EMTA WINTER FORUM
Tuesday, February 20, 2018
Hosted by JPMorgan
The Great Hall
60 Victoria Embankment
2:30 p.m. Registration
2:45 p.m. Panel Discussion
Current Events and Trends in the Emerging Markets
Luis Oganes (JPMorgan) – Moderator
David Hauner (Bank of America Merrill Lynch)
Elina Ribakova (Deutsche Bank)
Sergei Voloboev (Nomura)
Phoenix Kalen (Societe Generale)
4:00 p.m. Panel Discussion
Investor Perspectives on the Emerging Markets
Kevin Daly (Aberdeen Standard Investments) – Moderator
Jan Dehn (Ashmore Group plc)
Ben Sarano (EMSO)
Richard Segal (Manulife Asset Management)
Rob Drijkoningen (Neuberger Berman)
5:00 p.m. Cocktail Reception
Additional Support Provided by Tradeweb.
Attendance is complimentary for EMTA Members / US$695 for Non-members.
South African Transition, CEMEA Credits Discussed at EMTA Winter Forum in London
Reactions to the change of leadership in South Africa were included in the discussion at EMTA’s Winter Forum, hosted by JPMorgan in London on Tuesday, February 20, 2018. The event also featured global economic framework analysis and specific country reviews, and attracted over 125 market participants. Tradeweb provided additional support for the event.
Luis Oganes of JPMorgan led the event’s sell side panel, which included David Hauner (Bank of America Merrill Lynch), Elina Ribakova (Deutsche Bank), Sergei Voloboev (Nomura) and Phoenix Kalen (Societe Generale). Oganes polled the panel for views on US and ECB monetary policies, and the dollar-euro exchange rate. Voloboev, Ribakova and Oganes stated their house calls were for four US FOMC rate hikes in 2018, with Hauner and Kalen noting their firms expected 3 hikes. As for 2019, predictions ranged from two hikes (Nomura) to four (JPMorgan). The majority of banks forecast the euro to cost $1.30 by year-end, with Bank of America Merrill Lynch at $1.20. Voloboev confirmed that Nomura expects ECB tapering on asset purchases to end in September 2018, while Kalen’s firm Societe Generale anticipated purchases to continue into December.
Oil price forecasts were also discussed. Voloboev saw oil trading in a range capped on the upside by US share production and on the downside by the continued cohesion of the OPEC/non-OPEC accord. Kalen specified the upside cap was likely around $70, while Hauner and Oganes anticipated higher levels, at $75-80 and $75 respectively in the 1H, before a US shale response in the 2H. Hauner ventured that the OPEC/nOPEC agreement curtailing production could remain in effect until 2020.
Turning to the recent elevation of President Ramaphosa in South Africa, Ribakova was enthusiastic, emphasizing that, “this is a structural change story…it could be the first major change since the end of apartheid.” She praised Ramaphosa’s work to build consensus and unity within the ANC, and for “playing the long game.” The bar to greater business confidence was low, and she acknowledged that her target of 11 ZAR/USD could be exceeded. “Local investors are cautiously optimistic, but not yet overweight,” she concluded.
In contrast, Hauner declared that, despite the “sea change” in investor sentiment, “the ZAR is over-valued by 20%, and it has de-coupled from fundamentals.” For many investors, a possible downgrade by Moody’s overhung the credit, and South Africa’s status as an oil importer could prompt additional inflation, he added. Kalen saw potential additional investor inflows, despite the skepticism some investors maintain in the heavy lifting of major economic transformation. Voloboev judged South Africa to be “priced to perfection, although the story is very exciting.”
Panel enthusiasm for Turkish debt was restrained. “It’s hard to be fundamentally constructive,” opined Hauner, before venturing that, “because it is an unloved story,” there could be room on the upside. Ribakova and Voloboev saw tactical and selective trades. Kalen forecast a year-end TRY rate of 4.08 per dollar.
Continued investor enthusiasm for Russian debt was reviewed. “Just because Russia is a consensus trade, it doesn’t have to be wrong,” stated Ribakova. She praised the country’s progress in narrowing fiscal deficits during an era of weaker oil pricing, while acknowledging thorny geopolitical issues. Voloboev expected Russia to regain all three investment grade ratings by year-end, thus prompting technical inflows; “it’s still an incredibly solid credit.” Hauner cautioned there was limited upside for the RUB, despite his firm’s bullish oil forecast.
Events in the Gulf were also a panel topic. “Reform in Saudi Arabia is the most exciting story in the Middle East,” asserted Voloboev, who, while praising the initiatives of Crown Prince Mohammed bin Salman, warned that there remained “deal risk, such as a delay of the succession process if the King is incapacitated.” Voloboev also argued that Riyadh could continue to weather the occasional “mess-ups such as Lebanon, because of its special status and balance sheet.” Both he and Hauner saw the biggest opportunity in Saudi equities, with Hauner pointing out the technical boost that would be triggered by the upgrading of Saudi Arabia to the MSCI EM index.
Kevin Daly (Aberdeen Standard Investments) then led the Forum’s buy side panel, which featured Jan Dehn (Ashmore), Ben Sarano (EMSO), Richard Segal (Manulife Asset Management) and Rob Drijkoningen (Neuberger Berman). At the outset, a show-of-hands poll conducted by Daly revealed that the majority of attendees considered themselves bullish on EM assets, a view heartily endorsed by at least one of the panelists.
“You should buy ruthlessly in EM,” Dehn declared, stressing that the loose global monetary policy of the past decade had led to the over-buying of DM assets. “EM is the only market that got cheaper during QE,” he continued, advising investors to “load up” on EM instruments during risk-off market turns, even as volatility would now likely increase. In comparison, “DM offers no value.”
Other speakers were more cautious in tone. Segal noted the quick rebound following the US wage inflation scare in January. “We all know that fiscal policy will loosen, and the US and ECB are tightening. There is still a case to be made for EM, but it’s not clear if we can have the same returns this year as in the past…there is no reason to be overly worried, but the warning shots have been fired.”
There was general agreement that election fears in Mexico and Brazil were overblown. “Typically, elections are accompanied by more perceived risk than is justified,” emphasized Sarano. In his opinion, the outcome for Brazil would likely be positive, with a centrist, reformist candidate the most likely victor. He stressed that the country’s need for a government, “that can act and resume the reform agenda; it can’t have an inactive government.” On the other hand, he believed that Mexico could have a government that accomplished little, and still justify current valuations.
Neuberger recognized that his assessment of greater risks in Mexico vis-à-vis Brazil was a consensus view, while seconding that fears were likely overdone. Segal reminded attendees that the major reform work in Mexico’s telecom and energy sectors had already been enacted, in comparison to the delayed pension reforms in Brazil. Dehn envisioned only upside for Mexican debt after the election, foreseeing an overselling in the run-up to election day. “If AMLO wins there will be a relief rally [in the buy the rumor /sell the fact tradition]; if he loses there will be monster profits.” He encouraged investors to consider buying MXN if polls continued to show AMLO in the lead.
While many speakers echoed the first panel’s lack of conviction on Turkey (“it is a tactical opportunity, but it lacks a longer-term anchor given the political backdrop,” according to Drijkoningen), Segal admitted his bullishness made him an outlier. “As long as the Central Bank can keep real rates relatively low, there is a case to be made [to invest]; and they are pretty good at crisis management,” he affirmed.
Dehn recommended buying Turkey on dips, assuming the global macro picture remained positive for EM. “Turkey is probably the biggest consumer of our intellectual capability,” lamented Sarano. For accounts generally bullish on EM, he voiced that, “there are better places to put your money.”
Views were mixed on whether the good news had already been priced into South Africa. Drijkoningen adopted a “glass half-full view.” Sarano judged the credit a medium- and long-term buy, “with a lot of value unlocked, but there could be some disappointment if the pace of change doesn’t continue rapidly.” More cautious, Segal warned, “the result of state capture can’t be done overnight.”
Venezuela, principally a bet on regime change, was only for those with long-term time horizons, speakers concurred. Sarano described recovery values as greater than current pricing, although an investor could end up owning the debt of the “materially failed state for a long time.”
Dehn believed a debt restructuring could move quickly in a post-Maduro regime, although the political outlook was unclear. He reasoned that the military would continue to support President Maduro unless there were major street protests, an extreme rigging of the vote, or (less likely) some spark arising from the opposition.
“The opposition is inept at best, and the solution is a long time away,” rued Segal. “There is no human capital in New York willing to go back; no Arminio Fraga waiting in the wings.” He added that the unknown quantity of oil pledged to Russia and China also served to temper any enthusiasm.
Before concluding with trade ideas, Daly asked speakers if they were concerned by China, noting the risk of a trade war with the US following the increased tariffs on imports of steel and aluminum. Segal expressed generally positive comments on the country’s macroeconomic profile. “The soft landing has been well managed, but trade wars—including intellectual property—are always a possibility.”
Dehn declared that, “China serves as an important part of the drama circuit in EM. The ‘hard landers’ come out every so often but they have been wrong for ten years.” Concerns over the debt to GDP ratio were mistaken because of the high deposit to GDP ratio, and because “most lending goes into long-term infrastructure which helps them maintain high growth rates.”
Dehn observed that once Chinese debt was included in global benchmarks, “we will have positions, not views.” The era was approaching when investors would be benchmarking vs. Chinese bonds rather than UST, and vs the RMB rather than the USD, he concluded.