further dollar appreciation, although he admitted he was unsure how much stronger the dollar could go.  Borja added that many EM corporate debt issuers were net exporters with dollar revenues, and lower local-currency costs would help such companies in Brazil and Russia, among others.

Efstathiou asked if the market had sufficiently priced in the upcoming Fed rate hike.  Welch commented that the long anticipation of a Fed move had created a “Chicken Little” scenario.  When rate hikes finally come, he advised investors to view it as a buying opportunity for LatAm assets.

Baweja asserted that the market had not adequately factored in the entire hiking cycle, and argued that EM credits were driven more by China than any other factor.  He worried that lower Chinese growth could prove more detrimental to the asset class than US rates.  Baweja expressed increasing bearishness on China (“it is not the same old, same old”), and underscored that significant further downside risk existed.  D’hooge commented that local currencies would feel the rate hikes most and that during the 2004 hiking cycle, EM external debt spreads actually tightened. “I’m not too worried,” he summarized, and concurred that a Chinese slowdown was of greater concern.
The panel also addressed commodity prices.  D’hooge drew a comparison between the apparent attempts by Saudi Arabia to squeeze shale producers out of the market to similar moves by large iron producers to squeeze out marginal iron producers.  While the oil market seemed to be reaching a new stability, he was less confident that iron prices would not fall further.

Welch saw Brent reaching $70 per barrel by year-end, and a potential small upwards move in copper.  The market had erred in not differentiating between commodity-exporting countries, he stated, citing as an example that 40% of Brazil’s imports were linked to commodity prices, offsetting the more-widely discussed commodity-related exports (while contrasting Brazil with Colombia, which does not have a significant offset on the import side).  Caribbean countries were profiting from the commodity price slide (with the exception of Trinidad & Tobago), and at the same time tourism revenues to the Caribbean were increasing.

Borja commented that sovereign wealth funds appeared to be buying commodity-importing country bonds, and he questioned how this could affect the market.  Finally, Baweja noted that because of their dependence on commodities, he could not recommend investing in Russian or South African FX.

Efstathiou brought up Petrobras for discussion, following the company’s successful 100-year bond issuance.  Welch first reviewed Brazil’s economic situation, noting that increases in electricity costs, bus fares and gasoline prices had resulted in inflation, which then weakened Brazilian growth.  He anticipated growth bottoming out in the 3Q, and predicted the SELIC rate would be hiked as high as 14%.  The Petrobras deal demonstrated the large amount of cash chasing yield in the markets in his analysis.  “The deal was a smart and audacious move; the buyside wants duration and spread, and the coupon was also attractive,” he stated.  Welch deemed prosecutions of corrupt officials a very positive development for Brazil.  D’hooge admitted to finding the Petrobras issuance attractive: some investors have concentrated on the very remote maturity, and the possibility one might never see one’s money back, but he focused on the “fantastic mathematics of the bond; the modified duration (at issuance) was the same as the Petrobras 2044 bond, showing that those very remote cashflows hardly matter, and you get a much higher spread almost for free.”

Finally, Borja reviewed the environment for EM corporates.  The $100 billion in Russian ‘fallen angels’ was one of the largest moves in the EM corporate space, and “some issues have macros that would be envied by investment grade issuers.”  Kazakh corporates have been hurt “by being in the wrong neighbourhood,” he stated.  In general, technicals supported corporates, with declining issuance (as much as down 60% in LatAm), while cash inflows continued.  Even Asian corporates, which could appear expensive on a relative value basis, had positive technical support.  Middle Eastern corporates had been expensive, “but this is an area you want to be in when there is market volatility.”