Spring Forum Speakers Stress Risk is in Developed Countries, Not EM
Continued optimism on the EM asset class—as well as pessimism on developed countries--reigned at the EMTA Spring Forum, hosted by HSBC Securities (USA) Inc., on Wednesday April 7, 2010. The event drew 150 market participants and was held in New York City.
Pablo Goldberg, repeating as the event’s moderator, compared the current atmosphere to that of the Spring Forum of last year and observing that last April, investors had just turned the corner towards a much greater risk appetite. Goldberg also highlighted Latin American nations being able to ease monetary policy during the financial market meltdown of 2008/09, a new development in the history of international financial crises. This year, he noted, GDP growth forecasts for EM (6.2% according to HSBC) were approximately three times the growth forecasts for developed countries (1.9%).
Goldberg asked the Forum’s four additional panelists to comment on the current appetite for risk and in what direction was it headed. Jim Valone (Wellington Management Company) began by seconding comments that EM had “passed a graduation test by enacting countercyclical policies” during last year’s economic downturn. He reasoned that most buy-side firms are thus seeing strong inflows to the asset class at a time when sovereign supply is limited, thus currently there is great technical support for prices. Going forward, Valone believed that policy makers are more likely to err on being “too loose for too long” rather than “removing the punch bowl early;” while warning that any premature tightening moves are likely to be poorly received by the market.
Jose Luis Daza of QFR Investment Management agreed that there are both technical and fundamental reasons for EM asset strength. When adjusted by ratings, spreads are not at record tights, he argued, and there is still room for further compression. With Japan “likely to be in deflation for our lifetime,” and Europe pressured to avoid rate hikes because of “the periphery,” the question boils down to the direction of US rates, and Daza viewed current information as indicating that rates would not be raised in 2010.
Bulltick Capital’s Alberto Bernal concurred that the US FOMC is unlikely to increase US rates this year. Bernal surmised that at best the US will create 1.5 million new jobs for the 8.5 million workers who have lost their jobs, and thus removing any impetus for tightening. He concluded “it is illogical then to short Brazil when you have low rates in the US.”
Finally, Guillermo Mondino of Barclays Capital observed that, based on a recent investor road show, even in the current environment of easy monetary policy and low opportunity cost, fund managers are not yet “maxed out on risk.” Mondino listed a number of potential events that could derail current risk appetite – including a worsening of the Greek economic situation and, as a result, a renewed focus on G-3 fiscal imbalances; policy mistakes such as a potential mishandling of Greece by the EU; and a potential bubble bursting (including possibly an EM bubble if current strength continued).
Can EM debt continue to outperform if developed countries show only gradual growth, asked Goldberg? “EM will outperform the developed world under almost any scenario,” declared Daza.
The panel also discussed the extent to which Latin America, via commodity pricing, was linked to China. Mondino noted that in addition to commodities, the linkages also included Chinese financing of development projects as well as FDI. Bernal pointed out that despite such arrangements, China had made clear in countries such as Ecuador that loans would be on commercial terms and with the appropriate conditionality.
Several panelists agreed that the top Latin macro performances in 2010 would be from Brazil and Peru. Views on Argentina differed. “Argentina will likely grow the most in 2010…but no one will believe them,” asserted Bernal, who cited record crop levels and demand from its larger neighbor. Bernal forecast Argentine growth of 6-7%, although admittedly from a low base. Mondino disagreed, expecting Argentine growth of 4-4.5%, and below the 5% he anticipated from other Latin economies.
Goldberg also asked speakers where they would position themselves on interest rate swaps. Panelists preferred to receive rates in Latin America, with Mexico and Brazil cited most often specifically. Almost equal was the consensus that speakers would prefer to pay rates in India, with Daza adding Taiwan.
Is the default risk of the Latin high-yielders overestimated? Again speakers agreed, seeing that, at least for the near term, Argentina and Venezuela have both the ability and willingness to pay. “Medium-term, though, in Argentina is absolutely unpredictable,” Daza cautioned, adding “what the current administration has done to destroy institutionality in that country is extraordinary.” Mondino summarized that “frankly, the macro fundamentals of Venezuela and Argentina are awful, but you get paid 800 or 900 bps when another awful story pays a lot less.”
Goldberg concluded by asking panelists for their picks for a currency to short and go long. Daza voiced confidence in a long position in most EM while shorting the G-3 currencies. Mondino and Valone expressed bullishness on the Kazakh tenge, with Bernal advising clients to buy the MXP (which he forecast would reach 11.5 per dollar by year-end.) Bernal would short the Colombian peso while Valone expected the Vietnamese dong would be vulnerable (“an overheating country fighting to keep the peg in place.”)
Following the formal presentation, the Spring Forum concluded with a cocktail reception.