EMTA SUMMER FORUM
Tuesday, June 21, 2016
2 King Edward Street
2:15 p.m. Registration
2:30 p.m. Panel Discussion
Investor Perspectives on the Emerging Markets
David Hauner (Bank of America Merrill Lynch) – Moderator
Jan Dehn (Ashmore Investment Management))
Sergio Trigo Paz (Blackrock)
Pierre-Yves Bareau (JPMorgan Asset Management)
Lupin Rahman (PIMCO)
3:45 p.m. Panel Discussion
Current Prospects for the Emerging Markets
Brett Diment (Aberdeen Asset Management) – Moderator
Aroop Chatterjee (Barclays)
Luis Costa (Citi)
Drausio Giacomelli (Deutsche Bank)
Luis Oganes (JPMorgan)
5:00 p.m. Cocktail Reception
Attendance is complimentary for EMTA Members / US$695 for non-members.
EMTA’s 19th Summer Forum in London Addresses Potential Brexit Reaction, US and Chinese Effects on EM
EMTA’s 19th Annual Summer Forum in London took place on Tuesday, June 23, 2016. Bank of America Merrill Lynch hosted the event, which drew over 150 market participants.
With the Brexit vote looming, moderator David Hauner (Bank of America Merrill Lynch) asked panelists for their thoughts if the “leave” vote prevailed, which was not expected at the time of the Forum. Ashmore’s Jan Dehn argued that “Britain is a small European country; if it has a recession [as a result of a Brexit], that won’t have a major effect on the large EM economies.” Pierre-Yves Bareau (JP Morgan Asset Management) recommended taking advantage of any Brexit-related sell-offs as an EM buying opportunity.
Blackrock’s Sergio Trigo Paz was more wary, and expressed concern that Brexit-related volatility could be harmful for EM. “This could be an ugly scenario...I don’t think it would be an immediate buying opportunity, but hopefully later on there will be one,” he commented.
Hauner next asked speakers for their thoughts on a Chinese economic slowdown. PIMCO’s Lupin Rahman noted that Chinese growth remained a concern, and there remained a risk of uncertainty and volatility. “The reform agenda has more or less stalled...and political tensions are still lurking in the background,” she stated. Rahman believed that stop/start policies in China were likely, and although a hard landing was not her base case, knee-jerk sell-offs were possible if Beijing announced slower growth figures.
“The fear of a hard landing in China recurs every year, but it never materializes,” observed Dehn. In his view, China was actively trying to join the world economic system, as evidenced by its campaigns to join the IMF’s SDR (successful) and mainstream indices (thus far unsuccessful). “Yet we are terrible hosts,” he asserted, and argued that, “China is primarily used as a boogie man when people want to churn their portfolios.”
The importance of the dollar, US rates and the American elections were addressed by Trigo Paz. The dollar could strengthen either by a flight to quality or impressive US economic performance, and either scenario could harm EM local markets. “We think there is barely a single Fed hike this year; there is not enough confidence in the US and the Fed fears erasing any growth.” A single hike of 25 bps would be easily absorbed by EM, he reasoned.
The high negative ratings of the two presumptive American presidential candidates inferred that the US election campaign would be negative in tone. “This will damage consumer confidence and possibly lead to a slower economy,” he warned. He added that a “Mexit” could result from a Trump victory.
Rahman expressed less concern that a Trump victory could hurt EM. She highlighted that a Trump presidency could “lead to news on Russian sanctions,” and affirmed that market fears of a major sell-off were likely overdone.
Hauner questioned if value remained in the consensus trade on Russia. “Russia is now an income investment, not a capital appreciation trade,” declared Bareau, who recommended Russian banks for extra carry. “But Russia is not where you will make the bulk of your money in the 2H,” he emphasized.
Turning to other individual credits, Rahman believed that spread compression had largely taken place in Ukrainian debt. The credit was fairly priced at current levels, in her view, although dips (often the result of the country's volatile politics) could represent buying opportunities.
Panelists concurred on potential upside for Brazilian debt. Bareau expressed optimism in the ability of Finance Minister Meireilles to champion reforms through Congress, and Trigo Paz pointed out that caretaker presidents are often able to push reforms that wouldn’t otherwise happen. Rahman saw value in select Petrobras bonds whose pricing did not yet reflect recent political developments.
Dehn argued that some Venezuelan bond yields were at such high levels that “you can still make money in a default.” With a great likelihood that the government change would occur “in the next twelve months, Venezuela is the most interesting trade in EM right now,” he stressed. Dehn noted that the Saudi valuation of Aramco had positive implications on the value of PDVSA. Finally, he clarified that he did not anticipate a Venezuelan default in 2016.
Trigo Paz noted that he had been long Venezuelan paper for three years, and continued to favor the credit despite his expectation that the Maduro administration would remain in power throughout 2016. Owners of Venezuelan debt, however, needed to be prepared for a restructuring; “it will be a rough ride.”
Other topics addressed by the panel included EM corporates, which Bareau labeled a “massively under owned; a very interesting sector to be in.” Rahman argued that crossover interest in EM corporates had been washed out, presenting “a good opportunity if you do your homework.” Trigo Paz noted that liquidity could be an issue even in good-name HY issues.
Finally, panelists saw opportunities in select MENA and SSA credits. “Some MENA credits look very positive for institutional mandates; they represent a pick-up in yield vs developed markets, and are still relatively safe credits, even if some of their shine has come off” according to Rahman, while admitting they were not strong-conviction dedicated EM portfolio trades. Dehn saw potential value in SSA, after having been “beaten up” because of weak commodity pricing. He praised Nigerian officials for their recent decision to free the naira, and also had positive comments on Ivory Coast.
Brett Diment (Aberdeen Asset Management) moderated the event’s panel of sell-side analysts, asking speakers to first discuss their return targets for 2H 2016. Aroop Chaterjee (Barclays) saw some upside potential in both commodities and EM credit, while predicting 7 to 8% underperformance in EM FX, and maintaining a bearish view on EM local debt. JPMorgan’s Luis Oganes agreed with the uncertain outlook for EM FX, while noting a more constructive assessment on duration in EM local bonds and hard currency debt. His year-end targets for the EMBIG stood at 350 bps, and the CEMBI at 375 bps, implying returns of around 6% and 2%, respectively, for 2H depending on where US Treasury yields end. Luis Costa (Citi) commented that retail investors had been absent from EM local debt “for quarters, if not years,” and argued that such paper was under-owned. He predicted choppy near-term EM FX performance.
Commodity pricing was not expected to vary dramatically in 2H. Drausio Giacomelli (Deutsche Bank) noted his house forecast of $50 per barrel for 2016, and admitted a personal view of downside risks later in the second half. Other commodities could have very mildly positive gains, he added. Oganes predicted oil levels between $45 and $50; and argued that, with the trigger for increased production averaging $53 for the top oil companies, EM was in a sweet spot. “These levels don’t create current account problems for importers, while they provide some relief to exporters,” he stated. Chatterjee’s base case was lower, at $40, noting that Libyan supply disruptions could end, Iranian supply could rise, and new shale projects could be green lighted.
The panel confirmed China, US rates, the US election, and Brexit as chief concerns. Chaterjee saw Chinese growth remaining at 6.5% this year and 6% or below in 2018. “This is a structural decline driven by factors such as a slowing labor market and less job creation; it is not a cyclical thing,” he affirmed. Officials have tried to “juice the ‘old economy’” as the transformation to a consumption-led economy transpires, and Beijing would continue to move towards capital markets liberalization (albeit at “not too fast” a pace). EM would generally follow China on any downtrend, he concluded.
The underperformance of the Mexican peso, a recurrent EMTA panel theme, was again discussed, with several speakers attributing its weakness to the currency’s use as a proxy, rather than fundamentally-driven. Oganes commented that the Mexican Central bank’s strategy to deter speculators through discretionary intervention in the spot market last March may have backfired in the end, “and the market is now testing it.” In a contrarian view, Costa asserted that MXN weakness was better explained as linked to oil capital outflows, rather than a result of institutional investor trading.
The surprise resignation of central bank governor Rajan made the outlook for India unclear. The jury remained out on whether this was due to political considerations given Rajan’s strong popular standing, or whether his dismissal signaled a policy move away from inflation-targeting and the efforts to clean-up of bank balance sheets, noted Oganes. The view was seconded by other sell-side speakers, who believed the naming of the next RBI governor would provide the market with an answer.
Speakers also addressed the major Latin economies. Costa believed the market’s assessment of Brazilian Central Bank dovishness was overdone, and did not foresee a V-shaped recovery in Brazil.
Oganes, in contrast, saw more SELIC rate cuts than expected, at 250 bps once the easing cycle starts later this year. Giacomelli believed rate cuts would start slowly in August, and could push the BRL below 3.35 per dollar (“a small price to pay for lower rates”).
Timelines for a political transition in Venezuela varied. Oganes saw the presidential recall mechanism being activated but it wasn’t clear if it would happen this year or the next. The critical factor, in Giacomelli’s view, was amount of FDI that could be prompted by a change in government in Caracas.
Finally, Oganes ventured that Argentina could be a BB credit by the end of the Macri administration’s term. He seconded comments by buy-side speaker Dehn on the attractiveness of Argentine local markets. GDP warrants and non-sovereign external debt also seemed relatively cheap, according to Giacomelli.