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EMTA Forum in Singapore - Oct. 21

Friday, October 21, 2016

Sponsored by ING 

Fullerton Hotel
The Straits Room, Level 4
1 Fullerton Square

 12:00 noon - Registration 

12:15 p.m. - Luncheon and Panels Begin

"Asia 2016-2017: A Sell-Side Perspective"
Tim Condon (ING Bank) – Moderator
Claudio Piron (Bank of America Merrill Lynch)
David Fernandez (Barclays)
Nizam Idris (Macquarie Bank)
Marios Maratheftis (Standard Chartered)

"Asia 2016-2017: Views from the Buy-Side"
Guan Ong (GIC Private Limited) – Moderator
Adam McCabe (Aberdeen Asset Management)
Celeste Tay (Loomis Sayles)
Desmond Soon (Western Asset Management)

Luncheon will be served with the compliments of ING Bank. 

The Forum will conclude at approximately 2:30 p.m.

Additional support provided by MarketAxess.

Registration fee for EMTA members is: US$50 / US$695 for non-members.  

“Tectonic Shifts” of Inflows Into Index Funds and Chinese Inclusion into Indices Reviewed in Singapore

Speakers at EMTA’s Forum in Singapore acknowledged reduced fears of a Chinese economic collapse hurting Asian economies, while reviewing the risks posed by the US elections, US rates and protectionism. The “tectonic shifts” of investor inflows into passive funds, and eventual Chinese inclusion in domestic bond indices, were also featured. The event was held on Friday, October 21, 2016 and sponsored by ING.

Tim Condon (ING) initiated the event by asking industry economists and strategists for their take on how the US elections would affect Asian debt markets. Marios Maratheftis of Standard Chartered believed that a relief rally could occur, with October polls showing Hillary Clinton with a clear lead. However, he underscored that post-election political problems could continue, such as US legislative gridlock, and the potential for a defeated Trump to cause disruptions to a Clinton administration. In Maratheftis’ view, the US economy wasn’t that far from a recession, and there was a “very real possibility of a US recession in the next couple of years.” On the other hand, weak US growth meant the Fed was unlikely to raise rates this year, thus supporting Asian debt prices.

Nizam Idris (Macquarie Bank) warned that the anti-globalization and anti-establishment forces that have been evident in the US election season and Brexit campaigns had taken root, and would pose threats to export-driven EM economies. Barclay’s David Fernandez noted that, despite both Clinton and Trump rejecting the proposed Trans Pacific Partnership (TPP), its eventual passage couldn’t be ruled out; “we will have to wait and see.” He added that the Obama administration was still hoping to pass TPP in a lame-duck Congress. Finally, BofA Merrill Lynch’s Claudio Piron speculated on potential geo-political implications of a Clinton administration, such as in Sino-American relations.

Condon followed up on the likelihood of US rate hikes. Fernandez’s base case called for a hike in December 2016, although he stressed divisions among the Board governors, as revealed in recent Fed minutes. “Even if they hike in December, which Fed will we have in 2017?” he questioned. Idris echoed a forecast of a December hike.

In contrast, Maratheftis reminded the audience that, in the fall of 2015, market consensus had called for a series of rate hikes in 2016, rather than the lone increase that did take place. He reiterated his contrarian view on US tightening, predicting that rates would remain unchanged through 2017. “Clearly the Fed wants to hike in December, but they have been trying unsuccessfully to raise rates for a year,” he argued. Should he be wrong and the Fed raise rates, he believed that market reaction would be muted as “no one foresees a series of hikes in 2017,” as had been feared in previous years.

In the day after President Duterte’s dramatic announcement in China that his country would “separate” from the US, Condon asked for panel views on the Philippines. “I don’t think anyone knows this president; we will have to learn about him over time,” reasoned Fernandez, who admitted it was difficult to make a fundamental call pending more information. Piron highlighted the improvement in Philippine economic conditions, while speculating that it remained a possibility that Duterte was playing off the US and China more astutely than generally assumed. Maratheftis commented that, since China posed more of a physical threat to Manila than the US, recent developments could actually be viewed as reducing international geopolitical risks.

Panelists concurred with Condon’s observation that fears of a Chinese hard landing no longer dominated international economic conferences. Maratheftis, however, expected “significant” Chinese economic deceleration after 2020, when Beijing will no longer be bound to its 2020 development goal. Idris speculated that a slowdown could occur earlier, with growth dropping to 6% following the 2017 party congress.
Piron and Fernandez maintained 6.3% Chinese growth targets for 2017. Piron expressed concern at the potential for “pernicious” capital outflows, while Fernandez noted that the gap between official government growth statistics and other private sector estimates was narrowing.

Following the strategist panel, GIC’s Guan Ong moderated a discussion of asset managers. Ong asked the panel to opine on key industry themes, such as the increasing role of electronic platforms, ETFs and passive investment strategies, and Chinese inclusion in domestic bond indices, while also addressing risks to EM debt.

In reviewing electronic trading, Desmond Soon (WAMCO) acknowledged that his firm used a variety of online platforms, including peer-to-peer and RFP-based systems. On the other hand, he expressed concern that regulatory actions had moved the onus to investors to “extract liquidity” when a holistic approach to strengthen the liquidity provisioning of the entire trading system might prove more effective. PIMCO’s Roland Mieth cautioned that online platforms didn’t overcome industry liquidity issues, and might not prove the most effective means to move large bond positions. Adam McCabe of Aberdeen Asset Management commented that, “execution teams are maturing, and are becoming specialists in identifying where the pockets of liquidity can be found,” such as via electronic platforms.

The increasing role of ETFs was a “tectonic change,” and one which will challenge active fund managers “for years to come,” according to Mieth. McCabe didn’t rule out the use of ETFs by active fund managers in constructing optimal client portfolios. In addition, several speakers predicted further consolidation in the asset management business, with Mieth stressing the need for economies of scale to achieve returns for clients. Soon underscored the “continued relevance of hedge funds to act as policemen, or vigilantes, of the markets,” by identifying inefficiencies.

Ong asked panelists to review EM-specific and external risks. China’s property market slowdown remained a key concern in the view of Celeste Tay (Loomis Sayles), while a more sanguine McCabe expressed confidence in Chinese leaders, and speculated that the ill-effects of structural reforms might be over-dramatized by foreign media. Instead, the US election and potential unraveling of the EU were the greater risks to EM, in his estimation.

Potential concerns for Mieth included a US policy error and an increase in protectionism around the globe. He didn’t view China as an immediate concern, and expected continued credit support to prop up the economy (“muddle-through stability is probably what they will go for”). On a longer-term basis, Mieth was monitoring political risk, as it remained unclear if President Xi would attempt to remain in power for a third term.

Ong pressed speakers to address protectionism as a risk to EM. Tay noted that movement in China to have a more inward-looking supply chain posed another significant threat to Asian exporters which had in the past provided such materials, albeit this had been evolving over time. Soon stressed that the threat of protectionism wouldn’t end with Trump’s defeat. Open economies, such as Singapore and South Korea, would be most vulnerable, while insulated economies, such as India and Indonesia, would be less affected.

The inclusion of China into local bond indices would be another industry game changer, with speakers expecting it to occur within the next 12-18 months. “I assume all of us on the buy side are looking at how this will work,” commented Mieth. He also suggested India might follow later. Tay alluded to the large increase in foreign ownership of Malaysian sukuks as a result of index inclusion, as an example of the roles of indices in growing the investor base.

Finally, India and Indonesia were reaffirmed as market darlings, according to investor speakers. Soon predicted that lone-holdout Standard & Poor’s would upgrade Indonesia to investment grade.