3:45 p.m. Registration
4:00 p.m. Panel Discussion
Opportunities and Challenges in EM Corporate Bonds
Anne Milne (Bank of America Merrill Lynch) – Moderator
Sarah Leshner Carvalho (Barclays)
Jacob Steinfeld (JPMorgan)
Paolo Valle (Manulife Asset Management)
Sam Epee-Bounya (Wellington Management)
5:00 p.m. Cocktail Reception
Additional support provided by Bank of America Merrill Lynch, Barclays and JPMorgan.
Registration fee for EMTA members: US$75 / US$695 for Non-Members.
Further Spread Compression Possible in 2017, Say EMTA Boston Forum Speakers
EMTA’s third and final Corporate Bond Forum of the year was held in Boston on Monday, November 7, 2016. Fifty market participants attended the event, sponsored by MarketAxess, with the additional support of Bank of America Merrill Lynch, Barclays and JPMorgan.
“We have had quite an exhausting year thus far: Argentina returning to the market, the Venezuelan oil drama and not knowing if they had the money to pay until just a few days earlier…and who would have guessed Brazilian issues would rebound up twenty percent by November,” commented Anne Milne (Bank of America Merrill Lynch), in her opening remarks. With strong returns year-to-date, outperforming consensus expectations, she asked panelists for views on future market direction.
Manulife Asset Management’s Paolo Valle voiced confidence that EM corporates would continue to perform, as the asset class served as an alternative to low-yielding DM bonds in an era of weak DM growth and inflation. Jacob Steinfeld (JPMorgan) concurred that the 2017 outlook for EM corporates remained positive, although he cautioned that 2016 returns would be difficult to repeat.
“We also expect spread compression in 2017, but more gradually and with more volatility,” added Barclays’ Sarah Leshner Carvalho. General stabilization in EM countries, including Brazil, was also supportive of the corporate asset class, with Leshner Carvalho specifying that, “we are not very concerned about an EM corporate bubble.” Wellington’s Sam Epee-Bounya expressed perhaps the panel’s most cautious stance, questioning some EM corporate valuations, although he too acknowledged that additional compression was “quite possible.”
Milne noted that a recent IG Investor survey by her firm showed the first increased allocation to EM from US IG investors in two years. Milne asked speakers for thoughts on crossover inflows into EM corporates and the status of the asset class today.
Valle argued that the crossover return “has just started,” and constituted only a fraction of volume compared to 2013. For distressed trader Steinfeld, the record of crossover interest in his credits was mixed, but Oi was attracting the greatest number of investors, drawn by both its size and inter-creditor issues.
With the Forum occurring on the day before the US elections and the potential for surprising results, Milne asked if the market was adequately pricing in potential risks, and which assets were most vulnerable. Leshner Carvalho viewed Mexican instruments (including REITS and consumer names) were most at risk for the unexpected Trump victory that would occur shortly thereafter, adding that Central America could also be vulnerable due to reduced remittances, as well as Colombian banks.
Valle hoped that fears might be overdone. Despite Trump’s campaign stance against trade agreements, such as NAFTA, “in EM, we are used to environments where a candidate promises things, but isn’t able to deliver.” Longer-term, Valle argued that Trump’s proposals for tax cuts and infrastructure spending could be beneficial; and that a “signal of concern” by the market could prevent the adoption of extreme trade protectionist measures.
The difficulty US investors faced in participating in Chinese new issuance, which were predominantly allocated to local accounts, remained a source of frustration to US portfolio managers, according to speakers. Epee-Bounya also raised concerns on Chinese new issuance valuations.
Global EM corporate issuance levels and default rates were also debated. Leshner Carvalho anticipated issuance growth, boosted by redemptions, stabilized commodity pricing and generally improved fundamentals. Steinfeld noted that JPMorgan’s 2016 LatAm default forecast of 8.9% was largely a result of the two large defaults of Oi and Pacific Rubiales. Next year the default rate should drop, if for no other reason but the fact that the denominator of EM issuance continues to expand.
Turning to specific countries, Epee-Bounya stated that Brazilian banks were a concern as a result of continued economic contraction, and he predicted that the political corruption scandals weren’t over; “there are still a lot of skeletons in the closet in Brazil.” Valle conceded that he had hoped for better growth by Q3, and that he had lowered his personal expectation of Brazilian performance in 2017 from 2.5% to “about 2%.” Valle expected that pension reforms would be passed, even if watered down from current proposals.
“The story for Argentine corporates is done,” declared Epee-Bounya. In past years, these companies had adjusted to economic realities, and were living within their means, with low leverage. Firms such as YPF remained good companies, but he was no longer confident in potential upside. Valle concurred that it was “difficult to be very bullish after the amount of Argentine debt that has been issued; we have to be patient and realistic about what they can accomplish.” Steinfeld agreed that 2016 returns for Argentine corporates would be difficult to achieve in 2017.
Finally, speakers concurred that the future for PdVSA would be a function of oil pricing. Valle admitted that it had become “much trickier to stay away from those yields,” and ruled out willingness to pay as a concern. Milne added her own comment that, with restructuring an inevitability, her firm maintained an underweight stance.