Over 200 Emerging Markets professionals attended EMTA’s Sixth Annual Summer Forum in London. Deutsche Bank hosted the Forum on Tuesday, June 17, 2003.
EMTA Vice Chair John Cleary (Invesco) welcomed attendees to the event, outlined some of EMTA’s recent endeavors, including its bond documentation charts analyzing collective action clauses, and EMTA’s new Volume Surveys on NDFs and Credit Derivatives. Cleary also highlighted the superior performance of Emerging Markets debt in comparison to other asset classes.
Prospects for Argentina, Turkey Debated
Jerome Booth (Ashmore Investment Management) deftly moderated the discussion, polling panelists for their opinions on the attractiveness of Argentine debt at current price levels. David Sekiguchi (Deutsche Bank) remarked that one would have to “make pretty optimistic assumptions to find value in Argentine debt.” However, Sekiguchi added that the results of the Uruguayan debt exchange might augur well for a successful Argentine restructuring if the government was able to achieve a 3 to 4 ½% primary surplus.
Booth countered that he was “not convinced” that Argentina could successfully restructure in the near future because of both “the fiscal irresponsibility hard-wired into the Constitution…and a willingness and ability by the President to change the rules if they don’t suit him.” Booth continued that a “strong argument” could be made that it is not in Argentina’s interest to undergo the restructuring process until they can alter the federal government’s revenue sharing arrangement with the provinces. “Argentina’s credibility, if they restructure this year and then blow up again in another three years, would be even worse,” he affirmed.
As for Turkey, Arnab Das (Dresdner Kleinwort Wasserstein) affirmed that Turkey had “three anchors;” its relationships with the US and with the IMF and the prospect of EU accession. Recent performance has not been “particularly encouraging, but nevertheless they have managed to keep it together,” according to Das. However, he remained concerned by the domestic debt situation. Das argued that the US will continue to be an advocate for Turkey vis-à-vis the multilateral institutions, but that its support will be tempered.
Alex Garrard (UBS Investment Bank) acknowledged he was more bearish. “Without a Herculean effort on the structural reform front, I don’t see how fiscal targets and growth targets that are required as a minimum for debt sustainability are remotely compatible,” he commented.
Panel Reflects on Last Year's Pessimism on Brazil
Sell-Side speakers also reflected on the strongly negative sentiment concerning Brazil expressed at the previous year’s Summer Forum. Larry Brainard (WestLB) reasoned that the market had failed to recognize the fact that the local market was financeable as long as funds did not flow out of Brazil, the Central Bank was successful in rolling over local debt, and the local bid remained strong (with Brazilian investors quickly adopting a constructive view of the new Lula government).
Das commented that the failure lay not in economic analysis but in political analysis, and a misperception that a Lula victory would lead to a “wholesale change of economic policies and a dramatic shift to the left.” The market failed to foresee that Lula would steer Brazil to the center, as “the mainstream of Brazilian politics is not on the hard left but in the center of the political spectrum.”
Booth opined that the most interesting aspect of the Brazilian events of last year was that, in contrast to what one might expect, a widely-discussed Brazilian meltdown was “a self-fulfilling prophesy that actually didn’t pan out.” Normally, Booth pointed out, “If 95% of Wall Street thinks a country is going to go, then it is going to go.” The fact that Brazil was “too good a credit to actually collapse” was a positive lesson for the market, according to Booth.
Sekiguchi conceded that the adjustment of balance of payments - not only reducing the current account deficit but also reducing it without generating a major recession - demonstrated that the economy was more flexible than he had believed, and marked an important economic development.
The panel also touched on a number of additional topics, such as new capital inflows (Booth declared the pipeline remained “huge”), rumors of a Mexican credit upgrade, and panelist opinions on general changes in the market over recent years (with Brainard and Das stressing the greater diversification of the market and reduced risk of contagion).
Mark Franklin (Citigroup Investments) prefaced his sixth consecutive moderation of the London investor panel with an observation that the previous panel seemed to believe that the market would continue to rally, given the caveats of Argentina and Turkey. However, he voiced skepticism that the market could continue to outperform as it had in previous months.
Brazil Still Likely to Outperform...but not at Previous Rates
Following the sell side comments on Brazil, Franklin sought investor opinions on Brazilian risks in a low growth scenario, noting recent progress on financial, tax and pension reforms, while also underscoring the country’s previous reliance on FDI and cautioning that such flows were unlikely to support the country this year. Michael Sonner (DIT, and also an EMTA Board Director) doubted that Brazilian assets could return another 20%, but affirmed that Brazil remains an important part of his asset strategy and that Brazilian debt would still outperform. The Lula administration surprised critics on the upside, Sonner noted, and the “locals have really come back...and are giving strong support.” Brett Diment (Deutsche Asset Management) found more value in local instruments and NDFs (the real is still “extremely undervalued,” he opined) but he remained “indifferent” on external debt issues. Diment forecast an aggressive rate-cutting stance by the COPOM, down to “around 18%” in 2003.
Simon Treacher (Blue Bay Asset Management) remarked that, just as some analysts had become overly sanguine with their predictions for Brazilian GDP in the past, now they might have become too pessimistic in their outlooks. He suggested that investor confidence in the previous economic team might have also been overstated. Treacher speculated an investor could still reasonably expect a contraction of 100 bps in Brazilian paper. AIG Investment Management’s Monika Machon echoed positive sentiment on Brazil and seconded Diment’s prediction that the COPOM would aggressively lower rates.
Investors Lack Confidence in Turkey
As for Turkey, Treacher dismissed talk of the Turkish convergence trade as “complete and utter nonsense,” commenting that Turkish accession to the EU is not likely to happen in the foreseeable future. Machon quipped that if she “could forecast Turkish bond movements, I could probably retire.” Turkey has surprised the market on the upside but further upside seemed limited as leaders seem to be pursuing conflicting policies, she commented, while acknowledging possible “noises, and maybe even action” on privatization and IMF reforms. Machon acknowledged that although she did not forecast massive tightening, she would be uncomfortable not owning Turkish debt.
Sonner described Turkish debt as fairly priced due to the number of potential risks; there would probably not be a ‘’disaster” but support for the debt was mainly based on geo-politics which were not enough of a reason for him to buy. “At the end of the day, the IMF and Turkey will reach an agreement” but not before there is a lot of “playing politics,” Sonner predicted. Sonner noted he was avoiding Turkish debt.
Panelists Assess Argentina, Venezuela and Philippines
Treacher scoffed at Argentine debt prices, saying the market was incorrectly pricing in “primary surpluses that have never been achieved before, and will probably never be achieved.” He stressed, “Personally I don’t buy the story” and commented that he preferred debt that paid coupons to work-out situations. Machon concurred that most investors prefer to receive coupons rather than the unknown of a credit restructuring. “I am not a buyer of Argentina here,” stated Machon, who conceded that recent talk of a faster-than-expected restructuring offer might prove her wrong. “I still don’t like it,” she concluded.
According to Diment, the Street is placing too much emphasis on Argentine politics and should be focusing more on economics. Diment argued that Argentina should not be treated as a basket case economy, “it has a lot of human capital, a lot of infrastructure, and a cheap real exchange rate” and Argentines have massive amounts of cash offshore and in mattresses. Sonner remained skeptical on Argentina, citing the continued issue with tax revenue sharing. “The trends do not look so compelling,” he cautioned.
Venezuela is “by far the cheapest credit out there by a long, long way,” according to Treacher who admitted it had not been the greatest trading credit over the past year. Diment was positive on Venezuela as well, saying owning both Argentina and Venezuela is not especially risky due to their low cross-correlation. Sonner confirmed he was shunning the credit because of the plethora of “open questions” regarding the country’s future direction as well as oil prices and the need for fiscal adjustment.
Franklin also solicited panelist comments on Philippine debt. Diment replied that relative to its credit fundamentals, the Philippines was “trading tight”, but recent tax revenue and fiscal deficit numbers were better than expected. Sonner observed that portfolio managers wishing to diversify into Asia were often led to Philippines as countries such as South Korea may not be considered “pure Emerging Markets countries,” yet it was not attractive to him at current levels.
Franklin concluded the panel with a comment that, while the amount of money under management in the EMs has skyrocketed over the past decade, liquidity in the trading market has not. He warned that he fears he has recently seen “Christmas future” appear in three instances: upon return from the Milan IADB meetings, he informed the audience, two of three dealers declined to quote $500 million in Turkish 2030 bonds for him at 3 pm; a 12-day rally of 12% in the Brazil 2040 subsequently gave up 70% of the rally in two days; and generally there is an inability to get large quotes on “non-generic assets.” Franklin cautioned that this suggests that any event that “sets the market off – rate rises, a lack of economic growth or door number three,” could significantly raise risk premia.