EMTA FALL FORUM
Tuesday, September 24, 2013
UBS Offices
1285 Avenue of the Americas (at 51st Street)
14th Floor, New York City
3:45 p.m. Registration
4:00 p.m. Panel Discussion
Current Events in the Emerging Markets
Rafael de la Fuente (UBS) – Moderator
Paul DeNoon (AllianceBernstein)
Matias Silvani (JPMorgan Asset Management)
Gray Newman (Morgan Stanley)
Javier Kulesz (Nomura Securities International)
5:00 p.m.
Cocktail Reception
Attendance is complimentary for EMTA Members. The registration fee for non-members is US$495.
Speakers at EMTA Fall Forum Discuss Market After Surprise Tapering Reprieve
Attendees at EMTA’s Fall Forum listened as a panel of EM experts discussed the FOMC’s surprise tapering reprieve, the effects of China on Latin American countries and the outlook for the major Latin economies. UBS hosted the event on Tuesday, September 24, 2013, in New York City.
Moderator Rafael de la Fuente (UBS) moved the event’s panel swiftly through the event’s wide variety of topics. De la Fuente polled speakers for their reactions to the surprise delay of tapering, and how EM investors should respond. AllianceBernstein’s Paul DeNoon argued that more important than the timing of the Fed’s eventual tapering move was whether EM economies would find a new equilibrium growth rate. However, the Fed’s announcement gave the market added time to adjust to the new international environment, and the fact that EM economies have decelerated.
“Because of the huge inflows into EM over the past few years, the outflows earlier this year were larger than we had previously seen...but most of the sell-off was a run for the door from retail investors,” DeNoon stated. The exit by some retail investors could potentially still drag down market psychology, he acknowledged, although institutional investors had not deserted EM.
JPMorgan Asset Management’s Matias Silvani believed that the rally following the Fed’s announcement served as “an opportunity to take risk off in countries you are worried about.” He argued that, in the last quarter, technical factors had surpassed fundamentals. “Previously, we had a liquidity-driven rally, so it was no surprise to see the outflows...I thought it was going to be much worse, but we didn’t have to liquidate anything,” he stated. Silvani concurred that recent selling was retail-oriented, with institutional investors remaining under-allocated. Risk management should remain a key theme in 2014, he stressed, especially with dealers providing less liquidity in the market than in the past.
On the Chinese economic effects on Latin America, Javier Kulesz (Nomura) recognized that a slowdown would be felt, “but I am not worried about Latin America falling off a cliff.” Morgan Stanley’s Gray Newman noted that his firm, like most, had forecast slower Chinese growth in 2014, while underscoring that “Chinese GDP hasn’t been all that helpful in explaining the past, so investors should be careful when they focus on GDP only...commodity pricing is more linked to import demand.”
The Chinese government was taking steps to address three serious issues – pollution, corruption and the concentration of wealth, DeNoon reasoned. Resolving these issues would invariably translate into slower growth, but DeNoon expressed cautious optimism, due to the “good news” that Beijing recognized the problems.
De la Fuente also guided speakers through EM-specific issues, starting with Argentina’s legal matters. Kulesz recommended that investors overweight Argentine debt, based on several factors. He argued that Argentine debt was not fully pricing in a change of presidential administration in 2015, which he reasoned was increasingly likely. In addition, Kulesz expected that delays in the legal case against Argentina would eventually lead to it being unresolved by the expiration of the “rights upon future offering” clause, which he saw as allowing Argentina to be more able to negotiate.
“If you are long Argentina because you think the Supreme Court will take the case, I think you are crazy...but buy the debt if you see Argentina as a solvent creditor that is willing to pay,” advised Silvani. Generally, a contrarian stance on Argentina was the best way to play the debt, he added.
On Brazil, Newman found it “difficult to believe” that much reform progress will be carried out before the October 2014 elections. DeNoon saw opportunities in Brazilian corporates.
Asset prices in Mexico (and the MXP) did not reflect the potential for the energy sector in Mexico, in Newman’s opinion. “Last week’s announcement was underwhelming, but this is a major change,” he stated. Silvani agreed fundamentally that Mexico was appealing, and underscored that Mexico was a manufacturing company, rather than a commodity play. “However, technically the QE-unwind trade worries me; there is a lot of retail money here, and this is the most crowded trade, so technically there are still more outflows to go,” he said.
The panel had few kind words for Venezuela. Kulesz expressed concern on potential social unrest, including strikes. He saw downside risk, but not a default. DeNoon noted that for quite a long time he had been advised to buy Venezuelan debt in anticipation of political change and a new FX regime, both of which have yet to materialize. He concluded, ‘if Venezuela wasn’t part of the index, we wouldn’t care.”
In 2014, investors would be well-served to diversify, according to DeNoon. He recommended underweighting Ukraine and Venezuela, and adopting a tactical stance on currencies during sell-offs. EM corporates were one potential bright spot, “but a lot of money is chasing few ideas, and credit selection is very important.” Kulesz recommended a defensive position, while recommending Argentine provincial bonds, banks and public utilities. Newman reaffirmed his positive stance on Mexico, and Silvani favored selected Europe over Latin America, with manufacturing countries over “commodity plays.”