EMTA SUMMER FORUM
Tuesday, June 23, 2015
2 King Edward Street
2:15 p.m. Registration
2:30 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)
Lupin Rahman (PIMCO)
Pierre-Yves Bareau (JPMorgan Asset 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. Cocktail Reception
Attendance is complimentary for EMTA Members / US$695 for non-members.
US Rate Hike Dominates Discussion at EMTA’s 19th Annual Summer Forum in London
EMTA’s 19th Annual Summer Forum in London was held on Tuesday, June 23. Over 150 market participants attended the event, which was once again hosted by Bank of America Merrill Lynch.
David Hauner moderated the event’s investor panel, starting the session by polling speakers for their thoughts on China and expected US interest rate hikes. Pierre-Yves Bareau (JPMorgan Asset Management) replied that, with US rate hikes clearly in the offing, China was the most important story. “China is the country where we can see changes, for better or for worse,” he stated.
Sergio Trigo Paz (Blackrock) believed that EM investors had recently moved from “crying wolf to becoming too complacent on China...the country is now flying on a single engine,” he warned. Factors such as high real wages were starting to affect Chinese exports, and the anti-corruption campaign was acting as a brake on some projects.
Jan Dehn (Ashmore Investment Management) argued that the renminbi would eventually become the strongest currency globally. He also asserted that the Chinese bond market would skip a medium stage, and would eventually be on par with the Japanese and US domestic bond markets.
Turning to the dollar, the strong US currency has been a theme for four years, Dehn affirmed, and its effects on the US economy were beginning to cause concern. The broad consensus trade of a strong dollar/weak euro has met constraints, however, and he predicted greater volatility as “the herd still has this trade in place.”
Lupin Rahman (PIMCO) argued for the EM debt asset class on a fundamental basis. Recent shocks, such as the Eurozone or commodity price decline, have not prompted sell-offs as in EM’s early days. In general, EM debt valuations were fair, “but there is added spread to be had in special situations and frontier African markets.” Sticky institutional allocations continue to flow into the asset class, and these inflows might be waiting for market dips. “You may have cyclical bouts of weakness, but there are still lots of reason to be in EM,” she concluded.
Her argument was buttressed by Trigo Paz who underscored that “in a world where US rates will go higher, it will be more difficult to make money in fixed income unless you go into spread assets. He added that “there is enough for us to look at [in EM] for alpha.”
In the week prior to Greece’s default on IMF debt, Trigo Paz also accurately predicted a muted impact from Greece on the market. Any deal with Greece would be subject to its actual implementation, and would likely be viewed as a “kicking the can down the road” agreement.
Brazil appeared to be taking the appropriate steps on both the fiscal and monetary sides, Rahman believed, although she expressed concern that such actions appeared to be a “one-man show by Finance Minister Levy.” It was also not absolutely clear that growth would follow the adjustments. Rahman anticipated further weakening of the Brazilian real.
Like Brazil, another “key trade to get right,” in Bareau’s view, was Russia. “The big value move, the big power trade, in Russia has gone,” he declared. Bareau pointed out that economic variables continued to deteriorate, and he expressed increased caution on Russian corporates (although quasi-sovereigns might still offer value in his opinion). “The market for Russia has become ‘cleaner’ and bifurcated – there are the long-termers, and there are those who don’t want to touch it,” he affirmed.
Of the high-alpha credits, Trigo Paz selected Venezuela as his preferred trade. With a yield of approximately 24% at the time of the event, he judged this an appealing return of capital...if they pay their coupons.” The possibility of post-National Assembly election political changes offered another possible carrot. Dehn concurred, believing that oil prices have reached their nadir.
The recent Turkish elections were also discussed on the panel. The vote was positive in Dehn’s assessment, and had altered the country from “going down a bad path.” The country’s institutional framework appeared to be holding up well, and a macro adjustment was likely.
Dehn also questioned some of the status quo in EM. He criticized the influence indices have on EM investment, and the movement they encourage towards indexed credits, rather than the vast supply of excluded instruments. He also called for EM central banks to show more boldness in their holdings. “The vast majority of Central Bank reserves are invested in countries whose central banks are printing currencies. The world will soon be short of healthy reserve currencies; I’d like to see Mexico and others follow in the footsteps of China by working towards making their currencies eligible for global reserve currency status,” he affirmed.
A panel of sell-side analysts followed, moderated by Brett Diment of Aberdeen Asset Management. Diment contrasted the 1994 and 2004 US rate hiking cycles, and asked speakers for their assessment of likely EM market reaction to the long-anticipated Fed move.
Christian Keller (Barclays) reviewed the fundamental improvements in EM countries that have occurred since the 1994 rate hike (e.g., the flotations of many EM currencies), and argued that the clear warnings have helped avoid a surprise. However, he did not expect its effects to be as benign as the 2004 rate hiking cycle, and several EM economies could prove vulnerable.
The 2013 ‘temper tantrum’ served as a trial run, agreed Robert Burgess (Deutsche Bank) and as a result some EM countries prudently adjusted their economic policies. The after-effects of the rate hike would likely be felt gradually, as the US move would be mitigated by continued loose EU and Japanese monetary policy. “I am relatively optimistic on EM in a rising US rate environment,” he summarized.
Michael Marrese (JPMorgan) reminded investors not to think of EM as a single asset class, and that different instruments would fare differently. His firm was underweight EM corporates , in anticipation of a sell-off post-Fed action. Finally, Ahmet Akarli (Goldman Sachs) noted that the expected rate hike was one of a number of currents, including a change in the terms of trade, that have recently turned against EM after many years of flowing in its favor.
The panel turned to individual credits, and first discussed Brazil’s prognosis. Marrese expected the country to retain its investment-grade rating. “We are constructive on Brazil, but we do see some dangers, and it’s perhaps not optimal to go into Brazilian debt now,” he commented. “Locals have been enormously negative, and they were right...the corruption scandals were deep, and they appear to be unending,” he stressed.
“Stagflation is the key word for Brazil right now, but there might be an opportunity in the future,” in Akarli’s view. Keller concurred, and speculated that inflation might not peak until 2016.
Akarli expressed a short-term tactical view on Turkey, although he remained bearish longer-term. He listed high net foreign liabilities, a large current account deficit and weak growth as underpinning his concerns. Akarli also believed that no coalition government would prove sustainable.
Burgess agreed on a short-term opportunistic trade, citing the potential for an election-related relief rally. “The news was good for institutions and for democracy...but no one can see the path from here.” Longer-term, he predicted “populist-tinged posturing, as collation parties all keep an eye out for new elections.”
Marrese called the Turkish Central Bank the biggest winner in the elections, with its independence now preserved. He expressed an overweight view of Turkish equities and corporates, while remaining neutral on the currency (although new elections would be bearish for the lira, he added).
On Ukraine’s debt restructuring, Marrese was clear. “Ukraine doesn’t have the money, and the current IMF program is not enough,” he declared. If adequate haircuts were not achieved, there would inevitably be future restructurings, “or an international donor conference!” Both he and Keller confirmed underweight recommendations.
As for Russia, Burgess noted the arguments for a bearish stance were lengthy, and a de-escalation of sanctions didn’t seem likely. However, he noted client interest in local rates despite the decline in foreign ownership of OFZs, and recognized that “many investors will stay on the sidelines for now.” He forecast the ruble as range-bound, between 50 and 60 per dollar, for the next twelve months.
Akarli noted that the market had priced in approximately 200 bps in Russian rate cuts. “The exchange rate weakness is a boon to many local firms, and the Russian corporate sector is long hard currency,” he advised. He added that Goldman’s oil price forecast for oil was $55 per barrel.
Marrese noted “Russians are screaming for a weaker ruble,” and stated his own forecast of 57 per dollar. He expressed positive stances on Russian external sovereign debt, as well as quasi-sovereigns and corporates. In contrast, Keller warned that, “the Russian trade is gone...I wouldn’t run after it now.” He expected the Russian recession to worsen in 2016.
Other topics covered by the panel included South Africa (“so little has changed since I began covering it 15 years ago,” according to Burgess, while praising the Central Bank for its work on containing inflation) and India (Keller remaining constructive long-term, while Marrese’s enthusiasm had declined).