EMTA WINTER FORUM
Tuesday, February 19, 2019
Hosted by JPMorgan
The Great Hall
60 Victoria Embankment
London
2:15 p.m. Registration
2:45 p.m. Panel Discussion
Current Events and Trends in the Emerging Markets
Luis Oganes (JPMorgan) – Moderator
Andreas Kolbe (Barclays)
Christian Wietoska (Deutsche Bank)
Siobhan Morden (Nomura)
Gregory Smith (Renaissance Capital)
4:00 p.m. Panel Discussion
Investor Perspectives on the Emerging Markets
Kevin Daly (Aberdeen Standard Investments) – Moderator
Ben Sarano (EMSO)
Pierre-Yves Bareau (JPMorgan Asset Management)
Richard Segal (Manulife Asset Management)
Rob Drijkoningen (Neuberger Berman)
5:00 p.m. Cocktail Reception
Additional Support Provided by Tradeweb.
EMD Market’s Turnaround Reviewed at EMTA Winter Forum in London
Moderator Luis Oganes (JPMorgan) highlighted the “total turnaround” in market sentiment as he welcomed attendees to EMTA’s Winter Forum. The event, held on Tuesday, February 19, 2019 in London, attracted 150 market participants. Oganes attributed the rebound to a more dovish outlook on US rates, and an improved tone in US-China relations, suggesting a trade war could be avoided. JPMorgan hosted the event, with additional support provided by Tradeweb.
Concurring, Andreas Kolbe (Barclays) espoused a bullish view on the US economy, and did not expect a US recession either this year or next. The Fed will keep rates flat until September 2019, with an additional hike expected in 2020, he predicted. Generally, the EM credit outlook was “good enough,” although a global growth slowdown could eventually pose issues. “2019 will not be a disastrous year for EM, and we believe that we can hold on to the gains made year-to-date,” he stated.
Deutsche Bank’s Christian Wietoska maintained a similar US rate outlook, while cautioning that weaker European growth could create a headwind for EM. Oganes noted that JPMorgan had revised its FOMC forecast from a previous call for 4 hikes in 2019 to just 1 (in December). “We are not expecting a US recession as such, but that discussion may be revisited in 2020,” he advised.
Oganes steered speakers through a discussion of key EM sovereigns. “Turkey is clearly not out of the woods,” affirmed Wietoska. The risk of a 600 bp reversal in the 2H, and the need to rollover $80 bn in debt, could cause downward pressure on the lira, he commented. Oganes reasoned that, should the AKP do well in the upcoming regional elections, a period of political stability could prompt economic reforms.
Wietoska warned his firm had a “very negative” view on the South African economic outlook, stressing the difficulty of enacting necessary economic reforms. Large outflows could follow a Moody’s downgrade to below IG, as could any negative surprises in the annual budget. In addition, the Finance Ministry has the difficult task of detailing a clear solution on the Eskom issue, “and cost-cutting must happen without additional labor issues.”
Slightly more positive was Kolbe, who expected the country to maintain its IG rating by Moody’s. Cost reductions at Eskom are “not realistic before the elections, but it is not an imminent liquidity issue.” He argued that structural issues could be fixed once following the presidential vote. Gregory Smith (Renaissance Capital) described Eskom as the heart of the South African economy, while also voicing concern over the fate of South African Airways. He added that analysts are being increasingly aware, with new information, “how bad things got under the Zuma administration.”
Nomura’s Siobhan Morden focused on LatAm economies. She was hopeful that Brazilian Finance Minister Guedes (whose appointment “added credibility” to the administration) would introduce “meaningful” pension reform and, most likely with a strategy of “starting at the higher end and then watering it down.” Investors should understand that the savings will be gradual and phased in over the medium-term. Bolsonaro will need to make some progress on reducing crime in order to use political capital to push through reforms, she added. Oganes expressed a personal view that Brazilian spreads could continue to narrow, despite a house view that Bolsonaro remains untested in his legislation-passing skills.
Morden feared that Mexican President AMLO’s popular support “encourages more bad behavior.” She voiced long-term concerns over Pemex, with its IG rating important to monitor, although in her view Pemex had explicit government support. “I’m resisting turning more negative on Mexico, but the facts are making that harder,” confided Oganes, “the economic team remains in fire-fighting mode because of their boss, and they are not calling the shots.” He calculated that a one-notch downgrade of the sovereign (resulting from any official aid to the troubled state oil company) would prove less dramatic than Pemex losing its IG status.
Morden believed that the formula for President Macri to be re-elected in Argentina would be low inflation + low fx volatility + the final ballot being between Macri and former president Cristina Fernandez de Kirchner. Oganes’ base case was for Macri to win re-election and that IMF funding would continue with most other candidates, although “all bets are off if CFK wins.”
Russia’s fundamentals remain positive, according to Smith, and there was still a case to be long Russian debt. Outflows are likely if additional sanctions are enacted, with the ruble vulnerable. There was currently no market consensus on what additional sanctions would be imposed, he noted.
Running through frontier markets, Smith noted the recent Uzbek deal was motivated by a desire to encourage FDI and set a benchmark for corporate issuers rather than a sovereign need for funding. He offered a neutral stance on Nigeria, following the one-week delay of the presidential vote. Ghana may be over-sold despite valid concerns over its fiscal deficit once the current IMF program expires, while talks with officials in Cairo “reinforces my confidence that Egyptian reforms will continue when their IMF program is completed.”
The program’s investor panel was moderated by Aberdeen Standard Investment’s Kevin Daly, who asked speakers for their views of current market valuations. Ben Sarano (EMSO) and Pierre-Yves Bareau (JPMorgan Asset Management) agreed that valuations were “not bad, broadly speaking,” and “fair, not too hot, not too cold,” respectively, while Richard Segal (Manulife Asset Management) ventured that 5 to 7% returns were possible. Sarano judged EM FX as potentially a bargain from a multi-year time horizon, although he emphasized that a European bounce-back was necessary for a new stage of the EM debt rally. Bareau characterized the market as being “in the middle of a pendulum swing,” with technical support from those who had missed the rally, and who will provide future inflows.
Risks to market performance included geopolitics, sanctions on Russian assets and weakness in the German economy, according to Segal. In his view, the potential US-China trade war’s greatest impact was not its actual macro effect, but rather its continued domination of all discussion at EM corporate planning meetings; “they talk about this non-stop, even if it has no finite economic impact [for their firm].” Sarano suggested that occasional mini-shocks could be used as buying opportunities by investors. Bareau observed there was occasional “noise” from EM countries, such as actions by AMLO or the delayed Nigerian vote. He followed up that, on the positive side, the market could tighten on additional good news from China, which he deemed as “not really priced in yet.” Finally, Daly added that the risk for EM at this stage would be a downturn in growth, which would weigh on EMFX in particular.
Investors also concluded that further spread compression would still be possible in Brazil despite the recent rally. “This is a very transformational government which will make a big dent in the long-standing pension issue,” Sarano asserted. He predicted that the COPOM would move slowly, tolerating high real rates for a while before it moves to an easing cycle, and privatization opportunities could arise in 2020. In Bareau’s opinion, more value was likely in Petrobras debt rather than in sovereign issues. While wary of past overenthusiasm about reform fever (he reminded attendees of ‘Ramaphoria’ in South Africa and similar enthusiasm after the last Argentine presidential election), Segal remained optimistic on Brazil, although he encouraged colleagues to wait for better entry levels.
Segal concurred with sell-side panelists that Mexican officials are, “drip feed by drip feed, telling the markets they won’t let [a downgrade of Pemex to junk] happen; they will do all they can to keep it investment grade.” Bareau was sanguine about US-Mexican trade, reasoning that the worst case for a revised trade agreement vote would be a re-establishment of NAFTA. Sarano opined that Mexican debt was “a cheap credit,” but “one that is moving in the wrong direction; I don’t see Mexico as compelling in the credit or FX asset classes.”
Recent Turkish economic history included a series of “unforced errors, such as the President’s speech in London last year,” according to Segal, who seconded Oganes’ expectation that structural reforms could follow the April elections. Bareau feared “we are heading into a more difficult period for Turkey, as the CBT will be pressured to cut rates after the elections, and this won’t be good for the currency.”
On sanctions, “anything can happen, so I don’t know what the outlook is,” admitted Segal. He speculated that the Rusal episode might have been a lesson to Washington DC on the collateral damage of sanctions. Bareau viewed the rewards not worthy of the risk. Disagreeing, Sarano declared that Russian default risk was “zero,” because of the low hard-currency debt to GDP ratio. The extremely hawkish Central Bank (“real rates are high and will go higher”) make Russia “a highlight on the local markets space.”
South Africa was a “sad story; in some ways, it has finally gotten a backdrop where it can do better by removing corruption, and their terms of trade may be improving,” lamented Sarano. However, the Eskom problem was “a major deal; the infrastructure is breaking down and they don’t have the capacity to fix it. As a result, companies can’t go there because they can’t operate,” he concluded, adding his vote to those predicting an across-the-board junk rating by year-end (with Segal expecting the last downgrade to occur possibly in early 2020).
Venezuelan bonds were likely to rally in a regime change, Sarano affirmed. Segal conceded that his firm had “thrown in the towel” on Venezuela, as any restructuring was likely to be long and drawn-out.
Daly acknowledged his firm maintained a long position on Argentina (which he conceded was a real-money consensus trade) as he introduced a discussion of the country’s upcoming election. Segal expressed confidence that Argentines realized they couldn’t go back to old ways, and that the IMF anchor was necessary “even if the word is poisonous.” The bad news was that the market would have to wait until October to know the election results. Bareau saw the elections as binary, and declared he was not tempted at current prices.
Finally, Segal urged “brave” investors to consider Oman in the GCC credit arena. He questioned whether investors had fully adjusted their portfolios for the recent inclusion of Oman’s GCC neighbors into the EMBI index, observing that some may still be underweight.