EMTA Spring Forum: BOJ, China and Stable Eurozone Support EM
EMTA’s Spring Forum drew a standing-room only audience of over 150 EM market participants. The event was hosted by HSBC Securities (USA) Inc. on Tuesday, April 30, 2013 in New York City. Speakers discussed a variety of global and EM topics ranging from the current Eurozone stability and Chinese growth to the Venezuelan elections and the Argentine judicial saga.
Moderator Pablo Goldberg of HSBC Securities (USA) Inc. summarized EM conditions as an introduction to the event. Among the points Goldberg highlighted were the lack of inflation in EM countries; the elusive inflow of Japanese money, which, while oft-discussed, had so far appeared to be moving to Eurozone credits; and lackluster EM performance in the first four months of 2013, with hard currency debt virtually flat, and EM equities and corporates underperforming their DM peers.
Goldberg questioned Forum speakers if Eurozone bond price stability following ECB President Draghi’s “whatever it takes” speech was justified. Benoit Anne (Societe Generale) voiced ongoing nervousness about Eurozone prospects, with Van Eck Global’s Eric Fine concurring. “It is not a base case that there will be a Eurozone departure, but many still think so,” Fine stated, observing that growth remains a long-term concern. Denise Simon (Lazard Asset Management) reiterated the need for growth, while acknowledging that Draghi’s comments had bought Europe time.
Bulltick Capital’s Alberto Bernal argued that recent development in Tokyo had given European bondholders a gift. “If not for the Bank of Japan’s liquidity moves, we wouldn’t be seeing Italian bonds at current levels; there is $1 trillion propping up prices,” he stressed. Bernal cautioned that the relatively tranquil reaction to the Cyprus bail-in was unique, and could not be repeated in Spain or Italy.
Continuing on external factors, Simon reasoned that commodities were still supported by Chinese demand, although EM countries varied in their vulnerability to Chinese raw material demand. “The Chinese government said growth would be in the mid 7s, so why did people expect 8% growth? The market was over-hawkish in their forecasts, I am not concerned,” she stated. Anne dismissed concerns of a hard-landing in the Chinese economy; “I’m not losing sleep over it.”
Panelists differed in their views on EM opportunities. For Bernal, “I may have been wrong in the past, but this year I really think you need to get Venezuela and Argentina right to make money.” For Bernal, Buenos Aires provincial bonds (‘15s) offered upside without the downside of court rulings, but were only for those with strong stomachs, and those who could withstand volatility.
In contrast to Bernal’s emphasis on Venezuela and Argentina, Simon saw opportunities in Cote d’Ivoire, Angola and Iraq for 8-10% returns, while conceding that one couldn’t run a portfolio composed solely of small, illiquid credits. Fine agreed on the need to collect returns from small credits, while also accumulating Venezuela, “arguably the best credit in Latin America.” He expressed an aversion to Argentine paper during the current legal situation.
Anne suggested that investors take advantage of any short-term local market jitters as a buying opportunity. Despite extended easing in many EM countries, Fine still saw potential rate cuts in Russia and Nigeria, and possibly Mexico. Anne expected a wide swath of rate cuts, with many already priced in. Bernal saw rate cut potential in his native Colombia, especially with inflation running at below 2%. Simon predicted a potential 50 bp rate cut in India. On Brazil’s move in the opposite direction, Anne didn’t see the case for aggressive increases.
The MXP remained a market favorite according to speakers. Bernal viewed the currency as “dirt cheap” and predicted it would soon break 12 to the USD. Anne recommended “liquidity currencies” such as the Turkish lira and Indian rupee, while eschewing the ruble, Korean won and Chilean peso.
Bernal was unapologetic in his remarks on the recent Presidential election in Venezuela, which he termed a “robbery,” and further expressed a conviction that opposition candidate Henrique Capriles had actually won. He discussed the scarcity of goods in the country, “even for the wealthy,” and the parallel exchange rate. With such mounting issues, Bernal reasoned that newly-elected President Maduro would “either get more pragmatic and do something to avoid the scarcity of dollars, or he will be challenged internally within the government.”
The discussion ended with panelists offering their estimates of 2013 returns. Moderator Goldberg offered perhaps the most bullish potential returns (“possibly” 15% on EM equities, 5 to 6% on hard currency and 8-9% on the JPM GBI-EM index), while Anne was most conservative with a forecast of underperformance for EM equities and flat returns on hard currency debt.
EMTA SPRING FORUM
Tuesday, April 30, 2013
HSBC Securities (USA) Inc.
452 Fifth Avenue at 40th Street
Americas Room - 11th Floor
New York City
3:45 p.m. Registration
4:00 p.m. Panel Discussion
Prospects for the Emerging Markets
Pablo Goldberg (HSBC Securities (USA) Inc.) – Moderator
Alberto Bernal (Bulltick Capital Markets)
Denise Simon (Lazard Asset Management)
Benoit Anne (Societe Generale)
Eric Fine (Van Eck Global)
5:00 p.m. Cocktail Reception