EMTA CELEBRATES TEN YEARS OF SUMMER FORUMS IN LONDON
EMTA’s Tenth Annual Summer Forum, hosted by Merrill Lynch, was held in London on Thursday, June 28, 2007. Turnout was heavy in spite of, or perhaps due to, market turbulence in the days preceding the Forum.
Tulio Vera of Merrill Lynch moderated the session’s investor panel. Vera focused the discussion on four main topics—current market conditions, risk management, the appeal of corporate bonds and potential returns in local instruments.
Addressing the CDO- and hedge fund-related market jitters, Brett Diment (Aberdeen Asset Management) highlighted the positive economic fundamentals in most Emerging Market economies, while not ruling out further market upheaval. Diment saw a sharp slowdown in Chinese growth as the most serious fundamental risk to the asset class.
"Sub prime is clearly a mess," according to Paul McNamara of Augustus Asset Managers, who correctly forecast that cheaper entry levels were still to come. McNamara noted that as long as US rates and US inflation did not increase, the current period would be looked back as a good buying opportunity…"but there is scope for this to get sufficiently nasty," he cautioned.
To Hedge or Not to Hedge?
Addressing risk management, Treacher noted the paradox of investor desire both to hedge risk and to generate greater returns. "You have to hope that your investors are in it for the long term, and that they understand what you want to achieve," he commented. While the CDS market has offered EM investors many hedging opportunities, "somewhere along the line there will be a problem because of the fact that the CDS market is bigger than the cash market," he warned.
Diment stressed a pragmatic approach to risk management, with his team setting absolute exposure limits. He questioned the effectiveness of risk models which are widely-used and thus less effective.
The Future of Corporates
F&C Asset Management’s Helene Williamson concurred with widespread sentiment that corporate issuance would continue to pick up, while stressing that investors have to be convinced that their corporate picks are long-term holds (due to their comparative lack of liquidity). She noted that corporate bonds issued by banks constitute a large portion of the corporate world, and expressed hope that the universe of issuers would be more diversified in the future. Finally Williamson observed that, faced with the plethora of corporate issues, a fund manager has to be very selective in the issues passed on to credit analysts for further examination.
McNamara voiced scepticism on corporates, arguing that "at this stage of the credit cycle, you are just getting a liquidity premium, you are not being paid for any extra risk." Treacher’s bullishness on corporates has tempered in the past three years, he admitted, and he is concerned about the bedfellows he might have in a corporate issue. He also chided deal managers for "putting any deal through the door that they can."
Evolution of Local Markets
Asked by Vera about how to measure local markets performance, McNamara called the GBI Global Diversified a "reasonably acceptable benchmark." He further discussed the unique problems and issues in creating an index for such securities.
Will sovereigns continue to avoid external paper issuance? "Most EM issuers were so scarred by the experiences of the 1980s that they will not go back" to issuing foreign-currency denominated debt, McNamara affirmed, adding that South Africa seems to be the only country that has done any cost/benefit analysis of local vs. external issuance. Williamson concurred that the "obsession with getting rid of foreign debt" often overrides economic logic.
Global Overview of World Economy
Jerome Booth (Ashmore Investment Management) began the sellside discussion by taking issue with a reference to Emerging Markets in the first panel as a "risk market." Booth countered that "all countries are risky, it’s Emerging Markets where the risk is priced in, and it’s the other ones—the Icelands and the New Zealands—that you have to watch out for!" Booth reminded the audience that EM debt is now dominated by "pension funds, long-only investors, and there are hundreds of billions of dollars potentially coming into the market;" it is no longer an industry composed of "highly-levered speculative money" of the pre-Russian crisis days.
Booth asked panellists to discuss the general global economic environment. Dresdner Kleinwort’s Arnab Das observed that the biggest risks to the Emerging Markets asset class continue to be exogenous factors. Victoria Miles (JPMorgan) noted that in the corporate arena, there has recently been an "explosion" in leverage, especially in the EMEA time zone, and she hoped to see a "moderation in the liquidity that would "restore some normality to markets and would lead to new issues coming at valuations that seem reasonable rather than stretched."
Responding to an audience question on the pain threshold for high-grade investors who have recently crossed over in relatively large size into higher-rated EM corporates, Miles opined that high-grade and high-yield crossover investors understand the market well, perhaps even better than traditional EM sovereign investors. She assessed that they would not easily be "spooked."
Trends in EM Research
A discussion of research then followed. Arend Kapteyn (Deutsche Bank) noted that sellside firms have been pushed to expand their coverage of EM sovereigns, citing that Kazakhstan has become mainstream and analysts are now covering sovereigns such as Kirgizstan and Tajikistan. As a result of the widened scope of coverage, research teams are no longer able to provide the same level of analysis as when they reported on a more concentrated world. Thus, he asked hypothetically, with the corporate world being so much larger, are risks being appropriately priced?
David Lubin (Citibank) suggested that in fact investor demand for research may generally be on the wane. Lubin advised that with investors now taking exposure on currencies and interest rates in such places as sub-Saharan Africa, "frankly they cannot know what they are buying! Not only is there a shortage of written research, but there is a shortage of what one can say about these countries because there is no data!"
Bonds not Aid Revisited
Booth seized the opportunity to revisit his oft-repeated call for replacing aid to sub-Saharan Africa with investment. He proposed that smaller countries band together and issue multinational dollar-denominated external bonds. Kapteyn and Das spoke positively on the proposal, though Kapteyn noted that debt relief terms often prevent beneficiaries from seeking new loans. Kapteyn added that a local currency issuance should not be ruled out. Das pointed out that Chinese and Indian loans are in fact providing support for many sub-Saharan African economies, and suggested that governments would likely prefer this soft lending to the discipline that the market would likely require.
The panel touched on additional topics (including Venezuelan President Chavez’s threatened withdrawal from the IMF) before ending with an assessment of risks. Booth reiterated his assertion at previous Forums that it would take a major war or huge rise in protectionism to derail the Emerging Markets and asked panellists for other concerns. Kapteyn ventured that only a combined growth and inflation shock in the US and a collapse in commodity prices would deliver a serious and long-lasting blow to the industry.