EMTA Spring Forum (NYC) - May 23

  
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EM Market Confidence Justified, Despite US Rate Hikes and Brazil Scandal, EMTA Spring Forum Speakers Conclude

“It’s hard to imagine a better environment for EM assets,” declared John H. Welch (HSBC Securities (USA) Inc.) at the outset of EMTA’S Spring Forum in New York. Welch specified that Chinese growth above 6%, the slow normalization of US rates, and the decreased concerns over trade wars were among the factors that had reduced risks to EM assets. The event was held on Tuesday, May 23, 2017 and hosted by HSBC Securities (USA) Inc. One hundred market participants attended.

Welch invited panel speakers to describe their global economic outlooks, as well as comment on EM markets specifically. JPMorgan’s Luis Oganes noted that inflows into EM equities and debt totaled $70 billion year-to-date, as the EM market remains relatively attractive to other asset classes. His firm expects two additional US rate hikes in 2017, which the EM marketplace could easily absorb.

Tim Gill (Fidelity) reviewed oil and US rates. He argued that strong oil prices are, generally, positive for global economic growth, and a “tailwind” for EM debt. Gill reiterated his bullish oil stance, adopted since the November 2016 oil-producer agreement between OPEC and other exporters, and noted the consensus expectation for the agreement to be extended. Finally, he reasoned that oil in the $50 range was largely productive, in that it kept pressure on some economies to make fiscal adjustments.

As for US rates, “for years we have been panicking about normalized US FOMC policy; but now it has started, and flows into EM have been the best in years.” He praised Fed officials for their clear commitment to avoid “over-hiking.” Gill acknowledged that spreads on dollar-denominated EM debt were “tight,” but saw value in a variety of frontier markets.

Dirk Willer of Citi concurred that higher US rates would not short-circuit the EM rally. His firm’s bullish $65 oil forecast for year-end 2017 was supportive of EM debt generally. The reaction by US corporations to the leaked NAFTA draft executive order, and their apparent victory in preventing its issuance, reassured Willer of the appropriate checks and balances to US trade policy. In Willer’s view, actions by the ECB to end QE faster than expected posed the greatest risk to the EM market, although he conceded that would be “more of a Q4 story.”

“Latin America is growing again after years of GDP contraction…although growth is still sub-par,” affirmed AB’s Fernando Losada. He noted that economic expansion has been fueled by consumption, while investment has lagged. The Latin American political outlook was dominated by elections in many countries “that can, and will, have market impact.”

Speakers generally agreed that the political situation in Brazil would be resolved relatively quickly. Willer was “quite bullish,” viewing the recent sell-off as a buying opportunity. A decisive ruling by the TSE could usher in a new President within weeks, and the names of potential successors being floated by analysts and the media are generally good candidates, in his view.

“None of us are pushing the panic button on Brazil,” agreed Oganes, while conceding that the chances for social security reform passage has “clearly decreased.” Brazil was also less likely to lead to greater EM contagion as well. Welch referred to speculation about a comeback for former President Lula, stating it was not something he feared, and that Brazilian voters would no longer tolerate high inflation.

Losada’s base case was that the current political crisis “won’t be as devastating as people thought last week [when details from the JBS plea agreement were revealed].” He sketched out three possible scenarios, in order of likelihood: (1) a TSE ruling pushes Temer from office and a pro-reform successor takes office; (2) Temer is able to survive until the end of his term; and (3) a worst case scenario where Temer engages in a bloody political battle for survival and, like a nasty cat, scratches anything nearby.

Speakers also touched on a variety of individual EM credits. Gill repeated his endorsement of Lebanese debt, made at EMTA’s MENA Forum in London in January. He cited the improved political situation, and the potential for credit upgrades. Oganes noted that Indonesia’s final investment-grade rating may translate into more Japanese retail inflows, as the country would now be included in the investment grade version of the GBI EM index. Losada expected “decent” results from Argentina’s mid-term elections, but warned of a real-exchange rate appreciation that will make Buenos Aires more expensive than Paris this summer. Finally, Gill and Losada concurred in calculating Venezuelan debt recovery values as greater than current market prices, while recognizing the many unknown factors.