EMTA FORUM IN BOSTON
Tuesday, April 19, 2016
The Langham Hotel – Chase Room
250 Franklin Street
3:30 p.m. Registration
4:00 p.m. Panel Discussion
Outlook for Emerging Markets Debt
Siobhan Morden (Nomura) - Moderator
Walter Stoeppelwerth (Balanz Capital)
Heather Hagerty (Fidelity Investments)
Tom Cooper (GMO)
Peter Marber (Loomis Sayles)
5:00 p.m. Cocktail Reception
Additional support provided by Balanz Capital and Nomura.
Registration fee for EMTA Members: US$75 / US$695 for non-members.
Boston Forum Speakers Focus on Global Risks and Post-Settlement Prospects for Argentina
In her opening remarks at EMTA’s Forum in Boston on April 19, 2016, moderator Siobhan Morden (Nomura) noted that the EM debt asset class appeared to be at an inflection point. After a difficult beginning of the year, investor fears of worsening conditions in the US, China and commodity markets had more recently abated, although low commodity prices and credit downgrades were affecting many. Morden led speakers through a series of topics at the event, which was sponsored by MarketAxess, with additional support from Balanz Capital and Nomura.
Morden asked Peter Marber (Loomis Sayles) for his views on global risks. Marber summarized that concerns over China, a potential Brexit, US elections, global terrorism and US rates were all “known unknowns,” and suggested that an “unknown unknown” risk could prove far more nefarious. However, “China has the potential to be one of the biggest problems because the situation is so opaque,” he declared. Marber believed the Brexit vote result probably won’t surprise the market, and speculated that a buying opportunity might arise in sterling if, in fact, the UK votes to leave the EU. Marber added that the market had absorbed recent incidents of terrorism, “if not become desensitized to it.” Finally, a victory in the US elections by Donald Trump would probably not benefit EM investors.
In Marber’s view, EM debt was likely at the upper end of a trading range at the time of the Forum. “I’m mostly constructive on the asset class,” he concluded.
Fidelity’s Heather Hagerty explained that, for the crossover investor, “fundamentals will always trump technical factors…the crossover investor will always look at where country risk will be in three years, not where it is now.” The crossover investor needed both a convincing fundamental story, as well as the potential for return, and she cited the recent joint Mexican-Pemex roadshow as an example of a nation demonstrating that it is “willing and able to address the challenges facing them.”
It was not clear to Hagerty whether it was only political gridlock that prevented the needed fiscal reforms in Brazil, and whether a new administration would prove able to enact the reforms that former Finance Minister Levy had failed in promoting. On the other hand, neighboring Argentina could potentially have the “best policy mix out there in EM; the question is can they execute it?” She urged caution for the near term, citing the difficulty the government might face in rolling back populist measures.
Balanz Capital’s Walter Stoeppelworth was more outspoken in his recommendation for Argentina. “We think there is a deeper bench in the country than at almost any other in Latin America; the new officials are talented people, who have gone back to Argentina on a patriotic basis.” In Stoeppelworth’s view, Finance Minister Prat Gay was deliberately under-promising on the hope of being able to over-deliver. He believed that reforms would continue to be enacted, and cited anecdotal evidence of “significant” graft that changed hands under the last government that could now be saved under the new administration. Inflation would fall quickly after June or July, in his analysis, and FDI could start to return to the country following the settlement to holdout creditors. An investment grade rating was not impossible in three to five years, he added.
Tom Cooper, of GMO and an EMTA Board Director, reviewed his long history as an Argentine creditor. Cooper acknowledged that he had been a holdout investor a decade ago (“because of an inadvertent position”), but stated that he had tendered in the more recent restructuring, “except for Bradys with collateral, where we got judgments.” Cooper revealed that he had participated in the new offering, and saw the most value in the longer-term bonds.
Morden recalled Cooper’s 2015 Boston Forum comment that Venezuela was “a train wreck.” Cooper admitted that Venezuela had surprised him; “I never thought they would make it this far, and I hope they can pull it out.” Although the default probability remained high, he didn’t rule out some way for the country to avoid such a scenario if oil remained above $40/barrel. Finally, he quipped that his history as a warrant-owner was like that of a lottery ticket holder; “you know someone is going to win it, but you know it won’t be you.”