EMTA FORUM IN DUBAI
Tuesday, March 13, 2018
The Capital Club Dubai
Gate Village, Building 3
Dubai International Finance Centre (DIFC)
4:15 p.m. Registration
4:30 p.m. Panel Discussion
Prospects for the Emerging Markets
Jean-Michel Saliba (Bank of America Merrill Lynch) – Moderator
Farouk Soussa (Citi)
Raffaele Semonella (HSBC)
Christian Esters (S&P Global Ratings)
Philippe Dauba-Pantanacce (Standard Chartered)
5:30 p.m. Panel Discussion
Current Trends in Emerging Markets
Franck Nowak (Franklin Templeton Investments) – Moderator
Okan Akin (AllianceBernstein)
Tim Gill (Fidelity Investments)
Jamil Koudim (LF Funds)
Brett Rowley (TCW)
6:30 p.m. Reception
Support Provided by Bank of America Merrill Lynch, Citi, HSBC, MarketAxess, S&P Global Ratings and Standard Chartered.
We regret that this event is not open to the media.
Attendance is complimentary for EMTA Members / US$695 for Non-members.
Rebound in Oil Prices Helping GCC Sovereigns, Note EMTA Dubai Panel Speakers
The rebound in oil prices had improved the outlook for GCC countries, according to speakers at EMTA’s 9th Annual Forum in Dubai. The event was held on Tuesday, March 13, 2018 and was sponsored by Bank of America Merrill Lynch, Citi, HSBC, MarketAxess, S&P Global Ratings and Standard Chartered. 100 market participants attended.
Jean-Michel Saliba (Bank of America Merrill Lynch) moderated the event’s Sell Side panel. Saliba opened the event by soliciting views on the region’s outlook for 2018, including oil pricing, geopolitics, ratings and specific GCC countries.
Philippe Dauba-Pantanacce (Standard Chartered) expected oil prices to remain relatively stable. He cited decreasing global supply levels, “surprising” compliance to the OPEC- Russia accord, strong global growth, and cuts to industry investment in recent years as all supportive of oil pricing. Dauba-Pantanacce also discussed the major geopolitical themes across the globe, and while he expected the Iran nuclear deal to be recertified, its termination would bolster Iran’s hawks at the expense of more moderate forces.
Christian Esters (S&P Global Ratings) reviewed the sovereign credit ratings of Gulf countries. While generalizations were not possible, “all of the outlooks on our GCC ratings are stable, except for Qatar, which signals that ratings downgrades have probably bottomed out.” Esters noted that S&P downgraded Qatar, Bahrain, Oman and Saudi Arabia after the oil price crash due to weaker fiscal and current account balances, but that more recently, “reform commitment and the oil price rebound are supportive.” Esters reminded attendees that Kuwait and Abu Dhabi escaped downgrades, both having twin surpluses; but that for other GCC countries to be upgraded, “a further permanent and consistent rebound in the oil price” would be a factor it would consider.”
“We are definitely at the tight end of the range,” stated HSBC’s Raffaele Semonella in a discussion of GCC valuations, adding that “it’s hard to argue for significant spread compression.” Semonella did, however, see value in MENA credits vs other EM regions. He reviewed the increased participation of Asian investors, including insurance companies, in GCC long-term debt, as well as US accounts, and analyzed possible ramifications. “When locals bought most of a deal, there was less potential for volatility; international buyers are more likely to flow in and out,” he concluded.
Citi’s Farouk Soussa addressed economic reform progress in the region’s behemoth. Saudi Arabia’s 2023 fiscal balance program is more realistic than its earlier program, “but there was also a credibility issue with this change in target.” Soussa listed numerous challenges to Saudi progress, including the potential for a backlash from religious forces to social reforms. In addition, the Ritz Carlton episode underscored the lack of strong institutions and added uncertainty for FDI investors, who are critical to bolstering economic growth and providing jobs for the 200,000 Saudi youth entering the labor force each year.
On the region’s high-yielders, Soussa saw most Omani risks as political in nature, including the succession to Sultan Qaboos. Although the succession “seems like it will progress smoothly, the new generation necessarily lacks the moral authority - including regionally - of the long-serving Sultan.” Soussa pointed out that Oman’s neutrality in the Qatari dispute will increasingly be questioned by its neighbors, but that largely because of respect for the Sultan, it has suffered no repercussions to date.
He believed that Saudi support of Bahrain’s currency peg was likely to continue, but cautioned that “the modalities of any Saudi support to bondholders were far from certain.” Semonella expected Bahrain to issue this year, and that for investors who can stomach volatility, a good entry point could present itself if spreads widened on the announcement of a new deal. Esters commented that GCC support of Bahrain was factored into the country’s rating.
Franklin Templeton’s Franck Nowak then led a panel of global portfolio managers. In opening remarks, he noted that 2017 was a year where, “it was impossible to lose money in almost any asset class, followed by a bout of returning volatility earlier this year, where there was nowhere to hide.”
Tim Gill (Fidelity) noted that the sanguine view widely adopted at the start of 2018 by the investment community was starting to be questioned. A more expansionary US fiscal policy, threatened protectionism and a potential US trade war with China could all be negative for EM, while FOMC rate hikes make the asset class less attractive on a comparative basis. “I’m not panicking, but these are not good developments.” On the other hand, the high level of OPEC production-cut compliance was a welcome development, and Gill anticipated the accord being renewed in 2018, with possible tapering in 2019.
Okan Akin (Alliance Bernstein) seconded the positive effects on the region of higher oil prices. He added that pricing for other base metals, such as gold, were at decent levels. Akin expected EM corporates to outperform in 2018, but urged investors to be selective.
Jamil Koudim (LF Funds) believed the repricing of bonds earlier in 2018 was “healthy, and a good entry point,” and he acknowledged increasing EM allocation on his non-dedicated funds from 20% to 30%. However, Koudim saw GCC credits as less appealing than others in EM, and preferred stories in Latin America, South Africa and Russia.
Brett Rowley of TCW discussed the wide appeal of Egyptian t-bills, and the attractive combination of high yields and lack of currency convertibility issues. Rowley expected that disinflation in Egypt and eventual Central Bank rate cuts will eventually push more investors into the country’s bonds. Gill agreed (“it’s too cheap not to be invested in Egypt”), although Koudim adopted a contrarian view, viewing Egypt as expensive; “most of the good news is priced in and there are lots of uncertainties,” and preferring Lebanon as a HY alternative with more potential upside.
View on Oman also diverged. Koudim described Omani sovereigns as fairly valued, and saw value in Omani quasis. In contrast, Rowley expressed skepticism. “Government officials don’t seem to have a sense of urgency on its fiscal issues.” He saw Oman as vulnerable to future downgrades. Gill noted that Oman had many suitors, including Iran and China, due to its strategic importance, and that important long-term factors also included diversification as well as succession planning.
Gill believed that Riyadh was, however, demonstrating a much more serious approach to fiscal adjustment than Oman, or Bahrain. The implementation of the VAT in Saudi Arabia (and the UAE) were positive steps. “MbS has a great story to tell, and stories often drive spreads.” Gill added that Riyadh’s greatest fiscal tool is its “sway in OPEC.”
Nowak concluded the panel with a brief review of the space for GCC in EM portfolios. Speakers noted the fact that all GCC credits, except Oman, are off-index, don’t have natural buyers, are unusual in their EM characterizations because of their high per capita incomes, but generally have lower volatility and benefit in “flight to safety” moves.