The Straits Room, Level 4
1 Fullerton Square
12:00 noon - Registration
12:15 p.m. - Luncheon and Panels Begin
"Asia 2018-2019: A Sell-Side Perspective"
Robert Carnell (ING Bank) – Moderator
Claudio Piron (Bank of America Merrill Lynch)
Eugene Leow (DBS)
Selena Ling (OCBC)
Kaushik Rudra (Standard Chartered)
"Asia 2018-2019: Views from the Buy-Side"
Liew Tzu Mi (GIC Private Limited) – Moderator
Shiva Iyer (Eaton Vance)
Celeste Tay (Loomis Sayles)
Juan Manuel Otero (PGIM Fixed Income)
Roland Mieth (PIMCO)
Luncheon will be served with the compliments of ING Bank.
The Forum will conclude at approximately 2:30 p.m.
Additional support provided by MarketAxess.
Registration fee for EMTA Members: US$50 / US$695 for Non-members.
EMTA Singapore Panelists Concede Further Sell-Off Likely
An audience poll at EMTA’s Annual Forum in Singapore revealed that the majority expected a further sell-off of EM assets. The event, held on Friday, October 5, 2018, was sponsored by ING Bank and was attended by over 100 EM market participants. MarketAxess provided additional support.
Robert Carnell (ING) reminded attendees of the bullish view widely expressed at last year’s Forum, and challenged a panel of Sell-side experts to explain “what went wrong.” Claudio Piron (Bank of America Merrill Lynch) noted that higher US interest rates and the stronger US dollar were the most obvious culprits, while adding that oil pricing had further exacerbated the situation for importers. Standard Chartered’s Kaushik Rudra underscored the importance of distinguishing vulnerable countries, i.e., those which were running current account deficits, from stronger, current-account surplus countries. Rudra further noted that Asian countries were generally in a better economic situation than EM peers in other regions.
Eugene Leow (DBS) argued that the most important questions for the markets were how long US rate hikes, and dollar strength, would continue. “Because at some point, local rates will become interesting,” he advised, cautioning investors to “wait for the right time.”
Rudra agreed with the audience poll result anticipating further EM debt selling. “I think we are in the middle of it now,” he stated. While “short-term pain” would continue, especially for local-currency debt instruments, he believed that long-term institutional money was still looking to invest in EM.
Carnell steered the discussion to China, and the “trade war in our backyard.” Piron confirmed that his firm had reduced its 2019 Chinese growth forecast from 6.4% to 6.1% as a result of the US-China trade war, and expected the RMB to trade at 7.1 per USD in the middle of next year. His firm believed a deal between the US and China was still possible before the US midterm elections, despite increasing Street skepticism. Piron noted that the recent speech by US Vice President Pence could be interpreted as a major transition in the Sino-American relationship, and signaled no easy fix was likely.
Rudra expressed concern at evidence of a Chinese economic slowdown, and its potential to exacerbate weakness in other EM countries. It was not clear if Beijing would return to pump-priming as it did in the run-up to the most recent Communist Party Congress, in his view. Selena Ling (OCBC) reasoned that should Chinese exporters pass along the US tariff costs, this could result in higher US inflation, possibly triggering the US Fed adopting a more hawkish posture on rates than the market currently expects. She added that ASEAN economies were the most likely beneficiaries from the US-China trade war.
Several speakers characterized Indonesia as collateral damage in the sell-off. Ling noted that, while the rupiah and Indonesian bonds had sold off recently, “Indonesia’s fundamentals haven’t changed from two months ago.” Piron concurred that Indonesia was, “more a victim of macro forces,” and highlighted the overweight in Indonesia by real-money accounts. Rudra concurred, noting that Indonesia--and India--were both domestically-focused, relatively closed economies, and were less vulnerable to increasing protectionism.
GIC’s Liew Tzu-Mi led the event’s Buy-side panel, acknowledging that the “Goldilocks scenario” expressed at the October 2017 panel had disappointed. Pointing out that, while EM debt returns had outpaced other asset classes since the 2008 global financial crisis, they have still lagged way behind US equity returns, prompting her to ask speakers if asset allocators should be concerned about EM relative performance.
Roland Mieth (PIMCO) stressed that EM debt should not be viewed as a monolithic block. While those investing passively in EM debt might be disappointed, and remain subject to the biases of EM indices, “value can be extracted by active management.” Mieth stressed the importance of selecting the “right instruments,” noting that some assets which appear cheap could get cheaper.
PGIM’s Juan Manuel Otero seconded the importance of EM asset selection, noting the dramatic sell-offs in Argentine and Turkish assets in 2018. He warned that the debt of oil-importing EM nations remained vulnerable, since they had not yet “been hit too badly.” Overall, Otero was optimistic on EM debt, “but you have to pick your spots.”
Celeste Tay (Loomis Sayles) underscored the importance of timing for portfolio managers, as well as selecting instruments from countries that are “most sheltered from negative forces.” In her view, the dollar was most likely at the top of its cycle, opening up potential opportunities when it waned.
Several speakers echoed Sell-side support for Indonesian paper. “Indonesia has been punished too much,” declared Tay, arguing that it had been incorrectly grouped with Argentina and Turkey, whose imbalances were much larger. “Indonesia’s current account deficit is much smaller that it was in 2013, and it is now funded by FDI,” she stated, making it less vulnerable to capital outflows. She also highlighted the credibility of the country’s Central Bank. Shiva Iyer (Eaton Vance) also found longer-term local Indonesian paper appealing, noting that there was not enough foreign demand to absorb frequent issuances, while local investors were nervous because of political noise.
Liew asked speakers how liquidity factored into portfolio selection. “Liquidity is a very important focus for us,” declared Iyer, who recalled that the Turkish lira had often sank vs the dollar on minimal volume. Liquidity issues led to contagion risk, he observed; “it’s like in a fire on one floor in a multi-story building, everyone goes to the same assembly point.” Otero concurred, noting that portfolio managers were often forced to sell “what they can, not what you want to.”
Moderator Liew noted that advances in technology, new inventions and changes in infrastructure could all be new ways to address liquidity concerns. Iyer agreed, specifying that the potential development of local bond markets, the rise of non-bank liquidity providers and Buy-side to Buy-side trading as possible solutions to liquidity concerns.
Martinez concurred that the re-election of Macri was the best thing for the economy, while arguing that on a long-term basis, a victory by moderate Peronists who subsequently maintained similar economic policies would put the country on sounder long-term footing. Gutierrez seconded the importance of “institutionalization” of new policy directions, rather than having to rely on specific leaders.
Several panelists acknowledged the potential appeal of local debt. “On paper it is very compelling—high yields, and a currency biased to strengthen; but the lack of liquidity means there is no exit if something happens,” summarized Stock. While his firm had no view on individual instruments, Martinez concurred with assessments that the undervaluation of the peso was not likely to continue.
Dollarization remained a final option should the situation deteriorate, according to speakers. Stock foresaw it as “inevitable, if all the other plans don’t work.” Bernal noted that halting monetary expansion was a draconian measure and, were it not to succeed, dollarization would have to be put on the table.
Fitch Ratings, MarketAxess and XP Securities provided additional support for the event.