EMTA Forum in Singapore - Oct. 24

EMTA FORUM IN SINGAPORE
Tuesday, October 24, 2017  

Sponsored by  

Fullerton Hotel
The Straits Room, Level 4
1 Fullerton Square
Singapore

12:00 noon - Registration 

12:15 p.m. - Luncheon and Panels Begin

"Asia 2017-2018: A Sell-Side Perspective"
Robert Carnell (ING Bank) – Moderator
Khoon Goh (ANZ)
Claudio Piron (Bank of America Merrill Lynch)
Nizam Idris (Macquarie Bank)
Marios Maratheftis (Standard Chartered) 

"Asia 2017-2018: Views from the Buy-Side"
Liew Tzu Mi (GIC Private Limited) – Moderator
Adam McCabe (Aberdeen Standard Investments)
Celeste Tay (Loomis Sayles)
Roland Mieth (PIMCO)
Rajeev DeMello (Schroders)

Luncheon will be served with the compliments of ING Bank. 

The Forum will conclude at approximately 2:30 p.m.

Additional support provided by MarketAxess.

Registration fee for EMTA Members: US$50 / US$695 for Non-members. 

Singapore Panel Reviews Chinese Growth as President Xi Promoted to Mao-like Status

With the day’s announcement of the elevation of Chinese President Xi Jinping to Mao-like status, EMTA’s Forum in Singapore focused largely on the Chinese economy. The event was sponsored by ING on Tuesday, October 24, 2017 and drew an audience of over 125 market participants.

Robert Carnell (ING) initiated the session by asking speakers for their views on the global economic backdrop. Khoon Goh (ANZ) declared that, “A December FOMC rate hike is a done deal, the market has already priced it in.” However, he raised an alarm that the market was “underpricing 2018 rate hikes, which will lead to dollar strengthening and some EM outflows.” A risk of synchronized tightening with the ECB should not be discounted, although it would start with ECB tapering, with European rate hikes “a lot further off, not until 2019.”

Bank of America Merrill Lynch’s Claudio Piron anticipated three US rate hikes in 2018. The anticipated unwinding of the Fed’s balance sheet would “clearly be a big complication for the markets.” Nizam Idris (Macquarie) predicted that the Fed would take a more hawkish turn under a new Chair, and expected dollar strengthening. Finally, Marios Maratheftis (Standard Chartered), while recognizing the benign global environment, voiced concern at the “massive optimism…and self-congratulation by policymakers.” Maratheftis cautioned that wages could increase by 2H 2018, with a pre-emptive Fed hiking rates more aggressively than expected. Such a “Fed shock” would be most damaging to Turkey, Indonesia, Brazil and Malaysia, in his analysis.

Idris detailed a cautious view on Chinese growth. “6.8 or 6.9% growth is not sustainable based on credit growth, something has to give,” he stated. Maratheftis termed his view “neutral to positive.” He forecast growth decelerating to an average of 6.3% in the next two to three years, slowing further after 2020, but with services comprising a larger part of the economy. “We are entering a Chinese era – it will have a new role in trade, geopolitics…everything!”

Goh agreed that Chinese growth would “have to slow” and stressed that China would deleverage and address over-capacity “at their own pace.” He saw Beijing’s focus as being on “stability, not volatility, in the financial markets,” and Chinese leaders’ desire for capital market liberalization with a deliberate sequencing. Piron pointed out that his firm had revised upwards both its Chinese growth target--and debt forecast--several times. He voiced concern that, as President Xi begins his second term, “to what extent is the reformist path still really important in China remains a question.”

The popularity of investment in India and Indonesia was also reviewed by the panel. Piron noted that India must address financial stability and, in contrast to China, the dearth of credit. “However, the reform story is still there,” he concluded. Idris commented that, with the unexpected Indian demonetization “debacle” over, “now we should be ready for better growth.” Piron highlighted market concerns for the Indonesian elections.

In her introduction to the event’s investor panel, moderator Liew Tzu Mi (GIC and EMTA Board Director) summarized the market conditions in the aftermath of the Great Financial Crisis –“massive S&P returns; super low volatility; unprecedented monetary easing, and even negative interest rates, which underpinned asset price inflation.” Her panel of portfolio managers was asked to discuss whether an inflection point was near, and how it affected portfolio decisions. In response, investors were nearly unanimous in their prediction of a continued near-term Goldilocks scenario.

Rajeev DeMello (Schroders) observed that the three major Central Banks continued to maintain generally accommodative monetary policies, and he didn’t see that ending in the next 6 to 9 months, despite gradual Fed hikes, ECB tapering and the Japanese elections. PIMCO’s Roland Mieth concurred that major changes were unlikely in the near-term, even if Central Bank policies began to diverge. On the other hand, Mieth acknowledged he was reducing risk exposure “because no one really knows when something like geopolitics could affect the markets.”

Celeste Tay (Loomis Sayles) agreed that, since inflation has stayed manageable, Central Banks could remain patient in their tightening, which would continue to support EM assets. The flattening of the Philipps Curve was an enigma for economists, and a substantial challenge for Central Bankers added Adam McCabe (Aberdeen Standard Investments).

DeMello ventured that “some form of US tax reform should provide stimulus to the markets, even if the multiplier effect is relatively low.” Demographic, technological and globalization-related factors have kept inflation low, perhaps explaining the Philipps Curve quandary, but he expected a gradual pick-up.

The Chinese Party Congress was the focus of a discussion by investors as well. McCabe declared that the inclusion of Xi in the constitution secured his power, and thus increased the prospects for SOE reform. Tay hoped that capital would, henceforth, be allocated to the more productive sectors of the economy.

Liew asked speakers to analyze the potential index inclusion of Chinese domestic bonds. DeMello noted that non-Asia portfolio managers would need to increase their understanding of the Chinese local bond market. He expected index providers to move gradually, similar to MSCI index inclusion of Chinese equities; thus funds could ignore Chinese bond inclusion initially and would have time to get licenses. Despite his expectation of a gradual roll-out, DeMello noted that there were already clients who wanted to more aggressively own Chinese local debt.

“It is one of the most interesting developments we will see in the next five years,” stressed Mieth, “and it’s a question of when, not if.” This would prompt greater debate whether China should be understood from a DM or an EM perspective; and that timing of such inclusion was “anyone’s guess.”

Tay noted that effects would depend on investor type. EM portfolio managers would find such inclusion less attractive than non-EM PMs because of competing higher yields in other EM credits. McCabe added that this would mean new challenges for Beijing, as policymakers would need to “address skepticism of some portfolio managers.”

Potential risks to EM debt included an unexpected slow-down in global growth and an over-aggressive Fed. Mieth reasoned that in the event of suddenly higher UST yields, “all EM countries will suffer initially, there will be no differentiation,” although those with better macro fundamentals could perform better eventually.

Prompted by an audience question for her own view, moderator Liew acknowledged she was less sanguine than her panelists. “Because we are longer-term investors, we see this as late cycle…I would be much more cautious at this point,” she stated.