EMTA CORPORATE BOND FORUM
Monday, November 5, 2018
ISDA Conference Center
10 East 53rd Street (at Fifth Avenue), 8th Floor
New York City
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
Jack Deino (BlackRock)
Jonathan Prin (Greylock Capital Management)
Yang Myung Hong (JPMorgan)
Katherine Renfrew (TIAA Global Asset Management)
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Registration fee for EMTA Members: US$95 / US$695 for Non-members.
Short-Term Market Drivers Reviewed at EMTA Corporate Bond Forum in New York
“Last year at this time, we had seen strong overall EM performance ytd of 6.6%, and we asked what could derail it,” mused Anne Milne (Bank of America Merrill Lynch) as she opened the Annual EMTA Corporate Bond Forum in New York on Monday, November 5, 2018. With asset class performance negative thus far in 2018, volatility in countries such as Argentina and Turkey, low (or negative) net new issuance, and rising interest rates, Milne asked speakers to identify the key market drivers for the next 3-6 months.
TIAA Investment’s Katherine Renfrew believed US-China relations could prove the main near-term factor in global macroeconomics, noting that increased tension is occurring at the same time as a decrease in EM growth expectations, which were too high. China’s slowdown appears modest as US actions are being offset with domestic stimulus measures, but seeing the impact of this slowdown on commodities will be one of the key drivers for EM growth. Other possible concerns included Italy’s budget dispute with the EU, although she did not foresee any major turndown at this time.
Yang-Myung Hong (JPMorgan) argued that US FOMC rate hikes and the stronger US dollar would remain key factors, noting his firm’s hawkish forecast of quarterly rate hikes until at least the end of 2019. Whether EM corporate bond yields enough to compensate for risk was an important question for portfolio managers.
Milne turned the discussion to EM elections. Jonathan Prin (Greylock Capital Management) pointed out that relief rallies had followed both the Mexican and Brazilian presidential elections but that valuations in Mexico had remained relatively rich. That could set the stage, in his view, for continued pressure on Mexican assets from both EM investors and, importantly, crossover investors; “I don’t think we are out of the woods yet,” he stated. Jack Deino (BlackRock) expressed concern that the market may be too optimistic on what President-elect Bolsonaro can deliver in Brazil (“his record in the past may be anti-private investment”). For him, it was important to watch who was appointed head of Petrobras, as well as the new president’s ability to craft deals with Congress.
The results of the Mexico City airport ballot raised new questions on the direction of the AMLO administration, according to panelists. “I don’t think you will see an event of default [on MEXCAT bonds],” stated Deino, who believed that although the incoming president might be willing to “push the envelope,” he would ultimately recognize the “very negative” reaction a default would prompt. Renfrew agreed, but remained concerned. “When they talked about not causing a loss for bondholders, we took that for granted. Now skepticism is creeping back in.” Renfrew suggested the case might raise question on how rating agencies assess other Mexican quasi-sovereign issues.
Hong reviewed historical quasi-sovereigns and sovereign spread differentials, and observed that they usually range from 50-100 bps. Hong also reminded attendees that there are few cases of a quasi-sovereign defaulting without an accompanying sovereign default. There have been recent incidents of defaults by Chinese firms “which looked like quasis, but in fact they weren’t.” Pushed by Milne on how to determine the difference, Hong replied that local knowledge of the relationship between the issuer and the sovereign was necessary.
Panelist views on Argentine corporates were muted. Prin believed it was still possible to assemble a “small, but robust” portfolio of provincial debt, although liquidity remained an issue. Deino stated that, following the notebook scandal, it was “hard to know where the next headline will flare up.”
Turning to Turkey, “it doesn’t take a rocket scientist to know that there will be more defaults…whenever you have an economy that goes from 6% growth to about zero, it will have quite a significant impact,” declared Deino. However, he considered Turkish banks to be well-regulated and, while some may run into trouble, “the majority of banks will be ok.” Renfrew noted that bank debt had borne the brunt of the Turkish sell-off, and urged investors to continue to monitor the rollover ratios for maturing bank syndications, with the recent news constructive for the larger commercial banks despite higher costs associated with the new facilities. “If you had over-reacted to the news, you could have lost a lot of money,” she commented. Renfrew would avoid smaller banks without government support or a strong sponsor. Finally, Prin remained concerned at the continued financing gap; “they still need portfolio inflows; the economy is as imbalanced today as it was 12 months ago.”
The panel also covered issuance trends and Russian sanctions risks before closing with a discussion of the impact of the US-China trade war. Hong believed that slowing export growth in China could be offset by domestic stimulus, and that trade-war effects had not yet been felt in EM corporates. Milne added that, as of yet, there was no evidence that refinancing activities have been affected.