Singapore Forum Speakers Discuss Potential Asian Central Bank Tightening
EMTA’s fourth annual Forum in Singapore was held on Wednesday, October 28, 2009 at the Fullerton Hotel. The event, sponsored by ING, drew 150 Emerging Markets professionals. The panel discussed the “10-standard deviation” experience of the previous rocky eighteen months, which panelist Martin Hohensee (Deutsche Bank) noted could be a unique occurrence during the careers of all present.
ING’s Tim Condon moderated the event’s sell-side discussion, asking for thoughts on when Central Banks in Asia will reverse course away from current stimulative measures. Cem Karacadag (Credit Suisse) agreed that this was a major topic of speculation although he expects current policies to remain in place for a while. “Any central bank is going to play defense when inflation is not really a threat,” he reasoned. Instead, the biggest question was when the US will move to hike rates, which he didn’t expect until 2H 2010. Karacadag emphasized that if central banks move to tighten, it would be because of positive developments; and that policies will move from being accommodative to being less accommodative but will not go to tight mode.
Wai Ho Leong (Barclays Capital) added that the defensive posture adopted by Asian central banks was also based on concerns for the quality of growth, citing as a specific example Korea’s positive GDP growth but which had resulted mostly from fiscal stimulus measures as well as correction in the inventory cycle. David Fernandez (J.P. Morgan) noted that there appeared to be a rolling market worry for the Chinese economy—“In 2009, the market was worried about 2010, not 2009; now everyone is worried about 2011 not 2010,” he observed.
A discussion of whether Indonesia’s status as fl avor of the month was supported by fundamentals ensued. Condon himself stressed the maturing of Indonesian politics, with Karacadag seeing the country on a path to an investment-grade rating “in three to five years.” Leong concurred, praising the country’s recent structural reforms.
However, near term, Fernandez advised, “If you are bullish on Indonesia, don’t go to Jakarta,” as he described local disappointment with post-election decisions by the government. Fernandez discussed the “unrealistically high expectations, unfulfilled,” of Indonesians, and the serious reassessment now apparently underway. He remained a long-term bull on Indonesia, however.
As for investment recommendations, Leong spoke positively on the KRW, Taiwan dollar and the ringgit as he expected the weak dollar theme to persist. Karacadag recommended Asian credits, “not the obvious trade like last year when we all thought Asian credit was cheap” but still potentially lucrative. Hohensee spoke enthusiastically on long-dated Chinese currency exposure and select Korean credits. Fernandez thought markets had priced in too much tightening in Korea and India, and had a longer-term positive view on CNY and INR.
Aaron Low (Lumen Advisors) led the event’s panel of investor experts which followed. Ashmore Investment Management’s Barry Field characterized 2008 as a year of “indiscriminate selling, with 2009 the reverse of that.” The sweet spot for investors had perhaps ended in September, he ventured, and 2010 will prove to be a difficult year for investors. Field did expect EM equities and corporates to be the out performers.
“In many cases, you would scratch your head and ask why you would want to buy for the long-term at these prices,” Liew TzuMi of the Government of Singapore Investment Corporation stated, while highlighting that during the 2008 EMTA Forum in Singapore, one could have created a basket of Asian highgrade credits yielding 10% (which would now yield 3-4%). Her firm will remain focused on local markets among other sectors, although she also viewed EM FX positively over the longer term. Investors needed to determine before they bought if the rate hikes being priced into the market were really going to occur, she advised.
The Rohatyn Group’s Goetz Eggelhoeffer believed the US economy would “muddle through.” He predicted that US rates would not be raised in 2010 despite a market obsession with it. Dollar weakness would continue as well. He concurred with Liew that a lack of Asian central bank hiking will disappoint the market, with government institutions remaining concerned about US growth (although he acknowledged that this could change once Q4 data is available).
How have Asia and EM countries emerged from the crisis? “The EM story has become even stronger,” argued Liew after events of the past year and a half. Long-term, nothing has changed in the EMs, which just reaffirms that investors should have exposure to the asset class.
Field sparked controversy when he stated “EM stopped being periphery last November and became part of the core.” He identified as a turning point the remarkable steps taken by the US Federal Reserve when it became concerned that countries such as Brazil and South Korea would sell Treasury bonds to raise dollars (“and the US needs them to keep on buying US Treasuries, not just to not sell them!”) Pension funds have since realized that their asset allocation should be much higher than five percent, and he expected EM to be a growing part of all retirement funds. He reminded the audience that Asian countries were only affected by the crisis because of lower exports and the drying-up of trade finance.
A debate ensued on Field’s comments on EM becoming core. Eggelhoeffer responded that while he was bullish on EM as well, it was “stretching” to describe EM as core because of the legal, political and financial systems unique to EM countries.
The panel concurred that EM equities and EM currencies were likely to be profitable investments in 2010. Field expressed interest in Argentina Discount bonds, while both he and Liew acknowledged they were looking at high-yield EM corporates.
Speakers also discussed large redemptions during the crisis (two of the firms noted that approximately 15% of assets had been withdrawn) and gating. Eggelhoeffer chided firms which forgot that gates are there “to protect investors from undue losses, not to save investment managers.” He expressed hope that investors would one day differentiate between firms which gated during market downturns and those which did not.
Finally, Field added to the lexicon of EM bon mots when, in referring to Eastern Europe and its growing integration into the global markets, he defined a developed country as one in which the Finance Minister can be “fiscally profligate and the bond markets don’t punish you for it!”