EMTA Forum in Hong Kong - Oct. 24
EMTA FORUM IN HONG KONG
Monday, October 24, 2016
Sponsored by 
JW Marriott
Pacific Place, 88 Queensway
Salon 6 - JW Marriott Ballroom (Level 3)
Hong Kong
12:00 noon - Registration
12:30 p.m. - Luncheon and Panel Begin
"Investing in Asia 2016-2017: Prospects and Risks"
Tim Condon (ING Bank) – Moderator
Adarsh Sinha (Bank of America Merrill Lynch)
Johanna Chua (Citi)
Stephen Chang (JP Morgan Asset Management)
Angus Hui (Schroders)
Luncheon will be served with the compliments of ING Bank.
Additional support provided by MarketAxess.
EMTA Members: US$50 / Non-members: US$695.
Hong Kong Forum Panel Focuses on Populism, Decreased Skittishness on China
EMTA’s Forum in Hong Kong was held on Monday, October 24, 2016. The event was sponsored by ING and attracted a crowd of 100 EM market participants. Tim Condon (ING) led the panel through a series of topics, including global populism, US rate hikes and Chinese inclusion in industry indices, while observing that the fears of a more dramatic Chinese slowdown in the first months of 2016 had given way to a new serenity.
Condon started the session by discussing the increase in populist politics globally, and asked speakers how this would affect Asian investments. Adarsh Sinha (Bank of America Merrill Lynch) observed that, following the performance of Hillary Clinton in the first US presidential debate, the market had appeared to discount the chances for a victor by Donald Trump and had returned “risk on” mode. He warned that there were a variety of potential European issues in 2017, such as the French and German elections, in addition to Brexit negotiations.
Citi’s Johanna Chua pointed out that the type of populism that resulted in a misallocation of resources was damaging, while there could, in fact, be beneficial aspects to some populist movements, such as increased social safety nets that could benefit economies as a whole. Finally, Stephen Chang (JP Morgan Asset Management) warned that the potential damage from populism had not been fully priced into the market, citing the cheap hedging prices.
Condon turned to the campaign stances of both US presidential candidates to oppose the proposed Trans Pacific Partnership (TPP). Angus Hui (Schroders) noted that South Korea and Taiwan were among those countries most sensitive to TPP.
“The lesson from TPP, from an Asian country perspective, is that the US is not a reliable partner,” stated Chua. This would make a pivot to China more logical. If TPP fails, countries will return to bilateral trade accords, she believed.
Speakers concurred that the US FOMC was likely to raise rates at its December meeting, with a general consensus of 2 hikes following in 2017. Hui believed that, in the case of a very gradual rate hike cycle, Latin American debt could prove an interesting opportunity, as well as India’s masala bond market for Asian investors to explore income opportunities.
As for the “Duterte effect,” Chua viewed long-term Philippine fundamentals “okay, if the President stays away from the economy.” The declared “separation” from the US was less meaningful than feared, because Japan was the largest investor in the country. “The Philippines is an ‘old-growth’ story, so it is not as exciting as a ‘new growth’ story such as Indonesia,” she stated. Duterte’s strong popularity could decline in the future, thus weakening his position.
Condon asked speakers for their latest views on China, following the notable “decrease in anxiety” from the first months of 2016. The “new calm,” according to Sinha had resulted from factors including the opening of the credit tap by Beijing, and improved communication on FX policy since the 8/11 debacle. “Investors are less worried now about a big one-off devaluation of the RMB; there is less panic now. However, the closer we get to 7 [RMB per USD], the more deflationary shock will occur to China’s trading partners.”
Chua added, “We all know China still poses a lot of risks, but they also possess a lot of tools.” The upcoming party Congress in 2017 would likely prevent any meaningful policy changes; instead, a strategy of “kicking the can down the road” was more likely to prevail. Hui noted that Brexit and other EU news, as well as developments in the oil market, had kicked China down from the top stories in the financial press.
Chinese composition in industry indices was being monitored by panelists. Chang noted that the high percentage of China in the JACI Index prompted investors to ponder how much exposure a portfolio manager should have to one economy, or if they should adopt a model capping the percentage of each country.
As for Chinese inclusion in the main global bond indices, Sinha believed that more clarification on Chinese regulations was needed. He expressed skepticism that China would be represented in global bond indices in 2017. Chua compared Chinese inclusion in world bond indices to the RMB being made part of the IMF’s SDR, and would similarly be inevitable. She reasoned that investor feedback would likely lead first to Chinese debt being added to EM global indices, and investors could benefit by analyzing “which countries will, as a result, get crowded out.”
Condon revisited the industry’s eternal liquidity debate. Chang replied that a clear shift in EM debt inventory away from dealers to the buyside occurred after 2008, “so your investment horizon has to be longer; we don’t just look at an issue for the next point or two.” Chang underscored the importance of buy-and-hold investors in Asia, such as insurance firms, resulting in more debt remaining out of the secondary market.