London Summer Forum Panelists See Sell-Off as Buying Opportunity
EMTA’s 16th Annual Summer Forum took place as the market continued to react to Federal Reserve Chairman Ben Bernanke’s suggestion that the current Quantitative Easing (QE3) policy could be nearing an end. Over 150 market participants attended the event, which was hosted by Bank of America Merrill Lynch in its London headquarters on June 25, 2013.
Alberto Ades (Bank of America Merrill Lynch) invited audience members to take part in an instant poll on investor sentiment. The results revealed that a plurality of attendees interpreted the May/June market sell-off as a temporary “risk-off” swing rather than a full-blown crisis, and that they would increase their exposure to DM equities most. Turkey was expected to be the worst performer of EM debt instruments. CLICK HERE for the full poll results.
Ades requested that Forum panellists assess the market turbulence. Alex Garrard of BTG Pactual Asset Management reasoned that hot money outflows should be expected when performance turned negative. However, he argued that stickier real money and sovereign wealth accounts remain under-invested in EM debt, and would offer long-term asset class support.
For Jan Dehn (Ashmore Investment Management), the market’s decline was an “uber-classic technical sell-off; and this buying opportunity will make money for the next 24 months -- there has been no fundamental change.” Dehn pointed out that Mexican and Brazilian local instruments were among the sell-off’s victims, while EM currencies had also been “beaten up more than warranted.”
Neuberger Berman’s Rob Drijkoningen suggested that the market had done Bernanke’s dirty work. “The market has pre-emptively tightened for the Fed,” he stated. He concurred that there was no justification for the market drop; “you tend to get extremes in these sorts of unwindings.”
Pierre Yves-Bareau (JPMorgan Asset Management) saw cash as offering the only place for an investor to hide, but when he reinvested, he would first buy local bonds, then EM sovereigns and corporates. In Bareau’s analysis, EM equities were cheap at current price-to-book levels, “even though earnings haven’t been impressive yet.”
Garrard acknowledged that frontier markets had been the first to sell off following Bernanke’s comments. While many frontier credits remained attractive because of scarcity value, there were also those that “may not be pristine stories.” Drijkoningen noted that he was underweight frontier credits.
The panel concluded with a debate on when the Fed would begin to wean the market off its QE program. Drijkoningen expected tapering to start in September. Bareau speculated that tapering could begin in December, while stressing that “we don’t care, we want to see the end of QE.”
Prior to launching the Forum’s panel of sell-side experts, Brett Diment of Aberdeen Asset Management conducted an additional instant poll. 52% of attendees expected tapering to occur in the 4Q of 2013, with 45% expecting Fed Fund rate hikes to begin in 1Q 2015. A Chinese hard landing was viewed as the greatest risk overhanging the asset class, while the most-welcome market surprise would be Bernanke backtracking on talk of tapering QE3.
Ahmet Akarli (Goldman Sachs) seconded buy-side speakers in stressing that “there is value out there, especially in local rates.” Akarli interpreted signals from the Fed as indicating that officials were “not happy” with the pace of the sell-off that had occurred in the four weeks preceding the Forum. Jefferies’ Richard Segal predicted that 10-year US Treasury bonds could go to 4.25 or 4.5%, and with yields hovering around 2.5%, “we have had half the sell-off we are going to have.” Sberbank’s Alexey Bulgakov concurred in describing the sell-off as largely technical in nature (“hot money came in, hot money went out”).
Barclays’ Christian Keller agreed that further market declines were possible. While market turbulence in 2011 had been more generalized risk-aversion, and affected most asset classes, he observed that EM had borne most of the pain in the current decline. Keller highlighted that the case for EM had been built largely on EM’s having better growth and having better balance sheets, but that growth, in particular in the BRICs, had disappointed in recent quarters. “We therefore would probably need to see some positive activity data come out of EM countries such as Brazil to improve sentiment for EM and inflows to come back,” he rationalized.
On the other hand, Akarli warned that that the market should accept that some of the rationale for EM investment might be slightly less impressive than in recent years. “Chinese GDP might no longer dazzle us as in the past, and commodity pricing might also not contribute as much to EM,” he stated.
Social unrest in Brazil and Turkey was addressed by speakers. Segal downplayed recent Turkish unrest as a “flash mob protest with no leadership, no real cause, and with the opposition weaker than the governing party.” He subsequently stressed his long-term optimistic outlook on Turkey. Segal similarly viewed Brazilian protests as “venting,” noting that President Dilma Rousseff has not been blamed personally, and reasoned that a weaker BRL and stronger US economy will eventually help Brazil. Akarli spoke positively of the growing democratization of the Turkish state.
The panel concluded with analyst
recommendations. Bulgakov favored
longer-dated Russian oils. Hungary, Cote
d’Ivoire and Russian quasi-sovereigns were among Keller’s favorite EM credit
trades, while Segal recommended Venezuela’s 2016 bond as well as Q-Tel’s 2028
issue. Moderator Diment acknowledged he
was cautiously adding duration back to his portfolio, and spoke constructively
on both Brazilian sovereign and local market bonds.
Bank of America Merrill Lynch
2 King Edward Street
London
2:30 p.m. Registration
2:45 p.m. Panel Discussion
Investor Perspectives on the Emerging Markets
Alberto Ades (Bank of America Merrill Lynch) – Moderator
Jan Dehn (Ashmore Investment Management)
Alex Garrard (BTG Pactual Investment Management)
Pierre-Yves Bareau (JPMorgan Asset Management)
Rob Drijkoningen (Neuberger Berman)
4:00 p.m. Panel Discussion
Current Prospects for the Emerging Markets
Brett Diment (Aberdeen Asset Management) – Moderator
Christian Keller (Barclays)
Ahmet Akarli (Goldman Sachs)
Richard Segal (Jefferies)
Alexey Bulgakov (Sberbank CIB)
5:00 p.m. Cocktail Reception