EMTA Forum in Frankfurt - May 9

EMTA FORUM IN FRANKFURT
Tuesday, May 9, 2017 

Hosted by

 

Steigenberger Frankfurter Hof
Am Kaiserplatz
Frankfurt am Main, Germany 

4:00 p.m. Panel Discussion
Prospects for the Emerging Markets
Guy Stear (Societe Generale) – Moderator
Andreas Hahner (Allianz Global Investors)
David Hauner (Bank of America Merrill Lynch)
Jörgen Hartmann (Deutsche Asset Management)
Inan Demir (Nomura) 

5:00 p.m. Cocktail Reception 

Additional support provided by Bank of America Merrill Lynch, Nomura and Societe Generale.
 

Registration fee for EMTA Members: US$75 / US$695 for non-members.
 
We regret that this event is not open to the media. 

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Majority of EMTA Frankfurt Forum Attendees Remain Cautiously Optimistic on EM Debt

According to a show of hands, the vast majority of attendees at EMTA’s Annual Forum in Frankfurt considered themselves to be “cautiously optimistic” about the outlook for the EM marketplace, although moderator Guy Stear (Societe Generale) ventured that the emphasis was perhaps on “cautiously.” The event, held on Tuesday, May 9, 2017, was sponsored by MarketAxess, with the additional support of Bank of America Merrill Lynch, Nomura and Societe Generale. 50 market participants attended.

Stear reminded participants of the strong performance in EM debt since the first quarter of 2016, and asked panelists what factors contributed to market strength. Allianz Global Investor’s Andreas Hahner underscored the importance of the recovery in oil and other commodity pricing, liquidity from Central Banks, and the clear telegraphing-in-advance of US rate hikes in supporting the EM market. David Hauner (Bank of America Merrill Lynch) added as positive factors the “homework” done by many EM countries themselves, citing as examples reforms in Argentina and Brazil, and technicals, such as the reduced supply from commodity–related corporate issuers.

Jorgen Hartmann (Deutsche Asset Management) seconded the importance of the oil price recovery, and the reforms undergone by several oil exporters, including FX liberalization (which allowed for greater shock absorption). Nomura’s Inan Demir affirmed that accommodative policies by Central Banks were the most important factor in recent EM performance, while cautioning against complacency, especially with expectations of the US FOMC reducing its balance sheet.

Stear prompted further discussion of investor complacency. “Some clients say they have to continue to dance [because of inflows]…but they want to be near the exit,” summarized Hauner. South African and Turkish spreads have recovered fairly quickly from their respective credit downgrading and unsuccessful attempted coup, largely a result of global liquidity, “which often matters more than the domestic story.” Hauner acknowledged that at some point volatility could squeeze some investors out of the market.

Concerns about the election of US president Trump and anti-globalization policies were also raised. In Hartmann’s view, Mexico and Asia remained vulnerable to Trump policies, “although you don’t have to worry, because his policies will entail winners and losers, a fact that you can handle well in a broadly-diversified portfolio.” Demir believed that US tax cuts and expansionary fiscal policies remained possibilities, “and to the extent this boosts US growth, it would be positive for EM; a rising tide lifting all boats.”

Describing downside risks to the market, Hauner opined that a shakeout would likely evolve from emerging countries themselves, following EM recoveries from DM-related sell-offs, such as the taper tantrum, Brexit and the Trump election. Hahner expressed concern that the effects of Brexit have not been accurately reflected in the market, with some pain possibly to be felt in Eastern Europe.

Addressing individual markets, speakers concurred that Russian hard-currency bonds were expensive. Sanctions had limited new supply, “forcing everyone into the existing bonds,” Hahner explained. Hauner calculated that current spreads implied a two-notch credit-rating upgrade, and that any negative surprise, such as a new collapse in oil pricing or an unexpected political event, could lead to “a lot of people trying to get out a very small door.” Hartman highlighted the professional and effective economic response of Russian officials to the oil price collapse; “the market is correct that Russia deserves credit upgrades,” he stated.

Reduced political noise in Turkey was being welcomed by investors, in Demir’s view, although “sentiment will depend on how President Erdogan uses his new executive powers.” Policy-making was likely to be too discretionary to please the markets, and there will be pressure to see more credit flowing. Hartmann viewed Turkish sovereign paper as pricy, preferring Turkish banks which “are highly profitable and well-capitalized. President Erdogan has demonstrated a history of budget austerity, he added.

The panel also discussed the growth of the ETF industry. “It is easy to invest in passive funds when everything is going up,” said Hauner, “but in a situation like Argentina 2001, you want to be in actively managed funds.” Demir seconded that active management was “key” in times of market stress. Hartmann raised issues in benchmarking, such as the composition of indices, which could force investor exposure to sovereigns or industries they wish to avoid; in contrast, “active funds can make tailor-made solutions and can make it match the risk profile of each investor.” Panelists concurred that institutional investors remain under-invested in EM generally, “so there is room for growth in both passive and active funds,” concluded Hauner.

Finally, panelists discussed the GCC region following recent regional mega-issuances. “Anything that broadens the investment universe is welcome,” according to Hahner. Hauner expressed concern at signals of potential backtracking in Saudi Arabian economic reforms, and that the government’s Vision 2030 program was too ambitious. However, the large amount of Saudi assets and the move towards privatization put the Kingdom in better stead than Bahrain or Oman. Demir noted that the outlook for energy pricing would clearly be a major factor in GCC development, as well as the progress on economic reforms.