388 Greenwich Street
27th Floor Auditorium
New York City
2:00 p.m. Registration
Panel No. 1 – 2:30-3:30 p.m.
Investor Perspectives on Emerging Markets Assets in 2017
David Lubin (Citi) – Moderator
Pablo Goldberg (BlackRock)
Dave Rolley (Loomis Sayles)
Hari Hariharan (NWI Management)
Jim Barrineau (Schroders Investment Management)
Panel No. 2 – 3:45-4:45 p.m.
Economic Outlook for the Emerging Markets in 2017
Joyce Chang (JP Morgan) – Moderator
Christian Keller (Barclays)
David Woo (BofA Merrill Lynch)
Drausio Giacomelli (Deutsche Bank)
Alberto Ramos (Goldman Sachs)
Attendance is complimentary for EMTA Members. The registration fee for non-members is US$1,000.
2016 EMTA Annual Meeting Focuses on Trump Effect on Markets
EMTA’s 2016 Annual Meeting, held on Thursday, December 1, 2016, largely focused on the effects of US economic and foreign policy under President-elect Donald Trump. The event was hosted by Citi in New York City, and drew a crowd of over 250 EM market participants.
Citi’s David Lubin moderated the event’s investor panel, and noted that the general market consensus appeared to be that US fiscal policy would be loose, while monetary policy would tighten and that a stronger US dollar would result. Lubin asked if panelists agreed, and if they were concerned about the effects of such a policy mix on EM countries.
BlackRock’s Pablo Goldberg noted that the protectionism espoused by Trump during the campaign, combined with the significant degree of policy uncertainty generally, were not likely to help EM economies. Goldberg added that it remained a question whether the EU would also adopt more protectionist measures, adding further pressure on EM.
Dave Rolley of Loomis Sayles divided Trump’s fiscal proposals into those measures likely to pass the US Congress, such as corporate tax cuts, and others which might prove more controversial. Hari Hariharan (NWI) argued that Trump’s plans were not “all unambiguously bad” despite the likelihood of a stronger dollar and higher US rates, while acknowledging that, “no one believes that commodities have a sustainable upside.”
Finally, Schroder’s Jim Barrineau asserted that the market had gotten ahead of itself, with prices that reflected policies yet to be enacted. The dollar was likely to become too strong, putting the break on US growth, and perhaps forcing the US FOMC to “take its foot off the pedal.” Barrineau believed there were possible paths that could mitigate damage to EM.
Following up on US rate policy, Rolley predicted two rate hikes in 2017, in addition to the widely anticipated December 2016 hike. Trump will have the opportunity to appoint four voting FOMC members during his term, he observed.
Speakers also focused on China, with several highlighting Beijing’s steps to discourage capital outflows. Chinese leaders needed to decide if they wanted to let the FX rate move gradually, or whether they would orchestrate a “maxi-devaluation.” However, the market remained convinced that no major policy changes would be enacted prior to the 2017 party congress. Barrineau reminded the audience that most Chinese debt was denominated in the domestic currency, limiting the potential damage due to RMB weakness.
Several speakers agreed that Trump’s protectionist stance during the campaign would mellow once he took office. “He is already walking back from many of his pledges,” observed Goldberg, “and I don’t think we are going back dramatically in terms of trade.” Rolley concurred that the anti-trade stance adopted during the campaign was “more noise than anything else,” and that a trade war was unlikely.
Trump was similarly walking back from his “currency manipulator” threat to China, according to Hariharan (which he stressed was less important than issues such as cyber hacking and theft of intellectual property). On the other hand, “any new trade deal is D.O.A.,” in Hariharan’s view. Finally, “some intelligent renegotiation of NAFTA was possible,” although it was unlikely to cause a huge systemic risk.
“The need to get headlines,” could lead to some moderately bad developments with regard to protectionism in Barrineau’s assessment, but eventually “cooler heads will prevail because growth is what creates jobs, and what gets you re-elected.” As for changes to NAFTA, Mexico was likely to be adversely affected dues to its relative lack of leverage.
Panelists continued to fear a Venezuelan default in 2017. “The carry is still very attractive, and is less sensitive to duration risk, so there is still an argument to be invested there, but always with your finger on the trigger,” warned Goldberg. Barrineau foresaw some potential spillover effects because of Venezuela’s weight in industry indices, and legal issues which could lead to uncertainties in the oil market, but believed that, with oil in the $50-$60 range, it was possible for Caracas to muddle through 2017 (“although they will default at some point”). Hariharan added that the unknowns included IMF involvement, and even what Trump policy would be vis-à-vis the IMF. “Who knows,” he concluded.
Goldberg suggested that Brazil was on a “much better path, and was starting to address some long-term issues despite political gridlock.” Barrineau believed that signs of economic growth would be crucial to President Temer’s attempts to pass legislations such as pension reform, and “lots of good news is already priced in.” Hariharan suggested Temer’s window of opportunity might close by March.
The event’s second half featured a panel discussion of sell-side experts. Joyce Chang of JPMorgan moderated the panel for the 21st consecutive year. In her introductory remarks, Chang noted that 2016 had been shaping up as “one of the strongest on record for EM fixed income returns, with markets reflecting an inflection point in EM macro fundamentals after several years of deterioration, as well as the return of inflows as the global search for yield intensified.” However, the unexpected US election results appeared to have removed support for the EM fixed income markets, and she asked speakers to discuss their analysis.
Alberto Ramos (Goldman Sachs) discussed his firm’s 3.5% global growth estimate, up from a prior 3.1% forecast. He expected 3 rate hikes in 2017 following a 25 bp hike in December 2016, with a terminal rate of as much as 3.75% in 2018. Deutsche’s Drausio Giacomelli noted US growth estimates have been revised upwards since the Trump election, with his at 4% by the end of 2017 on a quarter-on-quarter basis.
“I haven’t been this energized about US growth potential in a long time,” exclaimed David Woo (Bank of America Merrill Lynch), who highlighted that the Republican sweep of the US elections was likely to lead to fiscal stimulus. Woo added that the market was still underestimating the potential use of stimulus to boost US growth.
Finally, Christian Keller (Barclays) confirmed his US growth estimates were generally within consensus (at 2.2% in 2017 and 2.5% in 2018), with an equally in-line call for 2 US rate hikes in 2017.
Chang steered the conversation towards China, and whether it would promote stability, or volatility, in EM debt next year. Woo cited the general consensus appeared to be that President Xi Jinping would seek to consolidate power at the 2017 party congress, and Chinese corporates would “not be allowed to fall off a cliff” before the meeting. The US and China appeared to be a on a collision course with both countries needing weaker currencies to stimulate growth, and this was likely to be negative for EM, with likely volatility in the Chinese currency. Keller noted that Chinese officials might not be able to “control everything as much as they have in the past and considered China a key risk for 2017. Speakers concurred in their expectations of a weaker RMB (Woo at 7.25 per dollar in 2017, Keller at 7.35 and Giacomelli at 7.4 per dollar in 2017 and 8.1 in 2018).
As for Latin America, “a trade war with Mexico is not going to happen,” declared Woo. He added that if the US were to grow at a strong rate, Mexico would be “the biggest winner under Trump, not the biggest loser,” and noted that much of the potential US infrastructure would be built by Mexican laborers, with potential remittances to Mexico itself. Ramos predicted that even with changes to current trade policy, Mexican exports might still remain attractive, with the MXN/USD exchange rate substantively higher than his fair value estimate of 15 to 16 pesos per dollar.
Panelists’ views on Brazil diverged, with Giacomelli on the relatively constructive end. In his view, investors were awaiting signals that it was time to return to the country, and that President Temer had no alternative other than to “stay on course with reforms.” With the appropriate reform legislation passed and acceptable plea bargains, rate cuts could follow and encourage both growth and capital inflows. A more wary Ramos noted that low domestic savings, the lack of investment in education and infrastructure remain key issues in Brazil. “There is a lot of faith in the spending cap and social security reforms...but their impact won’t be felt for eight to ten years,” he stressed.
Chang asked how Turkey and South Africa would fare in 2017. “All factors are against Turkey right now,” commented Keller, citing among other factors its large external financing needs and exposure to higher oil prices. Keller would not rule out the lira hitting 4 per dollar.
The rand was also a candidate for greater weakness, although it could benefit from Chinese economic stimulus (unlike non-commodity exporting Turkey). In Keller’s view, South Africa would lose its investment grade rating in 2017, although a political change was likely. Giacomelli had a mildly more optimistic take on South Africa, labeling it a “close call,” but venturing that a credit downgrade could be avoided.
Finally, Venezuela’s ability to dodge a default was debated. “They are on a collision course with the basic principles of economics,” affirmed Ramos, while conceding that “oil in the $50 to $60 range adds some oxygen.”