EMTA FORUM IN FRANKFURT
Thursday, April 26, 2018
Steigenberger Frankfurter Hof
Frankfurt am Main, Germany
3:30 p.m. Registration
4:00 p.m. Panel Discussion
Prospects for the Emerging Markets
Guy Stear (Societe Generale) – Moderator
David Hauner (Bank of America Merrill Lynch)
Nicolas Schlotthauer (DWS)
Henrik Gullberg (Nomura)
Christian Wildmann (Union Investment)
5:00 p.m. Cocktail Reception
Additional support provided by Bank of America Merrill Lynch, Nomura and Societe Generale.
Registration fee for EMTA Members: US$75 / US$695 for Non-members.
We regret that this event is not open to the media.
Frankfurt EMTA Panel Identifies Dollar, Rates and Elections as Key Factors to Monitor
“This event continues to get fuller than in prior years, it shows interest in EM has increased,” stated David Hauner (Bank of America Merrill Lynch) at the outset of EMTA’s Fifth Annual Forum in Frankfurt. The event was held on Thursday, April 26, 2018 and was sponsored by MarketAxess, with the additional support of Bank of America Merrill Lynch, Nomura and Societe Generale.
Guy Stear (Societe Generale) returned as the event’s moderator, leading off by asking speakers to identify the key themes in EM investment in 2018. For Hauner, the most important factors were global rates and the US dollar, energy and geopolitics (he expected oil to reach $80-85 by June), and the upcoming elections in some major emerging countries. Nicolas Schlotthauer (DWS) stressed the importance of Chinese growth, while Henrik Gullberg (Nomura) argued that Central Banks’ responses to increased oil prices would be crucial. Finally, Christian Wildmann (Union Investment) saw the dollar, euro and RMB exchange rates as pivotal; he would also be monitoring EM flows when Central Banks in Europe, Japan and China adopted less accommodative policies.
The resilience of EM in the face of increasing US rates was discussed. Hauner attributed continued EM strength to the dollar’s weakness for most of the past year, and believed that recent dollar strength would prove a temporary phenomenon. His forecast for EM sovereign (2.5%) and EM local bond returns (4.5%) were “not terribly exciting, consensus forecasts,” and he was not concerned by a short-term EM sell-off. Gullberg argued that solid growth overall had mitigated EM sensitivity to US monetary policy.
Schlotthauer was sanguine that the threat of trade wars would also not de-rail EM performance. “We do not see trade wars as a base case, but one can only guesstimate the probability of this risk” Other panelists agreed. In Hauner’s view, Trump’s m.o. was to create noise, wait for a concession and then take a quick victory. “We don’t think he wants a lot of unresolved fights…NAFTA should be resolved by summer because of the US midterms, and China wants to find some common ground with the US,” he reasoned. Wildmann ventured that Mexico and China were reacting rationally, with President Xi being quite clever, in their responses to Trump. The US president’s tirades against other DM countries was not weakening the potential for a strong and united US-European stance.
The importance of selecting active managers in EM investment was highlighted by panelists. Hauner noted that a study of ETF performance revealed that active managers had historically outperformed indexed funds in a rising US rate environment. Increased oil prices, elections and the USD fx rate would all effect EM countries differently, thus making the case for active managers. Schlotthauer affirmed that the growth of the EM universe over the past two decades to include a much higher number of countries-- with a wide range of ratings and maturities-- gave EM portfolio managers, “a much more varied range of opportunities.”
Picking up on the theme of the expanded EM universe, Wildmann affirmed that with frontier market expansion, “you need to increase your team, and dig deeper into the single B credit space.” The desire by clients for more diversified portfolios posed a challenge for managers, who needed to create “smarter products,” and needed more staff to analyze more illiquid debt.
Following his emphasis on global themes, Stear steered the panel through select credits. Wildmann explained that general bullishness on Russia, including crossover inflows, earlier in the year, had led to a strong sell-off as the US adopted stronger sanctions on April 6. While he thought assets might have over-corrected, and pockets of value likely existed, possible further noise in the run up to the US midterms made Russian debt vulnerable to further downside. “Selection is key; one needs to be quite cautious in Russian corporates,” he concluded.
Hauner concurred that there was still likely to be additional crossover selling, and further downside risk. “However, at the end of the day, fundamentals will prevail in Russia, especially for those firms not affected by sanctions.”
Views on South Africa diverged. Schlotthauer questioned whether President Ramaphosa would be able to deliver reforms, “and so far there is not too much clarity.” Gullberg argued that moves at South African SOE boards to root out corruption were notable, and this could lead to strong growth in a country where SOEs played an important role in the economy. “Business confidence and consumer confidence are booming,” he added.