EMTA INVESTOR FORUM IN LOS ANGELES
Thursday, April 7, 2016
700 Wilshire Blvd.
Los Angeles, CA
3:45 p.m. Registration
4:00 p.m. Panel Discussion
Challenges and Opportunities in the Emerging Markets
Drausio Giacomelli (Deutsche Bank) – Moderator
Bill Campbell (DoubleLine)
Kristin Ceva (Payden & Rygel)
Chris Getter (PIMCO)
Blaise Antin (TCW)
5:00 p.m. Cocktail Reception
Additional support provided by Deutsche Bank.
Registration fee for EMTA Members: US$75 / US$695 for non-members.
EMTA Panel in Los Angeles Reviews Global Economic Background and EM Opportunities
EMTA’s Third Annual Forum in Los Angeles took place on Thursday, April 7, 2016. The event was sponsored by MarketAxess, with the additional support of Deutsche Bank.
Moderator Drausio Giacomelli of Deutsche Bank described recent market conditions, and asked speakers to provide assessments of the global financial backdrop. Kristin Ceva (Payden & Rygel) reviewed the dramatic Central Bank activities in early 2016, from negative interest rates in Japan to dovish US FOMC policy. Ceva opined, however, that concerns about weakness in the American economy were overdone. “The Fed will go slow, but that doesn’t mean it won’t go at all…we believe there will be resilience in the US,” she stated. Ceva added that, while stable US rates have boosted EM, eventual hikes won’t necessarily cause a repeat of the May 2013 “taper tantrum.”
Doubleline’s Bill Campbell analyzed Fed Chair Yellen’s March speech; “she is very worried that, if US growth declines, she won’t have the tools to fully address it.” He questioned whether ECB bond purchasing was the appropriate policy tool when the “real issue is a supply glut in commodities.” Blaise Antin (TCW) found it “questionable” whether US rates could be hiked in June, especially with the unknown implications of a potential Brexit; and he expected the Fed to proceed very cautiously thereafter, as US elections approached.
Turning to Europe, Antin criticized the ECB for not being more aggressive earlier with its QE policies, while speculating that President Draghi’s tolerance for greater euro appreciation was limited. Most speakers concurred that Berlin’s strong desire for a balanced budget was not the best policy, and argued that accelerated German spending (e.g., on infrastructure) would be wiser. In addition, several panelists warned of the potential consequences by those Central Banks (including Japan) that had adopted negative interest rate policies.
Giacomelli directed the speakers to EM-specific topics. Campbell argued that China’s desire for a stable exchange rate, while also pursuing looser monetary policy, were in conflict. He feared that China could, “add volatility to the market at unknown points for the foreseeable future.” In Ceva’s view, the deleveraging of China’s corporate sector, and the pace of SOE reforms, were worthy of monitoring. Chinese data on the transformation of the economy towards a service economy was a positive factor, according to Antin, who cautioned that the process would not be completed quickly; investors would be wise to remember that political stability remained the paramount goal in Beijing, and thus economic reforms were always subject to social tension.
“Low for longer” commodity pricing was the base case for panel speakers, although panelists sensed that oil prices seemed to have found a bottom early this year in the mid-20s. Ceva expressed greater bearishness on metals than oil. EM corporates have generally outperformed DM because many issues were quasi-sovereign issues—with greater support than private sector debt—and have EM currency costs with sometimes hard currency income.
Antin lamented the “knee-jerk” response of some investors who have indiscriminately sold off all EM debt on commodity weakness, rather than analyzing which issuers in fact benefited from lower commodity costs. In addition, investors should also recognize that the policy responses by oil exporters, for example, differed. For example, Russia had allowed the ruble to depreciate early; Kazakhstan and Azerbaijan held on before eventual recognition of the need to devalue their currencies; while Nigeria continued to solider on with a strong naira; and GCC sovereigns maintained pegs, but with much stronger reserves.
Giacomelli also made capital flows a panel topic. “We all know that institutional investors remain under-allocated in EM,” affirmed Antin, who continued that, while EM inflows had ended its run in 2014, institutional investors had not “thrown in the towel,” and would remain enticed by EM yields. Ceva had recently observed greater institutional investment in local currency debt.
As the Argentine debt saga neared its conclusion, Ceva spoke enthusiastically about the initial accomplishments of the new administration, as well as the potential performance of its debt. “Argentina is probably one of the few stories where an investor can get yields above 8%, without the debt being an oil or mining issue,” she stated. Over-supply concerns were overdone, and Ceva speculated that sovereign wealth funds may be large purchasers. “Argentina is the kind of clear reform story that we don’t see a lot of in EM or DM these days,” added Antin.
Antin expressed a negative view on Turkey’s policy mix and politics, although he underscored that a large industry under-weight to Turkey could be a favorable technical factor. Campbell described Ankara’s Central Bank as having “lost credibility so many times.”
A downgrade for South Africa by 2017 was likely, in Campbell’s assessment. Structural issues were impeding growth, and recent government corruption cases wouldn’t help South Africa retain its investment-grade status. Ceva and Antin foresaw market rallies on any indication that President Zuma would leave office before the end of his term.
Venezuela had fewer and fewer tricks up its sleeve, assessed Ceva, after having restricting imports, selling assets and floating the concept of a market-friendly debt exchange. Antin speculated that any revelations from the “Panama Papers” could potentially prompt dramatic changes.
Finally, moderator Giacomelli was prompted to give his own view on Brazil. “Impeachment [of President Rousseff] is the most likely scenario,” he stated, while warning that a new president would still inherit the same problems of inflation and lack of growth. A lesson could be for the president “not to tinker with the economy; give it to the technocrats.”