EMTA Summer Forum (London) - June 27
Tuesday, June 27, 2017
Hosted by
2 King Edward Street
London
2:15 p.m. Registration
2:30 p.m. Panel Discussion
Investor Perspectives on the Emerging Markets
David Hauner (Bank of America Merrill Lynch) – Moderator
Gustavo Medeiros (Ashmore Investment Management)
Sergio Trigo Paz (BlackRock)
Michael Cirami (Eaton Vance)
Lupin Rahman (PIMCO)
3:45 p.m. Panel Discussion
Current Prospects for the Emerging Markets
Brett Diment (Aberdeen Asset Management) – Moderator
Christian Keller (Barclays)
Wike Groenenberg (BNP Paribas)
Luis Costa (Citi)
Elina Ribakova (Deutsche Bank)
5:00 p.m. Cocktail Reception
Attendance is complimentary for EMTA Members / US$695 for Non-members.
Online registration for this event is now closed. If you wish to register, contact Jonathan Murno (jmurno@emta.org).
EMTA’s Summer Forum Turns Twenty!
EMTA held its 20th Annual Summer Forum in London on Tuesday, June 27, 2017. Bank of America Merrill Lynch hosted the event, which drew 175 EM market participants. Speakers offered views on EM valuations, US rates and other global factors, while also offering insights on specific EM economies.
David Hauner (Bank of America Merrill Lynch) repeated his role as panel moderator, cautioning in his introductory remarks that values in EM fixed income might be stretched. Hauner asked speakers to comment on US rates, and indicate where they saw value in the EM asset class.
“We expect a gradual, protracted rate hike cycle and a very slow reduction of the Fed’s balance sheet,” commented PIMCO’s Lupin Rahman, who judged the risk of a US slowdown to be “very minimal,” with potential for increased EM spread compression, despite some “late cycle frothiness in pockets.” Rahman saw greater opportunities in local markets debt than in EM Eurobonds, due to valuations.
Sergio Trigo Paz (BlackRock), saw an increase in volatility for 2H as more G10 central banks joined the normalization pack pushing global rates higher, and “a dovish market is challenging a hawkish Fed”. As a result, he anticipated that investors in hard and local currency would at best earn carry, and at worse lose 1H gains. He preferred EM corporates, while noting that asset class inflows were a major factor behind the EM debt rally.
Hauner asked for views on commodities. Ashmore’s Gustavo Medeiros reviewed the impact of lower oil prices, pointing out that the correlation between commodity prices and EM credits was not always high. “A lot of countries have done their homework and have adjusted to lower oil prices.”
Michael Cirami (Eaton Vance) echoed comments that EM fundamentals were “probably not” the most important factor supporting current prices. As for the growing importance of the ETF market for EM debt, while passive index funds still only owned small percentages of EM bonds, it was something he was monitoring. Trigo Paz warned that idiosyncratic stories “could turn out badly” for investors holding passively-managed funds.
Hauner directed the conversation through specific markets. Rahman subscribed to the consensus view that China would emphasize stability in the prelude to the next party congress. “It’s very likely we will see a marked slowdown in growth—maybe even less than 4 to 5%—but I don’t expect a financial crisis,” she stated. Rahman also expected renminbi weakness in the medium-term.
Trigo Paz argued that Brazilian debt prices accurately reflected current risks, and didn’t see an alternative to President Temer. Medeiros recommended Brazilian local debt, observing that, “it’s hard to see what would bring Brazilian inflation higher” and “make no mistake; people are going to have to go back to Brazil, especially locals.”
Trigo Paz dismissed concerns of a radical turn to the left in Mexico under a President AMLO and noted that fears of radical changes in US policy towards Mexico appear to have been overdone. Liquidity in Mexican assets was a major benefit; “you can get out if you need to.” Medeiros suggested that if AMLO were elected, he would do well to copy former Brazilian president Lula’s move to the center.
Venezuela continued to offer a conundrum to investors. While a complicated matter, “it offers the highest carry in the market. If there is no regime change, then you keep getting paid and it is very expensive to short,” summarized Medeiros. In his view, the Maduro administration appeared unlikely to be toppled in the near future.
Cirami questioned the valuations of many African sovereigns. He specified Ghana, Zambia, Angola, Mozambique and Senegal as among the credits he would avoid, citing the default history of many African sovereigns. He urged Nigeria to liberalize its FX regime, while offering praise for Rwandan officials who limited their recent bond issuance to match their needs (rather than increase it for possible index inclusion). Tanzania was an African credit that might offer value at current levels.
Political and economic turmoil have caused South Africa to lose its status as the favorite crossover country, observed Trigo Paz. “Now you need to go to South Africa often to keep up with its changing situation,” he stated.
Cirami suggested investors consider Eastern Europe. “[They] might be boring…but boring might be good for the next 12-18 months,” he argued, with such credits unlikely to default, while offering modest carry. He added that countries such as Macedonia might be under the radar screen for many investors.
Finally, in the MENA markets, Medeiros warned that investors entering the Egyptian T-bill market should be cautious. Cirami’s greatest concern was on Oman, while noting that he didn’t see value in Qatari debt, expressing skepticism about the country’s liquidity and the recent spat with some of its neighbors.
Aberdeen Asset Management’s Brett Diment served as moderator of the event’s sellside panel. Diment questioned if the market had become too complacent, with spreads at the lower end of the range for the past 5 years, EM FX rebounding from lows, and no price reaction to a 20% drop in oil prices since March.
Sellside speakers echoed the caution of the buyside counterparts. Barclays’ Christian Keller acknowledged that it could be a case of crying wolf to suggest market complacency. At current levels, he wasn’t “enthusiastic about anything, although I think it’s good enough.” BNP Paribas has become more defensive in its trade recommendations, stated Wike Groenenberg, as global economic growth has not exceeded consensus expectations as much as in the first quarter, but she added that US real rates remain low, hence the overall environment for EM remains supportive. The one-directional market also raised concerns for Luis Costa of Citi, although he expected a choppier EM FX market.
While increasing debt levels in China were a concern, panelists expected Chinese officials to avoid any market disruptions before the next party congress. “The Chinese government has enough mechanisms at its disposal to prevent any blow-ups,” affirmed Groenenberg. She added that the new Bond Connect program would start slowly, but might gain momentum; and that Beijing would support the renminbi to promote its use.
Deutsche Bank’s Elina Ribakova stressed the increased importance of geopolitical analysis in portfolio management. “For example, President Zuma has thrown off the technical analysis of South African economic variables,” she stated. Analysis of Russia must include an investigation of all the factors influencing the new US sanctions bill. Keller agreed that Russia’s “good macro story was complicated by the sanctions.”
Groenenberg addressed tensions in the GCC, and warned that, “The situation with Qatar is far from resolved.” Qatar’s ejection from the GCC could not be ruled out, leading to a potential devaluation. She questioned the Saudi budget, predicting that the budget deficit would be wider than projected. Groenenberg saved her greatest concerns for Oman, declaring it to have “the worst fundamentals in the region.”
Ribakova reviewed the popular trade in Egyptian t-bills, “At 20% rates, it’s no free lunch, but the budget was passed in line with expectations.” Investors should monitor IMF program approval, as well as Cairo removing energy subsidies, as signs of future directions. “For now the program holds water and the next six months looks like a good story.”
Costa led the discussion of Latin American credits. In his view, Mexico represented the greatest LatAm opportunity for investors, and Argentina remained a good transformational story, “although issuance has been relentless.” Investors might be over-optimistic in their assessment of reform passage in Brazil, and he would avoid Venezuela “because I don’t think the oil downside has been reached, and oil analysts are downgrading the possibility of reaching $50 or $60 this year.”
Keller seconded a positive outlook on Mexico, while noting, in his view, LatAm was not the region with the greatest potential. Groenenberg’s view of social security reform passage was greater than Costa’s, and she expected President Temer to hang on in Brazil, because of the large number of votes needed to oust him.