EMTA Forum in Los Angeles - May 18

3:45 p.m. Registration 

4:00 p.m. Panel Discussion
Challenges and Opportunities in the Emerging Markets
Walter Stoeppelwerth (Balanz Capital) – Moderator
Jeff Norton (Mizuho Securities USA LLC)
Kristin Ceva (Payden & Rygel)
Chris Getter (PIMCO)
Blaise Antin (TCW)

5:00 p.m. Cocktail Reception 

Additional Support Provided by Balanz Capital and Mizuho Securities USA LLC.   

Registration fee for EMTA Members: US$75 / US$695 for Non-Members. 

REGISTER FOR THIS EVENT 

EMTA Los Angeles Panel Reacts to News of Temer Scandal

The revelation of tape recordings capturing Brazilian President Temer discussing the payment of “hush” money dominated the discussion at EMTA’s Forum in Los Angeles. The event, sponsored by MarketAxess, was held on Thursday, May 18, 2017 with Balanz Capital and Mizuho Securities USA LLC providing additional support.

Balanz Capital’s Walter Stoeppelwerth summarized the news, the market’s reaction, and Temer’s intention to remain in office, asking panelists for their commentary. “Yesterday we were very confident about the reform process in Brazil,” affirmed Kristin Ceva (Payden & Rygel), “but now the best case is a speedy resolution such as Temer resigning.” The worst case would be for Temer to be impeached, which would entail a long, drawn-out process, rather than the simpler conclusion if the TSE were to invalidate the 2014 election.

PIMCO’s Chris Getter observed that one result of the news is that social security reform was at best delayed. Getter remained constructive on Brazil, but “I would take the most optimistic scenario off the table.” He pondered how the economy could persist with 7% real rates, and while 100 bp rate cuts were still possible, larger cuts seemed unlikely. He added that the BRL was cheap, “although it wasn’t exactly expensive to begin with.”

“The news has thrown a huge wrench into the Brazil outlook,” agreed Jeff Norton (Mizuho Securities USA LLC). The return of former President Lula was probably no longer possible due to the latest revelations, which also included reported payments to his accounts. “The 2018 election race is now wide open; there is no obvious front-runner.”

In concurrence, Blaise Antin (TCW) underscored the importance of finding a new “moral authority to lead the country, someone who floats above the political fray.” But it remained an open question if such a person could drive reforms through, and Antin found it difficult to see a path for reform approval before the next presidential elections.

Stoeppelwerth reviewed the accomplishments in neighboring Argentina since the election of President Macri, while underscoring the persistence of high inflation. Ceva agreed, and voiced an optimistic outlook on Argentina for the next year. She expected the “top notch” economic team to engage in more aggressive reforms after the mid-term elections. Getter expressed reservations that the Central Bank would be able to lower inflation in the foreseeable future because the underperformance of the fiscal accounts mandated a monetary counterbalance.

Antin viewed domestic support for Macri as “reasonable,” and benefiting from divisions in the Peronist camp. “However, the fruits of Marci’s efforts have yet to filter through to the population, and the state remains too large a factor in the economy; ultimately what is needed is a trimming of the state labor force, the cutting of subsidies, and the private sector must compose a larger percentage of the economy.” He believed that Macri allies will do pretty well in the mid-term elections, and were cognizant of the steps they would need to take afterwards.

Moving to Turkey, political developments over the past three years have undermined the case for long-term exposure according to Antin, with “each cabinet reshuffle has produced a less good cabinet than the one prior.” He lamented that Turkey’s current account deficit remains large whether oil is at $100 or $40, and referred to its

Central Bank as “the least credible of any large EM country.” Growth has been promoted by increasing fiscal stimulus, but Antin didn’t see how it could continue through the 2019 election. “As a short-term trade, such as a Brazil-related sell-off, there is an opportunity, but as a twelve-month trade, I’d be concerned,” he concluded. Ceva added that a “flailing” Turkey had missed inflation targets for years, and real rates were not attractive.

The panel also reviewed developments regarding Mexico, with President Trump “creating his own distraction,” in Norton’s view. The market has come to the conclusion that Trump cannot unilaterally destroy NAFTA; as a consequence, spreads, as well as the Mexican peso, have returned to pre-election levels. Norton suggested that US rate hikes currently represented a greater risk now to Mexico than changes to NAFTA. “Mexico never grows really fast; in part because of its being a bifurcated economy, one part integrated into NAFTA and one not,” in Antin’s view. Energy reforms have not borne as much fruit as expected because of timing.

The market would be following the State of Mexico’s elections as a harbinger for the upcoming presidential election, noted Ceva. She suggested that fears of a President AMLO might be overdone, citing his pragmatism as mayor of Mexico City and the institutional constraints he would face without control of the state governments, Congress, or the Central Bank. The conclusion of NAFTA renegotiations before an AMLO presidency would be beneficial for Mexico. Norton likened the situation to market concern over the election of President Humala in Peru.
“We are assuming changing NAFTA will be a de-fanged process, but Trump is not the most predictable president,” cautioned Antin; “it’s not my base case, but it’s impossible he won’t lash out at Mexico.” Antin believed that ultimately the US Congress would “keep things under control.”

The panel concluded with a discussion of opportunities in the EM asset class. Norton urged investors to be patient for opportunities, seeing more value currently in corporates than sovereign paper. Ceva saw the “push” into EM based on the search for yield being increasingly replaced by “pull” factors, such as better EM growth and the pickup in global trade. Getter affirmed his constructive stance towards EM debt and commented that few global investors are overweight EM, “so we are not in a stretched state.”

Antin noted that active management is “still the way to go in EM, because not all EMBI countries are doing the right thing, so you need to pick and choose your winners.” Moderator Stoeppelwerth expressed a more cautious view than his panelists. “I don’t expect a blow-up, but there are lots of tourists and ETF money in our market. Our job is to be vigilant. There is probably some correction to come, but this business is all about entry points.”