EMTA Forum in Boston - April 18

 EMTA Panel in Boston Discusses Support for Asset Class

Gordian Kemen (Morgan Stanley) led speakers through a variety of topics at an EMTA Forum in Boston, held on Tuesday April 18, 2017. The event was sponsored by MarketAxess, with the additional support of Morgan Stanley and Nomura, and drew 75 EM market participants.

Kemen provided a general overview of the EM marketplace, and invited speakers to discuss their views of EM conditions. Siobhan Morden (Nomura) noted that her main concern was tight valuations; she added that, generally, EM fundamentals were “ok,” demand remained strong as capital inflow continued, and there was no obvious external event risk in the near-term. Tina Vandersteel (GMO) suggested that EM sovereign downgrades might have reached a bottom, with a possible rebound in the future. EM currencies remained attractive generally, in her view.

“The structural forces that have pushed down interest rates over the past 30 years haven’t changed,” stated Fidelity’s Heather Hagerty. Generally the risk characterizations for EM debt were positive, while underscoring the outperformance of EM, on a risk-adjusted basis, over the past 15 years. Finally, Mike Cirami of Eaton Vance, while expressing a strong reluctance to lump EM countries together in one basket, criticized as insufficient the progress on structural reforms in many EM countries. He cautioned that uncertainty about US policy, European elections and commodity pricing continued to overhang EM countries generally.

Kemen steered panelists through a number of EM economies. Cirami noted that with the Turkish referendum campaign out of the way, investors now hoped for a “period of normalcy.” Cirami noted that, with opposition claims of ballot fraud, the path forward for Turkey wasn’t yet entirely clear. However, he elaborated that, “I’m really bullish on Turkey- they have a rock solid ability to service debt, and they have had a tight fiscal policy for a long time now.” A contrasting view was provided by Hagerty; “we don’t foresee a rapid turnaround for the Turkish economy,” she declared, while noting her firm’s negative outlook.

Delays in passing pension reform in Brazil were a concern for Morden. “We many get only 50% of what is proposed, so you can look at the glass half full or half empty,” she reasoned, then specifying that she would probably adopt the positive view. Vandersteel eyed potentially greater value in Brazilian quasi-sovereigns (e.g. Petrobras) than sovereign paper. “I really want to be able to write a report when Brazil gets its investment grade rating back,” added Hagerty.

A default by Venezuela remained “a question of when, not if,” stressed Morden. Venezuela could muddle through “perhaps even longer than we would expect” if it continued to manage its scarce funds effectively, e.g. by getting concessions on its Chinese loans, rolling over payments to oil suppliers and delaying payment of ICSID awards. A regime change was possible should recent protests turn increasingly violent, although a default on sovereign debt was still the most likely catalyst for ending the Chavismo era. (Another possibility would be US sanctions, but which would also cause stress on the US as an importer of Venezuelan crude).

“We are looking at the slow decline of South Africa,” rued Cirami, who clarified that he would not buy South African paper on weakness. “In five to ten years, South Africa will likely look worse than it does today,” he affirmed, citing among other factors “deeply corrupt policies.”