EMTA Forum in Dubai - March 17, 2015

EMTA FORUM IN DUBAI
Tuesday, March 17, 2015 

Shangri La Hotel
Al Bader Ballroom
Sheikh Zayed Road
Dubai, UAE 

2:30 p.m. Registration 

3:00 p.m. Sell-Side Panel
Prospects for the Emerging Markets
David Spegel (BNP Paribas) – Moderator
Ahmet Akarli (Goldman Sachs)
Simon Williams (HSBC)
Walid Haram (Nomura)
Stuart Anderson (Standard & Poor's) 

4:00 p.m. Buy-Side Panel
Current Trends in Emerging Markets 
Dino Kronfol (Franklin Templeton Investments) – Moderator
John Carlson (Fidelity Investments)
Abdul Kadir Hussain (Mashreq Capital)
Saeb Elzein (Spinnaker Capital)
Eric Fine (Van Eck Global)

5:00 p.m. Reception 

Support provided by BNP Paribas, Goldman Sachs, HSBC, Nomura, Standard & Poor's and MarketAxess.  

Attendance is complimentary for EMTA Members / US$695 for non-members. 

EMTA Dubai Forum Discusses Oil Pricing, Risk/Reward on MENA Credits and Global Economy

EMTA’s Sixth Annual Forum in Dubai was held on Tuesday, March 17, 2015 and drew 100 market participants.  The event was supported by BNP Paribas, Goldman Sachs, HSBC, Nomura and Standard & Poor’s.

David Spegel (BNP Paribas) moderated the event’s sellside panel.  Spegel summarized recent events in emerging countries, and observed that global investors continued to focus on credit ratings (e.g. Turkey), the upcoming elections in Nigeria, the Ukrainian situation, a potential default by Venezuela, and oil pricing.  Spegel asked speakers for their general market outlook and what they saw as asset class risks.

Goldman Sach’s Ahmet Akarli recalled that his firm had adopted a cautious stance towards EM since late 2012/early 2013, as growth prospects--and benefits from the commodity boom--waned.  For 2015, he predicted the main themes would be dollar strength/euro weakness, commodity pricing, and disinflation.  In Akarli’s view, FX remained the most vulnerable EM asset class.

In a generally weakening EM environment, GCC assets would prove resilient “because these are the wealthier countries….and these are the countries where you are going to get your money back,” argued Simon Williams (HSBC).  “You may not like the way the money is being used, but they will pay you back,” he emphasized.

Walid Haram (Nomura) agreed that investors were not greatly concerned about the possibility of a Gulf sovereign default, although it was unclear to him whether current prices reflected the risks.  Haram described a generally deteriorating political situation in the Middle East –the conflicts in Iraq and Syria, a destabilizing Yemen, and dramatic revenue declines in oil exporters—and concluded that the equity markets in the region had somehow corrected for some of the additional political risk and decline in oil prices, whereas this was not reflected on the fixed income side, where GCC credits remain trading at tight spreads.

Stuart Anderson (Standard & Poor’s) reminded attendees that new regulations will be applied to ratings agencies in Saudi from September 1.  He highlighted recent ratings downgrades of Bahrain and Oman; and the move to a negative outlook on Saudi Arabia; mainly as a consequence of lower oil prices and its impact on fiscal positions.  In Anderson’s assessment, Gulf sovereigns had performed well compared to their peer group, and he highlighted their strong Central Bank reserves which would be able to finance deficits “at least for now.”  Oil was likely to average $55 per barrel in 2015, trending to $75 by 2018, in S&P’s view.

“I don’t believe anyone who tells me they know where oil prices are going,” stated Williams, who saw a market focusing on supply, while analysis of demand remained elusive.  “Deflationary global pressures could keep oil at low levels for sometime,” he speculated.  Anderson noted that the “huge stresses” at the oil companies had resulted in an exodus of young talent.  Spegel forecast oil reaching $73 in 2016, with euro-dollar parity boosting European demand and a continued US recovery; on the other hand, a nuclear agreement with Iran could lead to a new supply glut, he stated.

The panel addressed the implications of dollar strength on MENA credits.  For Anderson, the question remained whether corporates would seize the opportunity to issue dollar debt while rates remained at low levels.

On potential defaults, Haram discussed the “social taboo” on defaulting, and noted that such a taboo was not as strong in some Gulf credits as in others.  Anderson viewed the UAE real estate sector as potentially vulnerable, while underscoring that any problems would metastasize to banks as well.  Williams remained concerned by Turkey, and asserted that oil savings had masked imbalances.  Spegel forecast an overall default rate of 3.28%, declining to 3% in 2016.

Among investment recommendations, Akarli believed there was value in Russian credits although geopolitical concerns remained an issue.  Williams viewed long-dated Gulf paper as cheap; he spoke positively on Tunisia’s recent issuance, although warned that there was “no natural bid” in an EM sell-off.  Haram spoke positively on Dubai Holdings and bearishly on Turkey.

Dino Kronfol (Franklin Templeton) moderated the event’s second panel of both local and international investors.  The panel reviewed their predictions from 2014, with several acknowledging that they had not foreseen oil’s dramatic decline in the second half. 

As for how oil would affect their investment decisions, Van Eck’s Eric Fine stressed that a continued cautious approach was warranted, not expecting a rebound in demand in the near-term.  John Carlson (Fidelity) argued that high oil prices were good for the global economy, “because exporters used inflows for investments; when oil drops, people spend those savings in very small ways.”  Finally, Saeb Elzein (Spinnaker Capital) saw the supply/demand dynamics on oil moving in the right direction, and viewed growth outlooks as rising, although he first wanted to see volatility in the oil market decline.  “We are in a new era; the call on OPEC is now a call on US shale,” he underscored.

Discussing their overview of the market, Abdul Kadir Hussain (Mashreq Capital) expressed a “fairly bullish” stance, expecting slow and deliberate US rate hikes starting in September.  Fine eschewed local currency bonds, expecting outflows, and corporates, because of liquidity, and favored liquid, high-duration sovereign bonds.  He acknowledged interest in Brazilian (“already trading like it has been downgraded”) and South Korean bonds (“very hard to find that paper now, however”), as well as Argentina on a post-election basis.  Carlson agreed that he found it hard to make the case for EM corporates or locals at current levels, although he hinted at opportunities in distressed credits.

As for MENA credits, Hussain favored longer-dated regional issues.  “I don’t see any potential credit event for up to the next two years [in GCC credits]” he added.  Hussain also spoke constructively on Egyptian and Saudi equities (“because of the technical factor of opening up the Saudi market”).  Elzein seconded the recommendation on Egyptian equities, and also viewed select GCC bonds as cheap on a relative value basis.  Fine summarized his view as “we were supposed to like Egypt, but we don’t.”

Panelist views varied on a number of topics.  “Russian sovereigns and quasi-sovereigns are my favorite trade for next year; there may be a lot of value there,” stated Carlson, who based his opinion on “clear willingness to pay, a hesitancy in some EU capitals to continued sanctions, and the devaluation of the ruble in order to absorb shocks.”  Hussain concurred that Russian debt could be a “solid performer.”  However, Fine announced that he would not invest in Russia currently based on a number of factors not limited to oil pricing.

In addition, Fine noted he was bullish on duration, while Carlson expressed a bearish stance, and announced that his portfolio had shorter duration than any time previously in his career.  Hussain placed himself as in the middle.  Fine and Carlson did agree that holding cash was an appropriate investment strategy if one didn’t see value in the market.

Prompted by the audience for his own market commentary during the event’s Q and A session, moderator Kronfol acknowledged he was underweight duration, and was not as bearish as some of the Forum speakers.  He spoke positively on GCC high-yield credits, acknowledging idiosyncratic risk, and “didn’t agree with the doomsayers [on EM growth]; I don’t think China is falling off the cliff, and EM will continue to grow at twice or 3 times the pace of developed markets.”