EMTA Winter Forum: Risk Remains in Developed Countries, not Emerging Markets
Speakers at EMTA’s Sixth Annual Winter Forum remained generally constructive on the outlook for emerging countries, while at the same time expressing much greater concern for developed country economies. The event, sponsored by JPMorgan, was held in London on Tuesday, February 23, 2010.
JPMorgan’s Joyce Chang began the event’s Sell-side Panel by reminding attendees of the economic forecasts made at the same event last year. Chang noted that despite incidents such as the Dubai World payment crisis, a welcome surprise was the market’s resilience and its dramatic rebound from credit crisis lows. Chang then projected a slide listing the economic forecasts of panelist firms, pointing out a positive range of views on EMBI returns in 2010, and generally constructive views.
The panel began with a review of EM asset class risks. Phil Poole (HSBC) stressed that a key support to supporting EM overall would one day be consumption-led growth in China. The shift towards growth fueled by domestic consumption rather, historically, emphasis on export-led growth may be “generational rather than just a couple of quarters,” he opined--a view with which most speakers readily agreed--while noting Chinese authorities are currently moving aggressively to stimulate domestic consumption.
Highlighting the fact that speakers’ greater concern with developed market risks, the effects of the Greek debt crisis were also discussed. Igor Arsenin of Credit Suisse believed that any impact would be small and indirect. Although some market players were searching for EM countries with similar vulnerabilities, he viewed Spain as having more similar a profile to Greece than countries such as Hungary or Turkey. Poole concurred, noting that countries such as the Baltics, Hungary and Romania had already “slipped off the edge” and had subsequently been bolstered by IMF packages. Assuming a fairly smooth road on IMF packages, Poole didn’t anticipate any further selloff.
Arnab Das (Roubini Global Economics) emphasized “the Greek debt crisis has exposed structural design flaws of the euro,” as the currency of a monetary—but not political or fiscal—union. Greece cannot avail itself of the traditional solutions to debt crises (devaluation or default) and a package from ECB seriously undermines the credibility of an institution with a no-bailout policy. Chang observed that the situation in Greece, and even the financial difficulties of American states, only serve to highlight the more attractive potential for economic growth and performance of EM countries.
Most panelists echoed Arsenin’s forecast of GDP growth in Russia of 3-3.5% in 2010 following a dramatic contraction last year (Chang standing out as the most optimistic with a 5.5% growth forecast). Arsenin attributed the forecast less-than-stellar performance to “anemic” domestic consumption, itself a result of real-wage stagnation. Poole stressed Russia as increasingly a commodity play, describing it as “becoming more dependent on commodity pricing, rather than less.” He recommended both equities and external debt to investors.
Timothy Ash (Royal Bank of Scotland) acknowledged his bullish view on Russia over most of the past decade. However, he expressed concern about the “demographic time bomb” Russia now confronts; and also was increasingly troubled about willingness to pay among Russians. “Why are Russian non-performing loans so high when oil is still at relatively high levels,” he pondered. Finally, Moscow’s increased role in the economy in recent years will serve as an impediment to luring back some foreign investors, he reasoned.
Chang also solicited commentary from speakers on whether the market could be overly sanguine about Brazilian politics. “We are still living in the second term of the first leftist government in Brazil in hundreds of years,” Das commented, “so don’t expect a major paradigm shift.” Poole expected up to 300 bps in Brazilian rate hikes.
The panel concluded, as tradition dictates, with speaker recommendations. Poole reiterated his positive outlook on Russia, as well as Brazil ‘17s. He also favored rupiah vs. the ringgit, shekel vs. dollar and zloty vs. crown. Arsenin spoke positively on the high yielders, including Argentina GDP warrants, and receiving short-end rates in Brazil. Several panelists, including Ash, also recommended Ukraine.
Jerome Booth (Ashmore Investment Management), moderator of the event’s Investor Panel, began the session with an impassioned plea to audience members to “lobby anyone you can” in opposition to the Debt Relief Bill currently being reviewed in the UK parliament, which would potentially “bail-in” EM investors in HIPC instruments.
John Carlson (Fidelity Investment Management) voiced his “100% support” of Booth’s campaign against the bill, and noted his increasing concern such political risks, post-crisis (which Booth noted was more of a concern in developed markets than in EM countries where “they understand the importance of not having unorthodox economic policy, they understand contract law.”).
Booth also warned that “no one should talk about the credit crunch in the past tense,” citing the recent study by Reinhart and Rogoff which found that—based on financial crises over the last several hundred years--it took on average over 4 years for growth to recover following a financial crisis.
In stark contrast to his comments at the 2009 Winter Forum, where he boldly predicted a 50% return in EM equities, Carlson voiced much greater caution at this year’s event. “The recovery has reached a plateau; US unemployment is not 9.7%, it is 17% and getting worse.” On the other hand, Carlson noted there are no signs of US inflation. Brett Diment (Abderdeen Asset Management) followed that the near term inflation outlook would lead to no more than perhaps a “token rate hike” by the US FOMC in 2010.
Which EM markets are over-valued? Helene Williamson (F&C Investment Management) suggested Mexican debt probably had little further upside, while Diment viewed the Philippines as potentially overvalued, due to the deteriorating fiscal situation. Carlson seconded both viewpoints, and added that Brazilian equity might now be at fair value after previous volatility.
The panel also discussed what they would advise EM funds looking to invest in developed countries. Diment acknowledged that many EM investors had been seeking his advice on whether Greece was a buying opportunity; however the panel was unanimous in its view that default was not currently priced into Greek debt.
Speakers were not convinced that Argentina would launch a new debt offer for holders of untendered debt in the next two months. Williamson estimated the chances at 60%, with other panelists, metaphorically, shrugging their shoulders.
Protectionism remains a risk for EM countries, although panelists did not see it as having a high probability. “It’s great news that we really haven’t seen a move towards protectionism in light of the global situation,” Diment observed.
Rebalancing will occur “slow and hesitatingly,” Carlson predicted. “Why would China change the current export-driven model that has worked so well for them?”
In the worst-case scenario of a depression, panelists agreed that EM assets would perform best. Carlson specified he would look for closed, diversified Asian economies such as Indonesia. Booth agreed, adding countries with large Central Bank reserves would also be good bets such as India.
Top trade recommendations from Carlson included the high yielders (Argentine, Ukraine and Venezuela) as well as Indonesia. Diment saw value in the Baltics and Williamson recommended Russian quasi-sovereigns such as Gazprom. Booth cited the Indian and Korean local currency markets.