EMTA Corporate Bond Forum (London) - Jan. 25

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

Due to space limitations, this event is not open to members of the press. 

EMTA Corporate Panel in London Expects “Decent” Inflows

UBS hosted EMTA’s latest Corporate Bond Forum in London on January 25, 2017. Over 150 EM market participants attended to hear a discussion of asset class expectations for 2017.

Kathleen Middlemiss took on moderating duties, and in opening remarks provided context for the event. Middlemiss reminded attendees of the double digit returns in EM corporates last year, with the asset class benefiting from the low-yield environment globally despite a shaky start. After reviewing the background, she asked speakers for their views on likely flows in 2017, and for their analyses of both technical and fundamental factors.

Siddharth Dahiya (Aberdeen Asset Management) emphasized the strong economic conditions in EM countries, generally, compared to previous instances of asset class sell-offs. With approximately 80% of global bond yields under 2%, the year could be “decently strong” for EM inflows as the asset class offered “yield and decent credit quality.” Dahiya added that EM corporates might be prone to volatility depending on how the US rate hiking cycle was rolled out (which could be more important than the end rate).

Barclays’ Sarah Leshner Carvalho concurred that inflows into EM were likely to continue as part of the global quest for yield, while cautioning that there was a tail risk in unexpected US policies. Eduardo Alhadeff (JPMorgan Asset Management) offered his assessment that, in the short- and medium-term, EM debt prices might be expensive, and EM spreads may not be sufficient to attract cross-over interest.

Middlemiss turned the discussion towards EM corporate supply expectations for 2017. Panelist methodologies differed, although forecasts of $260 billion to $320 billion were offered. Bank of America Merrill Lynch’s Kay Hope believed that Fed hikes would not be as high as current market expectations, and that EM corporates could issue early in 2017 to take advantage before US rates rose.

Default rates were also addressed. Sell side analyst methodology also varied, with Leshner Carvalho noting her firm’s 1-2% EM corporate default prediction, compared to Hope and Bank of America Merrill Lynch’s 3%.

On liquidity, Alhadeff discussed the complex nature of how its contraction affected investment decisions. “One effect is that we simply don’t participate in small issues anymore,” he stated, while underscoring the needed for greater fundamental analysis of new issues. Dahiya concurred that his firm also eschewed smaller issues, and aimed to avoid holding a large percentage of any issue in times of tight liquidity.

The panel reviewed the challenges facing the asset class. Alhadeff expected 3 to 4 US rate hikes in 2017, which he recognized as being greater than market consensus. In addition, while the fears of a CNY devaluation have largely disappeared from the headlines it remained a concern, and a potential source of volatility. “We are not even close to solving the Chinese currency issue; and how the US administration plays its cards such as the ‘currency manipulator’ issue, will be important,” he reasoned.

“What makes me nervous, among other factors, is commodity pricing,” stated Leshner Carvalho, who listed firm forecasts of oil at $57 per barrel, weaker pricing for copper and pulp, and iron ore at $60. “Latin American credits have really benefited of late from improved commodity pricing; a black swan event in any of these commodities could push prices lower.” Dahiya seconded the commodity price concern, but questioned whether bond pricing would be substantially affected. “Our market is a lot more resilient than we think,” he said.

Finally, Hope raised geopolitical concerns as a potential pitfall for EM corporates. “And I would include in that the unknown policy direction of the new US administration,” she specified.