EM’s Resilience in Face of Global Slowdown Highlighted at EMTA’s London Summer Forum
EMTA’s 12th Annual Summer Forum was held in London on Thursday, June 25, 2009. Bank of America – Merrill Lynch hosted the event, which attracted over 150 participants.
Felipe Illanes (Bank of America - Merrill Lynch) led the first panel session of investors, asking speakers for comments on the global economy. Helene Williamson (F&C Investments) noted that fiscal stimulus packages were clearly starting to kick in, with the near-term appearing relatively rosy; however, she believed that 2010 remained a question mark. Jerome Booth (Ashmore Investment Management) expected the road ahead to remain rocky, while reiterating his definition of a developed country as one in which people don’t recognize their own sovereign risk.
Tom Fallon (La Francaise des Placements) called attention to the difference between this year’s event and the 2002 event. “Remember when we watched the Brazil vs. Turkey World Cup semi-final, and we debated which country would default first,” he reminded participants, alluding to the dramatic improvements in EM fundamentals in recent years. Fallon saw EM entering into a new era, and predicted that at future EMTA meetings, speakers would refer to the current period as an historical turning point.
Illanes polled panelists for their greatest concern in the current crisis. Most speakers ranked the spectre of global inflation as being a relatively low concern, while focusing more attention on any signs of “browning shoots,” the premature removal of stimulus measures before a recovery has taken root. ING Investment Management’s Gorky Urquieta added that he was also wary of an increased movement toward protectionism and was also monitoring geopolitical risks closely.
According to Booth, investors need to differentiate between global risks and each country’s specific risks. “Developed countries are still in denial,” he declared, adding that banks haven’t been adequately recapitalized and that hoarding behavior a la 1930s was possible. He questioned whether there was sufficient evidence of green shoots in G-7 economies, while remaining more confident of EM growth. He stressed that “there is no question that EM Central Banks will diversify their assets and sell US treasuries,” and that thus the US will have to lead the world while keeping its creditors happy.
Was the recent recovery in the EM debt asset class for real?, Illanes asked his panelists. Urquieta offered his assessment that there had been very little discrimination in recent performance, and that “easy money has been made by people going from cash to taking on some risk—what happens next?” EM debt had not witnessed new inflows, unlike other asset classes, and he ventured that when inflows returned, there would be greater differentiation between credits.
Turning to specific credits, Urquieta asserted that Brazil’s trading tight to Mexico was justified due to the latter’s dependence on the US. (“Brazil is a class act in financial markets, and it seems inevitable that Brazil will trade through Mexico,” Fallon seconded.) There was potential for change in Argentina, Urquieta noted, albeit from a very low base; and while Venezuela will continue to service its debt, the situation continued to deteriorate with little hope for improvement.
Other country-specific commentary included Urquieta viewing Latvia as unlikely to avoid a devaluation; and Fallon noting that the solid macro factors and relatively closed economy (“a plus in this environment”) made Indonesia stand out in Asia.
The panel discussed recent suggestions that Russia might be falling behind its BRIC counterparts, and whether Moscow could be rightly seen as “just a Veny with nuclear weapons?[!!]” Urquieta rejected the comparison, arguing that Russia has many non-oil resources, while Venezuela remains highly oil-dependent. Fallon, however, suggested that the weakness in Russia’s financial system sets Russia apart from other BRICs.
Concluding with a discussion of the crisis’ potential damage to the eurozone, Booth observed that “clearly all is on hold.” He suggested that investors –and potential new euro adopters — should consider the ramification of a potential departure from the zone, although he specified that he was not making such a forecast for 2009. Fallon believed that some countries might in fact accelerate their movement to join the single currency in a belief that they will be better protected.
Following the Forum’s buy-side discussion, Brett Diment (Aberdeen Asset Management) led a panel of sell-side experts. The session started with the inevitable debate on the shape of the recovery, with Marc Balston (Deutsche Bank) offering a backward J-shaped recovery as the likely pattern (“ with a slight risk of a W-shape”). David Lubin (Citigroup) stressed that the Anglo-Saxon economies need to increase their savings rates permanently in order to achieve growth, and warned that the withdrawal of capital from Eastern Europe by Western banks was a serious issue.
The panel’s Africa specialist, Stephen Bailey-Smith (Standard Bank) noted that his region had largely sidestepped the current slowdown as a result of its relative isolation from international capital flows. He then projected that there would be a revision of global growth in the coming months, with oil returning to $100 per barrel and a rally in the S&P 500 index.
Diment pointed out that the BRL and the ZAR have largely recovered from their selloffs, while other currencies remained at lower levels. Lubin recommended looking at currencies which had depreciated the most in the original sell-off, although he cautioned they were not necessarily the most undervalued. He expressed interest in the rupiah and the Indian rupee in addition to the BRL and MXP. He advised attendees to avoid the ZAR because of continued external vulnerability.
Pierro Ghezzi (Barclays Capital) seconded the recommendation on the BRL and rupiah, while adding the TRL and “maybe MXP in the short-term.” Bailey-Smith stressed “this is a G-3 crisis, not an EM crisis” and thus offered forecasts of the BRL at 1.6 and TRL and 1.4 per dollar. Balston admitted he was agnostic on the ZAR “even though everyone hates it.”
Prompted for year-end EMBI forecasts, Bailey-Smith offered 400. Balston gave a greater range of 300- 400, noting that there was a material risk that spreads could widen beyond current levels. Lubin called attention to recent investor interest in equities, which could potentially prove harmful to EM debt.
Are investors missing opportunities? Balston suggested that funds were currently performing well, after a quick turnaround, and there might be consensus forming for a quiet range-bound summer....”but perhaps there is complacency risk?” He added that inflation-linked debt, no longer in vogue, might be a good idea. Ghezzi noted that most of the rally could already have taken place although potential upside remained in Asian FX. Lubin didn’t see the buy-side as a whole missing any major opportunities, while reiterating long recommendations on the rupiah, Indian rupee, Israeli shekel, BRL and PLZ.
“The asset class has probably passed the resilience test,” affirmed Ghezzi, echoing many of the Summer Forum opinions, and future crises are more likely to be linked to global slowdowns rather than local events.
Following the discussion, EMTA members enjoyed a cocktail reception.