EMTA Fall Forum (NYC) - Sept. 11

Fall Forum Speakers Take EM Debt ‘One Day at a Time’ 

EMTA Fall Forum speakers addressed both macro-economic conditions as well as recent developments in Venezuela and North Korea.  The event was hosted by UBS, which has served as the event sponsor since its inception 16 years ago in 2002.  The Fall Forum took place on Monday, September 11, 2017 and drew a capacity crowd of 125 market participants. 

 UBS’ Rafael de la Fuente served as the panel’s moderator.  In opening comments, de la Fuente reviewed EM debt outperformance ytd, before asking speakers to give their views on whether EM prices were justified by improving fundamentals.  Speakers responded with a generally constructive view.   

“I don’t want to sound complacent, but sometimes you just have to accept low rates,” opined Gunter Heiland (Gramercy), stressing that that EM’s yield must be taken in the context of sub-1% yields in much of the competing assets in global indices.  In Heiland’s view, there was limited cause for concern as long as current growth continued, and there were no dramatic policy changes by the US FOMC or ECB. 

Van Eck’s Eric Fine argued that, while one must play the markets “one day at a time,” EM performance was supported by European and Chinese growth.  Gordian Kemen (Morgan Stanley) listed stabilizing credit ratings, benign inflation and encouraging growth as factors contributing to EM momentum on the fundamental side. 

Several panel speakers maintained that a gradual contraction in global liquidity could be absorbed by the market.  Kemen and Heiland praised the US Fed for its communication and transparency, which they viewed as important in preparing the market.  “I do think we will have a significant warning before there is any major change in central bank policies,” stated Heiland.  Fine expressed a more cautious view, asserting that less liquid assets could be quite vulnerable to a large exodus. 

“We all work on the assumption of a Chinese slowdown, it’s just the amount of the slowdown we are debating,” noted Kemen as de la Fuente steered the panel to a discussion of complacency on China.  And while China was a stabilizing force for EM, Kemen declared that it would be a mistake to attribute positive EM growth solely to Chinese demand for commodities. 

Panelists agreed that the geopolitical risks associated with North Korea were difficult to analyze, and, in Heiland’s view, not significant enough to rotate a portfolio.  Fine believed the situation would be resolved quickly and positively, while Kemen foresaw an oscillation between saber-rattling and de-escalation for the foreseeable future. 

De la Fuente then led the panel through a number of EM economies.  Fine did not fear the election of left-wing candidate AMLO in the upcoming Mexican presidential election, but rather “we fear fear of AMLO.”  Thus a cautious stance was warranted, in his view.  Heiland believed that the chances of an imminent renegotiation of NAFTA were unlikely, given the Trump administration’s track record thus far.  Kemen confirmed a bullish outlook on Mexico, adding that that, while the biggest moves on the currency side had already occurred, local rates were still attractive. 

The market has accepted lower targets for Brazilian pension reforms than originally expected, in Kemen’s view, but “it seems to be happy that something might still get done.”  Heiland questioned whether Brazilian levels were overly optimistic, arguing that the mere absence of new political drama has caused spread compression.  “The adjustment in the current account is a big deal,” Fine affirmed; “we like the story, but need to keep your eyes open.” 

On Venezuela, Heiland argued there were some signs currently that might, in retrospect, prove to have been obvious omens of a major event.  “I feel like that when they default, I should have seen it coming…and we learned with Argentina that sometimes you can buy bonds cheap, but it might take a long time to get paid--and without coupons.”  Fine stated he would limit his interest to buying only Venezuela bonds maturing in 2018 and 2019.  Kemen noted that recent US sanctions have made a restructuring more difficult, and pushed Caracas towards Russia and China.