Miami Forum - January 22 2013 Miami Forum - January 22 2013
Miami Forum - January 22 2013

Miami Forum Speakers Discuss Stabilization of European Markets and the Hunt for Yield

EMTA’s Second Annual Forum in Miami was held on Tuesday, January 22, 2013 at the Ritz Carlton Hotel.  Over 100 market participants attended the event, which was sponsored by MarketAxess, Goldman Sachs, Bank of America Merrill Lynch, Nomura and Santander.

Alberto Ramos of Goldman Sachs steered a panel of EM experts through a variety of global and Latin American topics.  Ramos began the session by requesting speaker views on the global economic outlook, and inquiring if the more constructive market sentiment in the months preceding the event was justified.

Bulltick Capital’s Alberto Bernal asserted that growth would accelerate in 2013, largely because of China having “turned a corner.”  Bernal forecast an 8.4% increase in Chinese GDP this year, a figure he described as conservative.  Santander’s Alejandro Estevez-Breton agreed that the global economic outlook had improved, while expressing concerns that substantial risks remained.  Moderator Ramos also sounded a cautious note, warning that the US will face “strong headwinds” in the 1H of 2013 before an improved 2H.

The stabilization of European markets was also discussed.  Estevez-Breton said his G10 macro colleagues predicted zero growth for the Euro Zone in 2013, with a 1.6% rise in GDP next year.  predicted zero growth for Spain in 2013, with a 1.6% rise in GDP next year.  “This is substantially weaker than our forecasts for the rest of the world, especially EM, but on the positive side reforms are being implemented in ‘peripheral’ countries,” he commented.  The announcement of the European Central Bank’s OMT program was a “game changer” that had led to the return of pension funds as buyers of some peripheral debt, a resumption of long-term debt issuance by banks outside the core and a rally in ‘peripheral’ European spreads.  Estevez-Breton added that a return to the market by Portugal or Ireland could have positive spill over effects on Italy and Spain.  Finally, he stressed that, while the Eurozone is not necessarily “an optimal currency union, its break-up is very unlikely,” given its origin as a political project.

Anne Milne of Bank of America Merrill Lynch noted that the European investors she had recently visited were no longer focused on the Eurozone currency crisis, and instead had turned their attention back to the hunt for yield.  Nomura’s Tony Volpon expressed his personal view that Spain would ultimately request OMT assistance, while in contrast, Bernal argued that the probability had dropped to 30% (“from 95% three months ago”).

Turning to Latin America, Volpon attributed the strong growth in Brazil for several years prior to 2010 to one-off factors that had masked structural constraints.  Volpon cited the wealth impact from commodity prices, a weakened real and tightening labor markets as reasons why Brazil had boomed for several years in the late 2000s, while the country has experienced a “massive hangover and sub-par growth since the 2010 Dilma election.”  The lack of investment, the strong BRL and record unemployment were now stifling economic output.  Volpon predicted 3.5% growth in 2013 resulting from an “aggressive pump priming on the demand side,” while suggesting Brazil would continued to fail to reach its potential until structural issues were addressed.  Panelists had different views on Brazilian rates – Volpon forecast the SELIC rising to 8.25% in 2013, while Ramos thought hikes were unlikely (“in any case the Central Bank will be behind the curve.”)

Concerns over the government’s interventionist policies and unilateral tariff decreases were deterring some corporate bond investors from increasing their exposure to Brazil, according to Milne.  Ramos questioned Brasilia’s use of “scarce resources to boost the industrial sector; that is not the country’s competitive advantage,” he stressed.

Panelists largely concurred in their positive view of Mexico, causing Estevez-Breton to warn that such a crowded trade could turn ugly if reforms were delayed.  Ramos noted that Mexico had regained some of its external competitiveness because of limiting labor costs.

In discussing specific EM assets, Milne noted that the size of the EM corporate market had now equalled the size of the US high-yield market, at approximately $1 trillion.  She reasoned that new EM corporate deals were oversubscribed, generally, as a result of strong funds flow from yield-seekers rather than fundamental factors.  Summarizing her views, Milne commented, “Is the market attractive compared to last year?  No.  But is it attractive to other markets?  Yes.”

Concluding with trade recommendations, Indian FX and rates were favored by Estevez-Breton, who apologized for going outside the time zone, while Volpon predicted that President Kirchner would not be re-elected, giving potential upside to Argentine assets.  Bernal believed that the MXN still had room to rally (to 11.75). 

On risks, Milne observed that a downgrading to junk status of any large Brazilian corporate could upset the status quo and spook the market.  Estevez-Breton saw any political transition in Venezuela as messy due to “non-existent institutions.”  Bernal would avoid Brazilian and Mexican dollar bonds, and Ramos suggested Brazilian growth would fall below market expectations.