EMTA FORUM IN FRANKFURT
Tuesday, May 10, 2016
Steigenberger Frankfurter Hof
Frankfurt am Main, Germany
3:30 p.m. Registration
4:00 p.m. Panel Discussion
Prospects for the Emerging Markets
Guy Stear (Societe Generale) – Moderator
Andreas Hahner (Allianz Global Investors)
Peter Schottmueller (Deka Investment)
Nicolas Schlotthauer (Deutsche Asset Management)
Tim Ash (Nomura)
5:00 p.m. Cocktail Reception
Additional support provided by Nomura and Societe Generale.
Registration fee for EMTA Members: US$75 / US$695 for non-members.
We regret that this event is not open to the media.
US Election, Brexit and Other Risks Reviewed at EMTA Forum in Frankfurt
EMTA’s Third Annual Forum in Frankfurt was held on Tuesday, May 10, 2016, with over 50 EM marketplace participants in attendance. MarketAxess sponsored the event, which was also made possible by the support of Societe Generale and Nomura.
Societe Generale’s Guy Stear moderated the panel discussion, and opened the session by asking for speaker views on the reasons for the EM debt rally, which started in mid-February. Allianz Global Investor’s Andreas Hahner attributed EM strength to a number of factors, including the possible bottoming of commodity prices, stimulus from major Central Banks, expectations of a more dovish US FOMC policy, and decreased market volatility. “In a low yield environment, there is a move to riskier assets…and EM fixed income looks very interesting,” he stated.
DEKA’s Peter Schottmueller agreed, observing that market “tail risks” had moved center stage in January, but now had again retreated. Fears of $15/barrel oil and a greater-than-expected Chinese slowdown had become serious concerns at the beginning of 2016 before abating.
Nicolas Schlotthauer of Deutsche Asset Management warned that, despite the waning of such issues, not all EM countries were “out of the woods yet.” He preferred the external sovereign debt “of countries where policies remain on track,” while seeing local currencies as more vulnerable. Finally, Tim Ash (Nomura) cautioned that EM debt had priced in much of the more benign environment. He didn’t foresee any additional good news emanating from major EM economies, such as Brazil, Russia or South Africa in the near-term.
Ash went on to discuss additional risks, such as the US presidential and Brexit votes, which he argued had not been factored into current price levels. A victory by US presidential candidate Trump could result in increased protectionism, and a “yes” on Brexit “could be the nail in the coffin of the EU.” Hahner expressed a more sanguine point of view, speculating that fears of protectionism and isolationism by the US in a Trump victory could be overdone (while acknowledging potential market volatility). Schottmueller reflected that Asian budgets would change dramatically if Trump withdrew US security guarantees, while rationalizing that it was probably “too late to reverse NAFTA.”
Hahner justified his positive stance on EM by observing that many potential events, such as a default by Venezuela, or South Africa being downgraded to junk-bond status—as well as other credit downgrades —would not surprise the market. “There would have to be a new catalyst for me to become negative on EM debt,” he stated.
Stear steered the panel to specific credits. Russia could benefit from a Brexit vote, reasoned Ash, because a British exit would weaken the EU. On the other hand, Ash declared that, “there are no structural drivers for growth in Russia at all…the reforms that Russia would need in order to grow would erode President Putin’s power, and he doesn’t want that.” Ash urged investors to trade Russia on a tactical basis only, as “there is no fundamental basis for buying Russian debt.” Schottmueller expected sanctions on Russia to continue, and predicted that either US election candidate would adopt a more rigorous foreign policy, “which would not be positive for Russia.”
Schlotthauer discussed the need to tackle structural topics in China (i.e. dealing with the so-called “zombie companies”), which he anticipated could make headlines again in the second half of the year. “We don’t expect China’s economy to fall off a cliff,” he added. Hahner saw the Chinese economy as being “very important for risk sentiment.” Schottmueller admitted a bearish stance towards China, which, he acknowledged, colored his view on other Asian credits as a result.
“We have thought of Turkey as a fairly sound credit,” opined Ash, who highlighted the country’s 4% growth last year, despite political unrest. The vast majority of EU-destined migrants were not, in fact, segregated in refugee camps, but were now participating in, and boosting, the Turkish economy. The resignation of Prime Minister Davutoglu created a new challenge, which analysts would need to evaluate; “short-term weakness [related to politics] may have been overdone because the long-term story is still ok, even if it is not a good rule-of-law story,” he concluded.
The panel also reviewed Indonesia’s “market darling” status. “Perhaps expectations might have been too high,” speculated Schottmueller, who noted the slow reform process and red tape delays. Hahner remained upbeat, predicting a third investment grade rating to be awarded this summer.