EMTA CORPORATE BOND FORUM
Monday, September 25, 2017
360 Madison Avenue, 17th Floor
(on 45th St. between Madison and 5th Aves.)
New York City
Topics will include:
3:30 p.m. Registration
4:00 p.m. Panel Discussion
Current Prospects for the EM Corporate Bond Market
Anne Milne (Bank of America Merrill Lynch) – Moderator
Sarah Leshner Carvalho (Barclays)
Eduardo Vieira (Deutsche Bank)
Jonathan Prin (Greylock Capital Management)
Erchen Yan (TIAA Investments)
5:00 p.m.
Cocktail Reception
Support provided by MarketAxess.
Registration fee for EMTA members: US$50 / US$695 for Non-Members.
EM Corporate Rally Expected to Continue, According to Speakers at EMTA Corporate Event
Despite the increased nuclear threat from North Korea, increased sanctions on Russia and Venezuela, natural disasters, continued political turbulence in Brazil, and rising US interest rates, EM corporates have returned over 6% year-to-date, noted Anne Milne (Bank of America Merrill Lynch) in her opening comments at EMTA’s Corporate Bond Forum in New York. The event was held on Monday, September 25, 2017, with over 100 EM corporate bond market participants attending.
While factors such as inflows and limited net new issuance provided technical support, speakers speculated as to what events could de-rail 2017 EM corporate performance. Jonathan Prin (Greylock Capital Management) agreed that performance was, to a large extent, driven by inflows into passive funds, which bolstered “anything index-related.” For him, the largest risk to EM corporate performance would be an extended period of dollar strength, perhaps driven by increased US rates.
“The complacency to some political events has been amazing,” agreed Eduardo Vieira (Deutsche Bank). In his view, an unexpected rise in US inflation could trigger an end to EM corporate inflows.
TIAA’s Erchen Yan noted that her team was continuing to monitor geopolitical risks, while echoing comments on the market’s insouciance regarding events such as the North Korean crisis. In addition, Yan recommended that investors monitor US-China trade tensions, and ventured that stalled reform programs in countries such as India could prove a risk to EM corporates.
Milne noted a monthly survey conducted by her firm showed an evolution of investors’ greatest concerns thus far in 2017. She listed top concerns reported by investors each month -- trade wars and protectionism (January), EU disintegration (February to April), Chinese credit issues (May to June), a bond market sell-off (July), FOMC and ECB policy (August) and finally the North Korea crisis (September).
Turning to the anticipated Chinese sovereign bond, Yan believed that, at a speculated size of $2 billion, “it would not move the needle either way” for Beijing. More likely, its raison d’etre was to provide a sovereign benchmark for future SOE dollar-denominated issues. Standard & Poor’s recent downgrade of China has largely been shrugged off by the market, but Yan sensed an increased effort by Chinese officials to reign in excesses in the financial system, and to focus on financial sector stability.
In the aftermath of well-publicized corporate scandals, Milne questioned whether corruption could ever be eradicated from the marketplace. Prin replied that it was unrealistic to expect a complete victory over corruption in either DM or EM, although investors can hope for reduced institutional corruption and also improved remedies, most notably in Mexico and post-Car Wash Brazil. Leshner Carvalho sensed a bit of investor desensitization to the issue, “a sort of fatigue.” On the other hand, the threads were being pulled to reveal larger issues, she believed. Vieira underscored Brazil’s efforts to rid corporate fraud during a deep recession, and with a new generation of judges and prosecutors.
Speakers addressed the potential effects of upcoming elections. Leshner Carvalho argued that fears that an AMLO victory in Mexico would greatly hurt Pemex and MEXCAT were overblown. “The existing airport is at capacity, it would be very difficult to cancel it at this point given investments already made; in addition, the indenture requires repayment in case of concession cancellation.” On Pemex, the only progress towards stabilizing production has come from joint ventures and partnerships, and “it would be hard for AMLO to do a lot of damage.” Saber-rattling with the US president over NAFTA was possible, although AMLO would likely have to “either tone down his rhetoric or under-deliver.” For Prin, a turn to the left in Chile could augur a more general leftist swing in Latin America, although Prin noted that this was not his base case.
EM corporate issuance ytd stood at $332 billion in Milne’s estimate, already close to her original full-year forecast of $360 to $370 billion, with a revision, “likely.” She noted that the bulk of new issuance had come from China, whereas LatAm and CEMEA ha provided minimal net new issuance. Yan expected the supply of Asian issues to continue, while specifying that half of the ytd Asian supply was Chinese bonds. Vieira expected an additional $8 billion to the $57 billion in LatAm bonds already issued ytd, and a smaller $62 billion issuance total in 2018.
On Brazil, Vieira believed momentum remained strong, following the “stabilization of the political situation, with the new allegations against President Temer shrugged off.” Brazil is now technically out of a recession, he noted. He praised issuers for doing, “a lot of homework, such as cutting capex, so spreads look good and we still see some room [for compression].” Vieira held a more positive view of domestic-oriented Brazilian corporates and larger banks (“which have survived a very difficult two years”), than for commodity issues.
The panel also discussed default rates (with Milne stressing that LatAm defaults at 1.9% were comparatively low) , quasi-sovereign support and return expectations (Milne expressing a bullish 10-12% for LatAm, 5% for Asia and 6% for CEMEA; Leshner Carvalho also offered a 9% EM corporate return forecast for 2017, while Vieira offered much more conservative estimates for 2018).