EMTA INVESTOR FORUM IN LOS ANGELES
Thursday, May 14, 2015
The Courtyard at LA Live
901 West Olympic Boulevard
Los Angeles, CA
3:45 p.m. Registration
4:00 p.m. Panel Discussion
Drausio Giacomelli (Deutsche Bank) – Moderator
Bill Campbell (DoubleLine)
Kristin Ceva (Payden & Rygel)
Chris Getter (PIMCO)
Blaise Antin (TCW)
5:00 p.m. Cocktail Reception
Additional support provided by Deutsche Bank.
Registration fee for EMTA Members: US$75 / US$695 for non-members.
Central Bank Divergence to Remain a Key Theme, According to Los Angeles EM Investors
MarketAxess hosted EMTA’s second annual Forum in Los Angeles, held on Thursday, May 14, 2015. The event drew 50 market participants, with Deutsche Bank providing additional support for the event.
Drausio Giacomelli (Deutsche Bank) began the session by observing that, in recent weeks, the EM debt asset class had suffered as an innocent bystander pushed around by global market events. He asked speakers to detail their “big picture” views to open the event.
Doubleline’s Bill Campbell noted that Central Bank divergence remained a key global theme, with the dollar consolidating following the US FOMC change of language on March 18th. In his view, ECB QE was unlikely to end before September 2016, with the Bank of Japan and People’s Bank of China also expected to continue easing.
Kristin Ceva of Payden & Rygel concurred, and expected both on-going dollar strength and euro weakness. “The upside to the euro is limited, as the EU needs a cheaper currency,” she stated, adding that she had funded some FX positions via the euro. “Expectations [for positive economic data] had been so low that anything had surprised us on the upside, but this isn’t likely to continue,” she commented.
Blaise Antin (TCW) warned that the possibility that disappointing US Q1 performance could bleed into the second and third quarters remained a tail risk. Market expectations of a US hike in September were starting to fade, in favor of a December hike. “It is not our base case, but it is possible the Fed doesn’t raise rates until 2016,” while attributing the delayed rate hike for recent euro and EM FX strengthening versus the US currency. Antin added that, after minimal euro-denominated EM issuance in recent years, euro-denominated issuance would probably pick up in the foreseeable future.
Credit differentiation remained an important theme even among oil importers benefiting from reduced pricing, noted Chris Getter (PIMCO). “It is not a case where everything is now screamingly cheap,” he affirmed. Antin admitted he had been surprised by the recent rebound in oil from a low of $45 per barrel, while noting the Street had been similarly flat-footed in its pricing forecasts. He underscored that it was important to identify countries with better macro factors and sounder policies, because “the outlook is not so rosy that you can just close your eyes and buy the asset class.”
Ceva’s firm had performed stress tests for exporters in the case of “lower for longer” oil prices. She praised the Mexican government’s pro-active actions, while expressing reservations about Colombia using “accounting gimmicks” on their fiscal responsibility side.
Giacomelli asked if speakers were more concerned by idiosyncratic risks to individual EM countries, or by global themes. In Getter’s view, most of the country-specific factors were well understood by the market, and analysts had been doing their homework to understand the risks in each case. Thus, external factors were of greater concern in his assessment.
The rise of the middle class in EM countries, and their subsequent increasing expectations for better services and improved government--and growing intolerance of corruption--was a key theme in Campbell’s view. Risks associated with disenfranchised EM middle classes, frustrated by the non-delivery of election promises, was important to monitor, and could trend to a more idiosyncratic risk. Ceva followed up that the recent Nigerian Presidential election and its transfer of power was well-received by the market, and the possibility of independent investigations in Mexico also offered hope that corruption could be on the wane in some EM countries.
Ceva noted that she had recently become slightly more positive in her assessment on Brazil, while maintaining limited expectations of structural reforms. The worst case in the Petrobras scandal had been avoided, and Brazil’s credit rating was unlikely to be downgraded. The market would also be pleasantly surprised if Brasilia achieved anything near its 1.2% primary fiscal target.
“Are we going to get everything we want in Brazil? No,” summarized Getter. However, he noted he was probably more bullish on Brazil than other EM credits. President Rousseff was “extraordinarily astute” and didn’t want to leave a tarnished legacy, while Finance Minister Levy was “very credible.” Getter expected continued rate tightening “until the Central Bank wrings out inflation.”
Campbell maintained a cautious outlook on Argentina. In his view, both candidates Macri and Scioli understand the country’s economic issues, but the level of the mandate was an important factor. In addition, Central Bank funding of the deficit remained a concern (“lots of games are being played to get dollars to the Argentine treasury.”).
“I’m not pounding the table, but at least there is the possibility of change in Argentina [compared to Ukraine and Venezuela],” stated Ceva. Scioli was the most likely victor in the presidential race, “but it’s a black box…as he has been vague about his policies with the hold-outs.”
The panelists were evenly divided on Russia. The economy was clearly entering into a recession, commented Campbell, and appeared to be moving to a more closed, Eastern-focused economy. With little signs of structural reform, and risks of further escalation, Ceva would sell Russia. “There are too many risks that you aren’t being compensated for,” she calculated.
In contrast, Getter noted his firm was overweight in Russia, while agreeing that, “Russian debt had had a decent run, and it is less interesting than it was two to three months ago.” Antin voiced that, “the politics are ugly and the geopolitics are bad, but the economic team has made some good moves.” His view was “more constructive” although he could not see a removal of sanctions and remained worried long-term.
On Ukraine, Campbell voiced concern that the likely extension of EU sanctions could result in less of an incentive for President Putin to rein in separatists. Giacomelli noted his firm’s estimate of a 50% (market-implied) chance that there would be no haircut in the upcoming Ukraine restructuring.
Finally, Antin noted the market had been relatively bearish on Turkey for the first four months of 2015. “There are some improvements under the AKP government, and the economy always seems to grow.” He described three possible election scenarios, with the market “seeming to want to believe” in an AKP victory without a super-majority, which would preserve Central Bank independence and no alteration in its mandate. Moderator Giacomelli noted his firm had become more constructive on Turkey in recent weeks.