2013 EMTA ANNUAL MEETING
Thursday, December 5, 2013
Citi
399 Park Avenue, 12th Floor (at 53rd Street)
New York City
2:00 p.m. Registration
Panel No. 1 – 2:15-3:15 p.m
Investor Perspectives on Emerging Markets Assets in 2014
David Lubin (Citi) – Moderator
Dave Rolley (Loomis Sayles)
Tulio Vera (Millennium Management)
Hari Hariharan (NWI Management)
Sara Zervos (OppenheimerFunds)
Keynote Address – 3:30-4:15 p.m.
Alejandro Werner
Director, Western Hemisphere Dept
International Monetary Fund
Panel No. 2 – 4:30-5:30 p.m
Economic Outlook for the Emerging Markets in 2014
Joyce Chang (JP Morgan) – Moderator
Alberto Ades (Bank of America Merrill Lynch)
Christian Keller (Barclays)
Drausio Giacomelli (Deutsche Bank)
Daniel Tenengauzer (Standard Chartered)
Attendance is complimentary for EMTA Members. The registration fee for non-members is US$1,000.
IMF Western Hemisphere Director Werner Urges EM Policy Makers to Take Advantage of Remaining “Easy Money” Market Conditions
The IMF’s Director of the Western Hemisphere Alejandro Werner delivered the keynote address at EMTA’s Annual Meeting in New York on Thursday, December 5, 2013. The event was hosted by Citi and drew over 250 attendees. In welcoming remarks, EMTA Executive Director Michael M. Chamberlin thanked Dr. Werner for speaking for EMTA a second time, having previously delivered the EMTA Annual Meeting keynote speech in 2008 when he served as Mexico’s Undersecretary for Finance and Public Debt.
Werner focused on trends affecting Latin economies – the drop in some key commodity prices, such as copper, gold and soybeans; the deceleration of Chinese growth; and the recognition earlier in 2013 that US easy monetary policy would sometime come to an end.
“It is important to highlight how important low US rates have been to Latin America in recent years,” Werner stated. He estimated that this has led to a significant savings on interest payments on external debt, at approximately 1.5% of GDP. In addition, easy money had allowed both sovereign and corporate issuers to extend their maturity profiles. Werner predicted that loose monetary policy would continue for another 2-3 years regardless of when tapering actually occurs.
He cautioned, however, that “the events of May 2013 remind us to prepare for significant bumps and not expect a smooth ride.” The market selloff last spring had actually proved helpful, as it “opened the eyes” of many policy-makers, making them better prepared to the eventual tapering process.
Going forward, policy-makers should take advantage of low interest rates while they still could, and continue to extend maturities. They should remain disciplined in an environment of non-growing tax revenues, enact structural reforms, and front-load their adjustments. Central Banks should not “use their powder” too early. Corporations should maintain the health of their balance sheets.
Werner also touched on individual economies in his remarks. Mexico had in recent years suffered from Chinese competition, but the country could benefit from expected acceleration in US growth, and successful implementation of telecom- and energy-sector reforms. Werner praised Chilean and Peruvian leaders for saving much of the recent commodity windfall.
He added that the IMF has been working with Argentina on a revised consumer price index—“our people working on it have seen a great disposition from the Argentines to work on this; they seem to be working quickly to have it ready [for 2014].” Some Central American and Caribbean countries faced declines in tourism or natural disasters, but he believed that El Salvador and Costa Rica would enact post-election fiscal reforms.
Werner’s remarks were preceded by a panel of EM investors chaired by Citi’s David Lubin. OppenheimerFund’s Sara Zervos and Hari Hariharan (NWI Investment) concurred that they were not concerned about EM capital flows on a long-term basis. Zervos (who serves as an EMTA Board member) added that her confidence in EM didn’t mean asset prices wouldn’t decline near-term, and she would look for post-tapering opportunities in countries such as Brazil. Millennium Management’s Tulio Vera believed that elections in the “fragile five” economies would serve to discourage any of the structural reforms needed to jumpstart FDI into those countries. He predicted a six to nine month period of “bumpiness” once tapering began.
Reviewing “fragile five” prospects, Hariharan termed Brazil an “unforced error” and added, “There is no reason it is in the mess it is in.” He hoped Brasilia would allow Central Bank independence, would put its fiscal house in order, and would let the BRL truly float and refrain from aggressive intervention in the FX markets. He saw opportunity because locals were in “total panic mode, which is a great time to buy Brazil.” On the other hand, Hariharan warned investors not to buy Indian debt on expectations of a market-friendly election result, and concluded that elections would hamper reforms in South Africa.
Addressing the decision-making process at the US FOMC in their tapering debate, GMO’s Tom Cooper (also an EMTA Board Director) didn’t believe that the Fed took into account the EM spillover of their decisions. “I can’t imagine they have a dog in the EM fight,” he stated.
On the asset class’s riskiest trades, since no policy changes appeared evident to Vera, he was refraining from “buying the hype on Argentina.” Zervos believed Argentine debt had moved “on vapor.” She added that she would not buy it at December price levels.
Venezuela was a “lousy story,” but Vera continued to espouse the country’s solvency due to oil exports. Zervos assumed that President Maduro would continue to service external debt, and that price levels looked cheap. She concluded that she’d rather miss the first 100 bps of any rally in Argentina, Venezuela or Ukraine to get more information, as all could prove “dodgy” trades.
Moving away from Latin America, Lubin polled the panel for their reaction to the contraction in China CDS pricing. Cooper replied that, while there were risks in China, default was not one of them.
EMTA’s Annual Meeting concluded with a sell-side panel discussion, which was led by Joyce Chang for the 18th consecutive year. Chang reviewed 2013 performance, a “year of real pessimism in EM,” and asked speakers to discuss their predictions for US Treasury yields, as well as global growth and EM asset class return.
Panel forecasts for the 10-year UST yield in 2014 ranged from Deutsche Bank’s 3.25% to Bank of America Merrill Lynch’s 3.75%m, with JPMorgan, Barclays and Standard Chartered estimates in between (at 3.4%, 3.5% and 3.4%, respectively). Chang observed that speaker predictions for 2014 EM debt returns were “neither incredibly bullish nor incredibly bearish,” with a few exceptions, including Daniel Tenengauzer (Standard Chartered) calling for a 6% local debt return, and Chang’s expectation of 4-5% returns for sovereign debt.
Addressing recent EM fixed-income supply and demand dynamics, Alberto Ades (Bank of America Merrill Lynch) stated that data suggests retail investor outflows into local debt markets, while institutional investors stepped in. He believed that retail investors moved into equities, but asserted that “the under-investment in EM debt is very significant.”
Chang initiated a discussion of EM elections, noting that 40% of the world’s population would go to the polls in 2014. For Tenengauzer, a credit rating downgrade on Brazil during that country’s presidential race could be one of the best things that could happen to that country, prompting government action. Deutsche Bank’s Drausio Giacomelli added “one shouldn’t stay overly bearish on Brazil’s prospects,” even in an election year, although he acknowledged economic performance was sub-par.
Christian Keller (Barclays), in contrast with investor Hariharan, was optimistic on potential progress in India. “We could get a regime shift with a new Central Bank governor, which could lead to new reforms.” He also spoke positively about the growing export sector. His enthusiasm was not matched by Ades, who stated “there is most likely not going to be any major changes in India.” Although not his base case, Tenengauzer saw tail risk of political violence in South Africa.
Giacomelli espoused the most bullish view on Chinese growth prospects, forecasting 8.6% growth in 2014. Tenengauzer believed growth would remain in the 7-7 ½% range for “quite some time.” Ades warned of “weakening demographics; we see the peak in terms of the labor force,” and believed growth could slow to 6% by the end of the decade (though remain at 7.7% in 2014). Keller’s 7.2% GDP forecast for 2014 represented the panel’s lowest estimate.
Chang noted that the EMBIG index now includes 28 frontier markets, although these new entrants account for only 10% of market capitalization. Tenengauzer highlighted the IMF’s assessment that frontier markets had outperformed during the Spring sell–off because “creditors didn’t want to sell, not because they couldn’t sell. Generally, the frontier market investor is savvier about EM idiosyncrasies than the crossovers who invest in Mexico and Brazil,” he added, and thus was less prone to panic selling.
Keller cautioned investors to be wary of over-hyping in new frontier issues. “There are probably a few rotten apples in there,” and credit differentiation was key. Tenengauzer spoke positively on sub-Saharan Africa in general, predicting 5.5% growth in 2014.