EMTA SPRING FORUM
Tuesday, April 29, 2014
HSBC Securities (USA) Inc.
452 Fifth Avenue at 40th Street
Americas Room - 11th Floor
New York City
3:45 p.m. Registration
4:00 p.m. Panel Discussion
Prospects for the Emerging Markets
Gordian Kemen (HSBC Securities (USA) Inc.) – Moderator
Marco Santamaria (AllianceBernstein)
Kathryn Rooney Vera (Bulltick Capital Markets)
Alberto Ramos (Goldman Sachs)
Jens Nystedt (Moore Capital Management)
5:00 p.m. Cocktail Reception
Attendance is complimentary for EMTA Members. The registration fee for non-members is US$695.
Market May Not be Pricing in Potential Russian Sanctions Risk, According to EMTA Spring Forum in NYC
A capacity crowd of 150 attended EMTA’s Spring Forum on Tuesday, April 29, 2014. HSBC Securities (USA) Inc. hosted the event in New York City. Themes at the event included EM elections, the threat of increased sanctions on Russia, and expected market performance.
Moderator Gordian Kemen of HSBC Securities (USA) Inc. highlighted the strong performance of EM local and external debt year-to-date, despite many risk factors that led to the 2013 sell-off still being in place. Kemen then polled speakers on potential upside for EM debt. Marco Santamaria of AllianceBernstein acknowledged that he had maintained “muted expectations” at the outset of 2014, with concerns over Chinese growth, Brazil’s drought, political turmoil in Turkey, Argentine FX reserve depletion and “the usual state of disaster in Venezuela.” However, a much more benign US rate scenario has proven market concerns to be over-done, and Santamaria “didn’t think the party was over yet.” Moore Capital Management’s Jens Nystedt saw the market in a short-term sweet spot, with the Fed hiking cycle largely priced in.
Kathryn Rooney Vera (Bulltick Capital Markets) argued that there was still upside in local debt, and expected double-digit returns. “Brazil and Mexican local paper offer the most value,” in her opinion, based on a belief that secondary energy sector reforms would be passed, as well as expected currency appreciation, and the attractive carry.
Goldman Sachs’ Alberto Ramos reiterated comments he made at EMTA’s Miami Forum that investors had previously over-panicked with regard to EM current account deficits. “It depends on how the money is spent; whether the current account deficit is being driven by a boom in investment or consumption; there is a big difference between what drove the current account deficits higher in Brazil, i.e. for consumption and in Chile, where it was used for investment,” he stressed.
On outflows, Rooney Vera argued that EM was unlikely to experience a debilitating outflow of capital given that EM fundamentals were much stronger than in previous years (she contrasted the current environment with the aggressive 300 bps in Fed hikes in the 1990s). She expected Fed actions on monetary policy to be cautious, with rate hikes delayed until April 2016. With UST rates remaining lower than expected, investors will return to yield-seeking activity, she argued. Santamaria noted that EM retail accounts might be allocating to EM indirectly, via HY funds; he also saw institutional investors as continuing to increase EM allocations.
The heavy EM election calendar was addressed. According to Ramos, the market was more focused on whether a peace deal with FARC rebels could be achieved than the actual polls in Colombia. Rooney on the other hand expressed concern that a presidential contender who appeared to be competitive in second round polling simulations embodied anti-free market principles. As for the oft-discussed Brazilian election, Ramos underscored that President Dilma Rousseff was still the favorite to win the election and voter dissatisfaction with the administration had not yet translated into more meaningful support for the opposition candidates (“the relationship between voters and the government is like the distant cousin you don’t really fancy, but you keep inviting to Thanksgiving dinner,” he joked).
The panel also focused on high-beta credits. Recent actions in Buenos Aires, such as the peso devaluation, higher interest rates, streamlining of costly subsidies, and fiscal restraint were similar to Chapter I of an IMF agreement, Ramos pointed out. He reiterated his positive recommendation on Argentine debt, noting market optimism over a new administration taking the reins in 2015. Rooney described recent policy actions in Argentina, as well as Venezuela’s bolivar devaluation, as “opportunistic pragmatism.” In regards to Venezuela; “we don’t see much upside [for fundamentals], but both the willingness and capacity to pay is intact,” she commented.
Nystedt believed that even President Putin does not know what his next steps will be in the Ukraine crisis. Nystedt cited a former colleague’s comment “this is Putin’s ‘Lehman moment’….no one can foresee the unintended consequences of any future move….how can the White House even understand all the financial interlinkages if full sanctions are imposed?” For non-benchmarked accounts, the good news was that managers have been given time to react. However, Russian-dedicated funds could cause market turbulence if they exit Russian paper at the same time. Nystedt argued that both EM investors and public sector officials have not adequately taken into account the potential of a very serious problem. “We are still several steps away from Iran-type sanctions,” he noted, but it could take the West five years to diversify from Russian oil.
Santamaria echoed Nystedt’s concerns. The interruption of oil flows to CEE and Baltic countries seemed thus far not to have been accurately assessed. “The market is not pricing in any significant tightening of sanctions,” he opined.
The panel concluded with speaker recommendations. Panelist picks included Venezuelan hard currency debt (“not huge conviction there, but the recent measures extend the day of reckoning” according to Santamaria). Rooney Vera liked Mexican locals, “because the energy reform is the biggest thing since NAFTA.” Nystedt expressed concerns on Brazil, expecting continued disappointment on economic growth in 2015 and a 50/50 chance for actual rate cuts next year. Among Ramos’ picks were Colombian local bonds.