EMTA FALL FORUM
Monday, September 12, 2016
1285 Avenue of the Americas (at 51st Street)
14th Floor, New York City
3:45 p.m. Registration
4:00 p.m. Panel Discussion
Current Events in the Emerging Markets
Rafael de la Fuente (UBS) – Moderator
Gunter Heiland (Gramercy)
Gordian Kemen (Morgan Stanley)
Eric Fine (VanEck)
Alberto Bernal (XP Securities)
5:00 p.m. Cocktail Reception
Attendance is complimentary for EMTA Members / US$695 for non-members.
We regret this event is not open to the press.
Fall Forum Panel Questioned If EM Performance Based on Liquidity or Fundamentals
In his opening remarks, UBS’ Rafael De La Fuente noted that 2016 was a complicated year for the EM asset class. Despite volatility during the first six weeks of the year, the market has performed well even in a post-Brexit world, he noted. At EMTA’s Fall Forum, sponsored by UBS on Monday, September 12, 2016, De La Fuente asked a panel of industry experts if liquidity and performance in the EM debt universe was a result of Central Bank liquidity and dovishness, or did it reflect improved fundamentals in the asset class?
“Year-to-date returns must be put in context,” commented Gunter Heiland (Gramercy). The 2015 second half sell-off was caused by Chinese growth concerns, low commodity prices and the Third Avenue high-yield fund meltdown. Heiland advised investors “don’t be fooled by the large nominal returns YTD in 2016; we have simply retraced on a price basis. Going forward, we see EM debt being supported by the yield advantage over the 50% of the Barclays Global Aggregate Index currently yielding below one percent,” he added.
“One cannot underestimate the role of Central Banks in EM debt performance this year,” stressed Morgan Stanley’s Gordian Kemen, who described the move to negative yields by the ECB, the BOJ and others as “a game changer.” In his view, there have been some improvements to growth and current accounts, but these alone did not justify performance on a fundamental basis.
Van Eck’s Eric Fine concurred that Central Bank policies had been the main force behind EM performance. He reasoned that the relatively mild market reaction to Brexit could be a result of “doomsday” scenarios prophesied by the “remain” camp. (“They set it up so negatively that the reactions weren’t as bad as expected.”)
Finally, Alberto Bernal of XP Securities sought to flip the questions. “I don’t think EM fundamentals have gotten much better; it’s that DM fundamentals have gotten much worse,” he opined.
De La Fuente asked panelists for their views on the greatest risks to the asset class in 2017. In Fine’s assessment, a recession that couldn’t be handled by Central Bank actions was the greatest concern, while weaker growth in China and Europe were also worth close monitoring. Kemen concurred, while stressing the need to distinguish between volatility and real long-term issues (such as the weak Italian bank sector).
EM could have a good year in 2017 if there were steady and constant growth, and “a real reason for the Fed to raise US rates,” Heiland argued. He believed there was a 50% chance of a US rate hike in 2016, while acknowledging “a lot of negative undercurrents and a lot of open geo-political issues.” Bernal believed EM assets could remain in a sweet spot, and dismissed the possibility of a Fed hike for the foreseeable future.
The effect of the US elections on EM debt was debated. Kemen pointed out Mexican investor concern over the prospect of a victory by Donald Trump, who has made NAFTA and the construction of a wall between the US and Mexico central tenets of his campaign. Kemen added that Mexican instruments were reflecting the possibility of a Trump election in current prices.
Bernal believed the nadir in commodity pricing had been reached, and expected oil to rise from a year-end 2016 price of $50 per barrel to $70 per barrel next year (“India and China still need energy”). Heiland concurred with the $50 barrel prediction for 2016, while voicing concern that Saudi Arabia appeared to be focusing on market share rather than higher pricing, and would be motivated by an interest to discourage investment in non-fossil fuels. Kemen had a weaker $44 per barrel forecast for year-end 2016, rising to $60 per barrel in 2017.
The panel turned to Latin American country specifics. Speakers had varying views on the prospects for post-Dilma Brazil. “The transition worked well, but the least corrupt person in the Brazilian government got impeached,” stated Fine, and the market should be braced for disappointments in fiscal and pension reforms under the new administration. However, Fine was not concerned about short-dated Petrobras paper. Kemen expressed a “very bullish” view on Brazil. He predicted a deep easing cycle, with Brazilian rates possibly being cut by at least 400 bps.
De La Fuente asked speakers if they were concerned by potential setbacks in Argentina under the Macri administration. “I’m not worried about the fiscal path; but I am worried about some crossover participation in Argentina—it makes a dedicated investor wonder when they will exit,” stated Heiland. Bernal noted that investor visits to the Finance Ministry were becoming very crowded, as were hotels and restaurants geared to business travelers and international investors. “Things are happening down there,” he concluded.
It was just a matter of time before Venezuela finally ran out of money, in Fine’s view, though debt service was likely to continue this year. He expressed doubt that a successful debt swap--as originally proposed--would work. Fine expected a bumpy political transition, which raised the specter of political issues to any eventual bondholder deal. Heiland and Kemen questioned current pricing in the 40s (as too rich).
Colombia’s peace agreement with the FARC was welcome news, and would presumably be approved by voters, but Bernal argued that the country’s economic health was dependent upon the 2018 election. “The Vice President is the only one who can take over who can maintain fiscal stability, and there will be a lot of demands from various sectors for peace dividends; but his health situation is not completely clear,” noted Bernal. Kemen expressed a “defensive, but not outright bearish” view on Colombia; Heiland admitted to nervousness that Colombia’s fiscal reforms could slide in this new era of peace.
[Editor’s note: In a surprise result, Colombians voted to reject the proposed peace deal in October 2016, and a new pact was negotiated in November 2016.]