Speakers at EMTA Singapore Forum Discuss QE2 and Its Effects on Asian Economies
EMTA’s Fifth Annual Forum in Singapore was held at the Fullerton Hotel on Wednesday October 27, 2010. About 150 market participants attended the lunchtime event, which was sponsored by ING.
Tim Condon of ING steered the event’s sell-side panel discussion. First on Condon’s agenda was the global market outlook and potential currency squabbles. JPM’s David Fernandez noted that the market was anxiously awaiting the details of the US FOMC’s latest quantitative easing program (QE2). The potential for subsequent dollar weakness was large, and “a lot of what we will be doing next year will be watching for Asian Central Bank intervention to stop rapid currency appreciation,” he stated.
UBS’ Nizam Idris argued that the expected results of the then-upcoming US mid-term elections had not yet been priced into the market, and that political uncertainty in the US could derail the global recovery. “Monetary policy can only do so much, and fiscal stimulus is not going to happen,” he asserted. He underscored the IMF’s newfound acceptance of capital controls, and advised that investors should expect such measures to be enacted.
Sanjay Mathur of RBS doubted that Asian central banks would refrain from intervening to prevent FX appreciation. If the QE2 tally is much bigger than expected, and inflows into Asian FX also larger than expected, there could be market disruption, he cautioned.
Martin Hohensee (Deutsche Bank) joined others in arguing that US Treasuries were not in bubble territory. He added that the US FOMC’s appetite for QE2 would also likely be larger than the original program it would unveil. Fernandez added that with the continued strength in EM prices, his firm’s newly-increased forecast of EM issuance in 2010 would likely be exceeded.
Panelists stressed that recent inflows into EM marked a long-term structural shift to the asset class. “The flows into EM are sticky, they are something we have to get used to, and they are only a fraction of what could be,” noted Hohensee. Idris countered, however, that the relative lack of liquidity of EMs compared to developed countries would eventually prove a concern.
The nascent “dim sum” or CNH market (yuan-denominated bonds issued in Hong Kong) was debated. Fernandez called the program “the acceleration of a plan that Beijing would have preferred to do gradually, but this is the cost of an outdated regime.” He predicted the market would garner increased attention in the coming year.
Hohensee viewed the CNH market as a petri dish for Chinese authorities. It could be used by hedge funds for arbitrage opportunities, would eventually decrease the importance of the Hong Kong dollar, and provide greater investment opportunities for foreigners.
Condon recalled last year’s discussion on “market darling” Indonesia. The country’s status as a market favorite was not completely justified according to Mathur. “A more stable –though not ideal—political structure and a stabilization of the balance of payments,” were positive factors, but he expressed skepticism on a “behind-the –curve” Central Bank, the debt being a “crowded trade” and a potentially inflationary economy.
Fernandez reminded attendees of his 2009 assertion that “if you are bullish on Indonesia, don’t go to Djakarta.” However, he reflected that in fact, “they are broadly getting things right, and we don’t expect significant policy errors.” Indonesia was not on his list of potential capital-control imposers.
Concluding on top recommendations, Fernandez predicted a tougher year for EM assets. Indonesia and India were among top picks, and the Philippines were under-owned, “though we are not saying it will be a strong performer.”
Mathur recommended the SGD as well as EM equities. Inflation could surprise on the upside in 2011, especially if a weak dollar leads to significant increases in commodity prices. Hohensee spoke enthusiastically on the Indian corporates as well as the currency, as well as Chinese property issues (specifically inland and newer-urban areas).
Idris recommended China, India and Indonesia based on a “muddle through” global economy. He also liked the INR on a longer-term basis.
Investors shared the relative optimism of the sell-side panel during a discussion chaired by Aaron Low of Lumen Advisors. Low questioned speakers for their thoughts on negative real rates in Asia and how long they could last.
Barry Field of Ashmore Investment Management opined that negative real rates could last into 2011. He also reviewed the likely effects of QE on Asian markets--higher interest rates in EM countries and lower bond spreads; a growing corporate market as companies take advantage of cheap capital; and capital control imposition in high growth countries.
The Rohatyn Group’s Goetz Eggelhoefer concurred that negative real rates would continue but eventually Central Banks would not be able to drag their heels. He reminded participants that Asian Central Banks had started raising rates in Q1, but became jittery with developments in the EU, and postponed further action while monitoring developments. “Going forward will be different, there will be less political uncertainty once the US midterm elections occur, and Central Banks will have to address considerable inflationary pressures,” he stated.
Rajeev De Mello (WAMCO) predicted that Central Banks would have to enact capital controls following the G-20 summit. He also expected tightened fiscal policy.
Liew Tzu Mi of Government of Singapore Investment Corporation underscored that another major paradigm shift was occurring in EM countries. “The era of high growth with disinflation in EM is over,” she declared. The move in emerging countries to domestic consumption-led growth, replacing their historical export-led growth, is inflationary, “so one needs to think more about inflation protection; or to select companies that have the power to pass on increased costs to consumers.”
De Mello echoed other speakers in asserting that allocations to EM would continue. Liew argued that, on a GDP-weighted basis, investors should have much more exposure to EM assets, “but some portfolio managers still have the mindset that our market is risky.” Field added that increased allocations to the asset class are a time-consuming process with “trustees, consultants, a culture of ‘backside-covering,’” but suggested investors should be concerned by the large exposures they currently have to developed countries.
Most investor speakers could point out no obvious bubbles, while they acknowledged that loose US monetary policy could spur such a development. However Eggelhoefer expressed a concern that local currency Asian bond markets were starting to “look frothy.” He specified that the amount of foreign ownership of Indonesian bonds is now four times previous peaks, and “the exit is extremely small.” While declining to specify a time frame for any market selloff, he predicted “it will end in tears.”
The panel concluded with asset recommendations and top market risks. Field voiced interest in Chinese and Russian equities, and second- and third-tier Chinese cities properties. Eggelhoefer viewed the SGD as a reasonable trade for 2011 and also found equities appealing. De Mello liked Indian bonds and Asian currencies. Moderator Low recommended Malaysia, Indonesia and Thailand.
Risks discussed by investor speakers included a “double dip” recession, a G-10 sovereign debt crisis, the expiration of US tax cuts, faster-than-expected inflation that forces faster Asian central bank tightening, and capital controls-- especially if imposed “relentlessly.”