EMTA WINTER FORUM
Tuesday, February 18, 2014
Hosted by JPMorgan
Bank Street Conference Centre
25 Bank Street
London E14 5JP
2:30 p.m. Registration
2:45 p.m. Panel Discussion
Current Events and Trends in the Emerging Markets
Joyce Chang (JPMorgan) – Moderator
David Lubin (Citi)
Richard Segal (Jefferies)
Benoit Anne (Societe Generale)
Tim Ash (Standard Bank)
4:00 p.m. Panel Discussion
Investor Perspectives on the Emerging Markets
Kevin Daly (Aberdeen Asset Management) – Moderator
Graham Stock (BlueBay Asset Management)
Ben Sarano (Emso)
Rob Drijkoningen (Neuberger Berman)
Craig Botham (Schroders)
5:00 p.m. Cocktail Reception
Attendance for EMTA members is Complimentary / Non-member fee is US$695.
EMTA Winter Forum Speakers Debate Capital Flows Concerns, and Views on “Toxic Trio”
Over 175 attendees filled host JPMorgan’s London auditorium to hear speakers at EMTA’s Winter Forum. The event was held on Tuesday, February 18, 2014, in the city’s Canary Wharf district. Among the many topics, speakers debated the outlook for high-yielding credits, as well as recent capital outflows from EM debt.
Joyce Chang (JPMorgan) summarized in introductory remarks that “there was no January effect this past January.” Chang added that, despite record issuance, outflows from the asset class persisted, and local markets would remain vulnerable. She reviewed panelist forecasts for key economic variables in 2014, observing that most speakers concurred in their EMBIG forecasts (with a general consensus around 325 bps), while UST 10-year yield estimates ranged from 3.25% to 3.75%.
Citi’s David Lubin described the market as remaining anxious about continued capital outflows, reduced EM export demand from developed countries, and Chinese growth prospects, with flows the “most certain to be a continued cause for pessimism.” On China, recent fluctuations on that country’s CDS pricing reflected a “cycle of panic and calm on the Chinese economy,” and he noted his own forecast of 7.3% GDP growth in 2014.
Several speakers offered more benign outlooks. Richard Segal (Jefferies) expressed relative optimism on capital flows to EM debt. “Further sell offs shouldn’t be too dramatic,” he said.
“EM has become a dirty word in recent months,” according to Societe Generale’s Benoit Anne, who believed that, despite supportive fundamentals, a confidence crisis had occurred. “Technically this might be a good time too, with lots of short positions,” he added. Anne anticipated renewed capital flows in due course; “this is a market correction, not a major crisis.”
Tim Ash (Standard Bank) also expressed an overall bullish tone, suggesting that the market had over-corrected. However, he criticized those CEE sovereigns which had wasted QE opportunities, and which had failed to enact structural reforms. Politics related to the lack of pre-tapering reforms were the greatest concern for Ash.
Chang’s poll of Ukraine views found a split result; JPM and Citi retained over-weight recommendations, Standard and Societe Generale advised clients to underweight the credit, while Jefferies was neutral. “Nothing is clear about Ukraine’s future,” Lubin acknowledged, “but we expect it to muddle through with its debt payments.” He added that, unlike its fellow high-yielders, Ukraine has the benefit of being classified as more geo-strategically important.
While not expecting a Ukrainian credit event in 2014, Ash also refused to rule it out. He no longer considered Ukraine to be in the “too big to fail” category, with Russian President Putin determined to pull Kiev into the CIS Customs Union. In addition, Ash could no longer dismiss potential ethnic conflict, while the country’s macro-economic situation remained “dismal.” He concluded, “Analysts, and investors have zero idea where Ukraine is going, and it is near impossible to call it, or make investment recommendations.”
Anne feared that “anything is possible in Ukraine, even the most catastrophic outcomes; we don’t want to touch it.” Chang added her own view that, while recognizing the country’s serious challenges, Ukraine would be able to achieve some sort of negotiated political settlement, and muddle through.
As for Turkey, Ash expressed a generally bullish view, but would be monitoring the March local elections for future political directions. He added that “getting Turkish local debt right would probably make one’s year.”
Segal concurred in his positive assessment on Turkey. “None of the political rhetoric has translated into bad politics, and political risk is more perceived than actual,” he asserted. Segal saw opportunities in Turkish corporates.
Lubin noted that the Turkish Central Bank’s rate hike was necessarily dramatic to restore credibility. Anne underscored that “the Central Bank won the game; Ankara has made the hedgies afraid to be short.”
Speaker recommendations varied. Belarus and Serbia showed interesting potential in Ash’s view. “Belarus might be easier to figure out than Ukraine, and the blow out risks are much more manageable.” Ghanaian debt prices had fallen enough to attract Segal’s interest, although he acknowledged fiscal policy has disappointed the market. Anne spoke positively on long–end Polish and Hungarian bonds.
Investor speakers discussed their concerns and market views on a panel led by Aberdeen Asset Management’s Kevin Daly. Tapering remained the market’s core driver, according to Graham Stock of BlueBay Asset Management, and credit differentiation was key. Stock offered a relatively upbeat assessment on EM debt, and noted “EM balance sheets are much better than they were years ago.” However, he expressed disappointment that greater structural reforms and infrastructure development had not been accomplished.
Schroder’s Craig Botham saw China as a potential risk to EM. Drijkoningen expressed concern that EM corporates were at risk for a number of technical factors (“there has been a large build-up of supply over recent years and limited dedicated holders”); as well as potential earnings disappointments due to a deceleration in EM domestic growth combined with depreciated currencies and higher local rates. Ben Sarano (Emso) revealed that his greatest fear was a disorderly default in Argentina, Ukraine or Venezuela. Although not his base case, Sarano saw the odds for a credit event in these sovereigns as increasing.
Daly invited a further review of what he termed the “Toxic Trio.” Sarano confirmed that his fund was long all three credits, and judged Argentina (especially local law bonds) to be the most appealing. The possibility of a mis-step in Ukraine was growing, although the geopolitical battle for influence between Russia and the EU meant that it was not in anyone’s interest to allow a default. Venezuela was the least appealing of the three, as it was a “country running out of road; they are taking to remedial action to address their issues.” He suggested a credit event was possible in 2015.
Enjoying an amicable debate, Stock ranked the three in exactly the opposite order. BlueBay hadn’t owned a defaulted instrument, and Stock expressed a strong aversion to taking on Argentina’s legal risk. Continued oil revenues, in contrast, served to increase the appeal of Venezuela.
Drijkoningen was not tempted by Ukraine at current pricing. “Even if there is an endgame, a lot can happen in between,” he reasoned, and he seconded Belarus as an alternative. “Election fever” had already seized any potential upside for Argentine bonds. Moderator Daly admitted his firm was underweight Ukraine and Venezuela, and also held no Argentine paper.
Panelists agreed with Stock’s assessment that the lack of growth in Brazil would not affect its ability to pay. A one-notch downgrade was already priced in Brazilian debt levels, and Stock suggested it was unlikely President Dilma Rousseff would not be re-elected.
The upcoming increase of Japan’s consumption tax was a tail risk in Botham’s opinion, because it could trigger a technical recession and harm Japan’s exporters, such as South Korea and Taiwan. For Sarano, portfolio managers could face challenges if US rates were hiked sooner than expected, or conversely – and perhaps more worryingly -- if recent disappointing economic numbers foretold a persistent slowdown. Speakers added that a US slowdown could kill off an upswing in EM manufacturing and lead to EM corporate concerns.
Concluding with investor recommendations, Botham surprised many by announcing that his firm was generally underweight EM, although he spoke positively on Taiwan. Stock had a constructive view on Colombia (dismissing election risk completely), while Drijkoningen favored Indonesia. Sarano admitted that he would add to Toxic Three positions at lower prices, and argued that EM investment grade paper was generally cheap. Daly added his own recommendation of the Philippine peso, joined Stock in recommending Brazilian rates, and confirmed his championing of frontier markets with positive comments on Mozambique and Rwanda.