EMTA FALL FORUM
Monday, October 1, 2018
UBS Offices
1285 Avenue of the Americas (at 51st Street)
14th Floor, New York City
3:30 p.m. Registration
4:00 p.m. Panel Discussion
Current Events in the Emerging Markets
Rafael de la Fuente (UBS) – Moderator
Shamaila Khan (AllianceBernstein)
Gunter Heiland (Gramercy)
John H. Welch (HSBC USA Securities, Inc.)
Jahangir Aziz (JPMorgan)
5:00 p.m. Cocktail Reception
Additional Support Provided by Tradeweb.
Attendance is complimentary for EMTA Members / US$695 for Non-members.
We regret that this event is not open to the press.
Outlook for Latin Economies and Turkey Reviewed at EMTA Fall Forum in New York
Attendees of EMTA’s Fall Forum were treated to a lively debate on major Latin economies, as well as Turkey. The event, held on Monday, October 1, 2018, was sponsored by UBS and drew 125 market participants. Tradeweb provided additional support for the program.
Moderator Rafael de la Fuente (UBS) structured the panel discussion by asking for panelists’ assessment of the global outlook. Shamaila Khan (AllianceBernstein) believed that global monetary tightening has already been priced into EM debt generally. EM IG countries have performed in line with their US counterparts, while those EM nations with current account deficits have demonstrated weaker performance. Trade wars, i.e. that between the US and China, could add volatility to EM assets, “although my base case is that there will be a negotiated settlement,” she stated. Khan argued that EM debt remained attractive, “because nowhere else can you find comparable yields.”
Gramercy’s Gunter Heiland stressed that the slow global recovery had prevented “the normal excesses at the end of the cycle,” and the FOMC’s transparency had helped the debt markets avoid any sudden plunges. Heiland concurred that a US-China rapprochement was likely prior to the US mid-term elections. He expressed concern about possible US Treasury supply levels and a stronger US dollar.
John H. Welch (HSBC USA Securities Inc.) agreed that, while trade wars remained a risk, the pattern thus far has been of strong talk and market jitters, followed by a sudden pull-back in rhetoric and deals. As an example, he observed that the revision of the NAFTA accord had ended up relatively benign. US rate normalization would affect EM countries differently, he concluded.
The strongest concern for the asset class was sounded by JPMorgan’s Jahangir Aziz, who believed that, while the 2Q repricing of EM risk was to be expected, “our sense is that the selling in August was very different, it was a definite re-assessment of EM risk.” For Aziz, it was unclear how countries with current account deficits would fare in the new global environment. He revealed his more pessimistic outlook on trade wars, forecasting a 25% tariff on Chinese goods in 2019, and voiced concern that Trump’s bellicose anti-trade rhetoric may not be a means to an end, but rather the end in itself. Finally, Chinese leaders have not yet responded as in the past to stimulate the domestic economy and/or relax regulations, and Aziz didn’t foresee a rebound in China’s growth until at least 2Q 2019.
De la Fuente started the discussion of individual sovereigns by polling the panel on Turkey. “My sense is that things are being held together by a thread,” affirmed Aziz. While the CBT rate hike had exceeded even JPM’s hawkish forecast, “625 bps still isn’t enough.” Aziz analyzed debt refinancing needs for 2019, “and my sense is that, as of now, they don’t have the numbers that suggest the market will rollover approximately $100 bn,” of the $240 billion falling due.
Khan voiced greater optimism on Turkey. She cited as good signs the recent rollover of Akbank debt, the high capitalization levels of Turkish banks which allow them to withstand higher levels of NPLs, and the absence of major cash withdrawals (i.e. a bank run) by Turkish depositors. Khan affirmed that, if any world leader had the power to make fiscal adjustments, it would be the widely-popular President Erdogan. Less confident was Heiland, who noted that, while Turkey has more economic resources than Argentina, the commitment of Turkish leaders to adjustments remained unclear, making Turkish assets susceptible to further sell-offs.
Turning to Argentina, Welch noted that, thus far, President Macri remained likely to win re-election despite the economic crisis. “Argentines seem patient so far, and the political fallout has been fairly minimal,” he stated. Argentina would have to resolve its on-going Lebac rollover drama, and would have to demonstrate progress now that the revised IMF accord had been concluded. However, he acknowledged that, “there is no single silver bullet…and the government needs to squeeze everybody,” to get the economy on sounder footing.
Heiland praised Buenos Aires’ decision to turn to the IMF, and for the “really strong commitment by Argentine leaders to do the right thing.” In contrast, Khan admitted to a much greater concern for political risk. “Macri is already losing popularity, and the adjustment hasn’t even kicked in yet,” she declared. The slightest risk of a return to a Peronist government should give investors pause, she cautioned.
On the Brazilian elections, Welch opined that a crowded field of 6 centrist candidates had bolstered the popularity of candidates on both extremes, yet both first-round victors would need to move to the middle to secure a second-round victory. PT candidate Haddad may be prevented from moving to the center by internal party politics, he stated. Heiland argued that investors should focus not only on the final victor, but on the new president’s margin of victory and whether he had won a clear mandate.
“We won’t get what we want in Brazilian pension reform, but we can get some of it,” according to Aziz. Both leading candidates would need to compromise to pass a bill through the country’s fractured Congress. Aziz warned that the market wouldn’t react well to a lack of movement on this “critical” objective. Khan suggested that the market might be under-pricing the potential positive economic effects of a Bolsonaro victory, and noted that post-Lava Jato politicians would be finding a new way to make deals. Improvements in corporate governance were a welcome development for Brazilian corporate debtors. “But this could all go wrong if the PT returns,” she concluded.
The incoming AMLO administration in Mexico, along with NAFTA 2.0, were also a panel topic. “I’m not sure which way they will go [upon taking office],” stated Heiland. With NAFTA trade issues “hopefully off the table,” the new government will need to demonstrate the path it intends to follow. Aziz believed that President-elect AMLO will “play by the book” vis-à-vis the new trade accord, with the inclusion of a representative in the talks likely indicating a reduced risk of “drama.” Aziz deemed it possible that AMLO would prove to be a pragmatic leader, and praised Banxico for “not being behind the curve; it is where it should be.”
Greater concern was signaled by Khan. “The market has given AMLO way too long of a honeymoon,” she declared. The conclusion of the revised NAFTA treaty came as no surprise to her; “I’m much more concerned about Pemex…it is poorly managed and could become a huge fallen angel.” AMLO’s appointments to Pemex management roles did nothing to inspire her confidence, she stated.