EMTA Winter Forum - London- February 17, 2015

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

EMTA Winter Forum Speaker Views on US Rate Hike Reaction Diverge

Over 175 market participants attended EMTA’s Winter Forum in London on February 17, 2015.  JPMorgan hosted the event at its newly-refurbished Great Hall.

Luis Oganes (JPMorgan) provided context for the event by reviewing recent developments in EM.  He asked speakers if EM growth would disappoint in 2015, and for their thoughts on how US rate hikes would affect the asset class.  Citi’s David Lubin viewed EM as “sort of stuck between China and the US.”  He explained that after a decade or so of Chinese interests being aligned with that of other EM countries, the rebalancing in China towards consumer spending-led growth, and weaning the economy of dependence on stimulus, translated into reduced benefits for its trading partners.  Furthermore, “it’s not completely mad that the government might even want to weaken the RMB in the future...that would be a major shock along the lines of US rate hikes,” he cautioned.

On US rates, Lubin noted that his firm was predicting minimal tightening by year-end, and reminded attendees that this would occur in the context of other liquidity-enhancing actions by the BOJ and ECB.  US hikes were “not coming out of the blue...we went through the dress rehearsal in 2013.”

Societe Generale’s Benoit Anne argued that rate hike action by the Fed would actually prove beneficial.  “Once they start, ‘Fed fear’ will go away, when the market realizes the pace will be slow.”  Anne compared the market to an anxious dental patient, adding “I cannot wait until this tightening starts...because there will be a ‘relief rally’ as the market realizes that it can deal with the Fed actions.”

Michael Trounce (Standard Chartered) expressed a more cautious short-term stance, expecting “maybe three months of disruption” in the marketplace once hikes begin.  However, he concurred with Anne on a longer-term basis.  Moderator Oganes also acknowledged there could be “some trauma” in the aftermath of US rate hikes, while noting his firm’s 2.4% UST 10-year forecast was the lowest among the firms represented.

The panel discussed local markets instruments.  Anne revealed his enthusiasm for CEE local paper, citing negative inflation rates, strong-risk appetite prompted by ECB actions, and the easing direction of the Romanian, Polish and Hungarian Central Banks.  Oganes noted his firm’s forecast of 3% local currency debt returns (real terms), while Lubin warned that EM FX would remain under pressure for the longer-term.

Panelists remained wary of investing in Ukraine, Venezuela or Russia.  Anne acknowledged he had considered recommending Russia until the Central Bank’s surprise rate cut decision.  Lubin expected a debt payment crisis in Caracas before year-end.

The event’s investor panel was moderated by Aberdeen Asset Management’s Kevin Daly.  Speakers discussed their thoughts on 2015 EM performance, with Ben Sarano (EMSO) noting technical support from redemptions exceeding new issuance, and competing debt instruments trading below a 0% yield.  Alex Garrard (BTG Pactual Asset Management) agreed that many G-3 investors were being pushed “to look a little down the credit ladder,” and favored African and Middle Eastern credits.  Graham Stock (BlueBay Asset Management) predicted 6% returns in both hard- and local-currency debt, while Greg Saichin (Allianz Global Investors) saw local-currency returns at 5 to 7%.

The panel revisited its 2014 discussion of high-beta credits.  Ukraine’s outlook has dramatically changed over the past year, Sarano noted, with no hard-currency inflows and Central Bank reserves dwindling to $7 billion.  “Ukrainian bonds are a long way from offering value,” in his assessment.  For Stock, Ukraine was “too toxic to buy,” noting that historical debt precedents don’t apply because “Ukraine’s neighbor is so intent on destabilizing it.”  Saichin noted that it was hard for investors to analyze traditional debt ratios when Ukraine’s territorial integrity remained unclear, while Garrard was more sanguine on Ukraine’s potential debt restructuring, expecting it to take the form of cash flow-relief from private creditors, rather than stock reduction, at this stage.  (“The longer term is a different question,” he stated.)

Speakers were divided on whether Venezuela could avoid defaulting.  Saichin predicted a credit event by year-end, and argued that Caracas wouldn’t remain in a state of default for long because of its dependence on food imports.  He preferred PDVSA bonds over the sovereign, because “PDVSA needs to be current and it’s much easier to attach oil assets.”

Sarano viewed a “muddle-through” was possible this year, and saw upside on Venezuela based on factors such as potential political changes via a recall election, PDVSA’s efforts to attract liquidity, Venezuela’s willingness to pay and the country’s 2015 payment schedule.  “We are not a million miles from recovery value,” he added.  Garrard would market-weight Venezuela in a benchmarked portfolio, and moderator Daly stated his base case was payments would be made this year (while pointing out that distressed investors are making increasing investor trips to Venezuela).

The panel also touched on Brazil.  Stock was sceptical of chatter that new Finance Minister Levy would prove “the saviour of Brazil; I’m not convinced any one person can save the country.”  Garrard expressed concern that the Petrobras scandal “seems to have some more chapters to run through; we are not close enough to the end yet.”

Sarano acknowledged he was having difficulties remaining bearish on Russia.  “Spreads are pricing in a downgrade to BB, and, although the latest cease-fire is tenuous, I don’t think a more aggressive sanctions approach will happen.”  He noted local support for Russian debt, and ruled out a sovereign default despite a challenging economic situation.  Saichin believed Russian corporates offered value to investors who either believed the crisis would end soon, or that Moscow would bail out corporates “on the QT.”

As for liquidity in EM debt, speakers largely concurred that the sell-side’s ability to warehouse bonds had permanently changed.  Garrard stressed that, as a result, investors needed to adapt their business models, while Sarano expressed concern that the next “too big to fail” scenario would involve an asset manager.