2015 EMTA Annual Meeting in NYC - Dec. 3

EMTA Annual Meeting Panelists Discuss EM Opportunities in 2016

Citi hosted EMTA’s Annual Meeting on December 3, 2016 in New York City. Over 250 EM market participants attended.

David Lubin (Citi) led the event’s investor panel, reversing the usual order and starting off by asking speakers for their favored trades. Lubin then queried his panelists if EM currencies had further downside potential. Hari Hariharan noted that for his firm to feel comfortable in EM FX, one has to get over “big dollar.” China’s currency remained an enigma, and a critical one at that. “None of us have the faintest clue what China is going to do,” and labeled the renminbi trading band system “absurd.” Schroder’s Jim Barrineau speculated that once the long-expected US rate hikes were announced, EM currencies could potentially rise with double-digit returns possible.

Dave Rolley of Loomis Sayles argued that China’s domestic debt issue could be resolved by either an “extend [maturities] and pretend” approach, whereby no principal was ever written off, and which would be currency-friendly; or the debt could be monetized. The value of the renminbi would react accordingly, depending on how Beijing decided to address its domestic debt overhang.

Addressing EM fundamentals over 2015, Blackrock’s Pablo Goldberg observed that “it’s hard to make progress in EM reforms in a bad economic environment.” Rolley highlighted that reforms are easiest when they can be blamed on others; thus, for example, progress was achievable in Argentina under the new government, and “maybe something can get done in Venezuela [post-election] too.” Goldberg added that it would be key in the Argentine case how the bad news would be delivered, as a large percentage of the public was still in favor of large government spending and economic inefficiencies. Barrineau pointed out the Argentine subsidies had blinded citizens from the actual deterioration in the economy, and President Macri would want to be gentle in his removal of subsidies and increases in taxation. Former President Fernandez de Kirchner would be vocal in tying Macri to the pain inflicted by an eventually devalued peso, he added. Hariharan suggested that Argentina might be “deluded” in its expectations of multi-billion dollar inflows once a hold-out deal was concluded.

Lubin pondered if recent performance in EM debt instruments had sullied the case for EM investment. For Barrineau, the answer was simple. “You need to keep EM debt in your portfolio if you want to hit a 7% annual return rate.” Rolley noted that EM debt’s competition included negative returns on European government paper, and Goldberg and Hariharan noted that returns were better than many other asset classes.

The panel concluded with reflections on what unnerved portfolio managers most. For Rolley, oil dropping down to the low $20s was a concern. Hariharan cited the possibility of a blunder similar to China’s mishandling on 8/11 of its currency devaluation. A mishandling of the FOMC’s message on interest rate direction was the risk which concerned Barrineau most.

Attendees to the annual meeting applauded Joyce Chang as she completed her 20th consecutive annual appearance at the event. Chang stated that in referring to her notes from two decades ago, many of today’s topics (the potential for a hard landing in China, the timing of US rate hikes, oil pricing) were also sources of discussion. She also referred to the economic predictions by speakers at the 2014 annual meeting. “We were correct that EM hard currency debt would outperform EM local, and that Ukraine would restructure; we were wrong on oil pricing, we underestimated dollar strength, and we thought Russia would be the worst performer,” she stated.

Chang asked for thoughts on the global macroeconomic background, beginning with a poll on whether the renminbi would depreciate in 2016 (4 of 5 speakers agreed it would). Alberto Ades (Bank of America Merrill Lynch) confirmed his house view of 6.90 CNY per USD in 2016, though less depreciation were possible. He noted that decisions on the currency were made by consensus, with no incentive for individuals to “stick their neck out.” Deutsche Bank’s Drausio Giacomelli believed China would have “serious trouble on growth in the 2H; there will be better growth in 1H.” Chang herself believed a devaluation would be front-loaded in 2016, and an FX rate of more than 7 per dollar was unlikely (her prediction was 6.7, with Barclay’s Christian Keller at 6.85).

Panelists concurred that US rates would be lifted by 25 bps at the Fed’s December meeting, with the majority also forecasting an additional 75 bps in hikes in 2016. Goldman’s Alberto Ramos (Goldman Sachs) also led a consensus view of a euro valuation at 0.95 in 2016.

Recalling the investor’s panels’ earlier conclusion that hard currency EM returns relative to other asset classes continued to make the case for EM investment, Chang asked if investors should return to local currencies in 2016. Ades noted that Bank of America Merrill Lynch predicted 2.7% returns in EM external sovereign debt vs a 1% return local markets (“although there is a wide range, depending on which market.”) Keller believed 2016 would be a year that was neither a disaster nor overwhelmingly bullish, and that perhaps the only factor that could improve his view was a commodity rally.

Chang polled speakers on several Latin American countries. Three of the five speakers expected President Dilma Rousseff to remain in office in 2016; while panelists agreed in their base cases that Venezuela would restructure its debt in 2016, and that Argentina would settle with its hold outs in the new year.

In additional comments on Brazil, Giacomelli believed there would be a push to impeach the Brazilian leader, but that there was no strong political rationale for doing so. He lamented the fact that “no real fiscal adjustment has been made so far, and politics have trumped economic needs.” Speakers voiced forecasts ranging from 4.25 to 4.5 BRL per dollar in 2016. Ramos noted that his forecast of a 2.3% contraction in the Brazilian economy might be optimistic, and predicted “a long, protracted recession” and that the panel might be discussing Brazil’s economic malaise for “3 to 5 years.” Ades gave an even more bearish forecast of a 3.5% contraction in Brazilian GDP in 2016.

The lack of a Congressional majority for Argentina’s new president, its low reserves and inability to access IMF reserves continue to pose challenges for Buenos Aires. “In Argentina, we have a lab experiment,” commented Ramos who recommended front-loaded adjustments in order to avoid fatigue.