AT EMTA SPRING FORUM, PANEL AFFIRMS THAT OPPORTUNITIES EXIST IN RESILIENT EM MARKET Newman inquired about what topics would the 2013 Spring Forum panel discuss? Although he feels that "we are due for something dramatic," Gagliardi spoke enthusiastically of the potential opportunities in the sub-prime industry. "What it looks like and smells like is very similar to the original debt in our market back in the 1980s," he thought. The panel generally agreed that corporate bonds will be a factor in the market, although restricted by liquidity concerns.
Speakers at EMTA’s Spring Forum discussed the outlook for Emerging Market economies, opining on issues ranging from commodity pricing and food inflation to the effects of an eventual investment-grade rating for Brazil. The event took place at EMTA’s New York headquarters at 360 Madison Avenue on Monday, April 14, 2008 and was attended by a crowd of over 100 participants.
Gray Newman of Morgan Stanley moderated the Forum panel, commencing with "the big question" of how EM would perform during a US recession. FrontPoint Partner’s Adam Weiner commented, "We’ll have a little recession in the U.S. When the tide goes out, we’ll see who is wearing their bathing suits!" HSBC Halbis Partners’ Mike Gagliardi emphasized that the year would be characterized by a greater differentiation of risk and spreads. "This should be fun," he observed, "The market will be less vanilla than for many years."
Pablo Goldberg (Merrill Lynch) noted the market’s resilience during the recent financial market crisis, and affirmed "we are big believers in decoupling." He added that, in contrast to the US, at this point EM countries are not showing any signs of a credit crunch. "The major threat is inflation," he observed.
With the ouster of the Haitian Prime Minister following food riots fresh in participants’ minds, Newman polled speakers for their views on whether other EM countries could prove vulnerable because of increasing food prices. Weiner saw potential cause for concern in countries such as Vietnam, India and the Philippines, and would not rule out a government being overthrown as a result of food inflation. Spegel concurred and listed Vietnam, the Philippines, Argentina and Venezuela as countries where political instability resulting from food inflation could lead to credit downgrades.
In five years, Brazil has gone from pariah—with speculation of a possible default—to poster child with speculation of an investment grade rating, Newman reminded attendees. Would any EM countries be making a similar journey over the next five years; or one in reverse? Goldberg suggested Uruguay could become a new poster child, while wealthy Venezuela could move in the opposite direction. Weiner added Nigeria, Zimbabwe and even Burma as countries with potential to move from international pariahs to poster child status. He also suggested that several southern EU countries such as Spain, Portugal, Italy and Greece could leave the Eurozone in the next decade and also suffer a reversal of fortunes.
The panel reviewed the potential impact of Brazil’s achieving investment grade status. Most panelists believed that the elusive investment grade rating would be awarded in the coming year. Brazil received its coveted investment grade rating from Standard & Poor’s on April 30, 2008. Gagliardi reminded the audience of the sharp contrast of President Lula today to the man who first met with investors in New York over a decade ago and did little to impress. "Isn’t it remarkable," he asked, that "Brazil has acted like an adult for the past six years." Spegel advised investors to consider corporate issues that might be upgraded with the sovereign such as Votorantim and GloboPar. Goldberg speculated that domestic rates could drop to approximately 8% in 2010.
Concluding with their top investment recommendations, Goldberg saw selling one-year CDS protection on Venezuela as a good bet, with "default risk of about zero (although he described Venezuela as "a rich country that could become poor")" as well as Gulf country currencies. Spegel agreed on Venezuela, questioning why spreads were at the same level as Ecuador. Gagliardi repeated his previous Forum recommendations for the currencies of sub-Saharan Africa while expressing concern on Serbia and Croatia."I’m not sure how Argentina could default in twelve months," Weiner confessed, in his less than enthusiastic recommendation. He also favored Israeli rates, the Taiwan dollar and Malaysian ringgit. As an out-of-consensus trade, Weiner suggested it might be time to turn bullish on the South African rand, "especially in light of platinum and palladium prices."
In the brief Q&A session which followed, industry eminence grise Arturo Porzecanski asked panelists how much they "worry about the commodity bubble bursting." Weiner replied that it was a constant concern for him. Gagliardi foresaw a decline in commodity prices but believed that fundamentals, including increased demand from EM countries, would continue to prop up oil and food prices.