EMTA 2018 Annual Meeting in NYC - Dec. 6

Attendance is complimentary for EMTA Members. The registration fee for Non-members is US$1,000.

Online registration is now closed. If you wish to register, please contact Suzette Ortiz at sortiz@emta.org.

At Annual Meeting in NYC, Analysts Ponder EM Patch in 2019

EMTA’s Annual Meeting drew a crowd of over 250 market participants, and featured discussions on the outlook for EM in 2019, as well as reviews of specific economies. The event took place on December 6, 2018 and was once again hosted by Citi in its New York City headquarters.

David Lubin (Citi) kicked off the event by leading a panel of EM investors, asking for views on likely US monetary policy and its effects on EM debt. Jim Barrineau (Schroders Investment Management) reviewed the “crushing” of EM during the dollar’s ascent, but reasoned that the risk of US fiscal stimulus had declined, and would act as a headwind to further dollar strength. Then, “once the market feels more comfortable with a lower probability of a rising dollar, we will see more inflows into EM,” he concluded.

NWI’s Hari Hariharan argued that the “peak in Quantitative Tightening” was over, that the previously-expected US FOMC December hike was not a done deal, and that hikes by the European Central Bank were unlikely in the foreseeable future. Hariharan expressed bullishness on EM debt, while cautioning that, “we need the non-dedicated investor to come back. If they don’t return, we will just be playing marbles in a confined space.”

Shamaila Khan (AllianceBernstein) observed that an EU slow-down and faster-than-expected US growth had resulted in capital outflows into the US. With the yield curve suggesting a US recession, “I think it’s important that the Fed needs to blink,” she commented. Finally, Pablo Goldberg (BlackRock) noted that “the things that have no tickers and are hard to measure,” such as protectionism, trade wars and sanctions, would have a major influence on EM direction.

Lubin directed the panel to a discussion of China’s economy. In Barrineau’s analysis, Beijing was wrestling over the amount of economic stimulus needed to counteract US trade wars. He expressed cautious optimism, despite the lack of clarity on how nasty the tariff battle would get. A hard landing was not his base case, although he equally did not foresee Chinese stimulus acting as a growth-engine for other countries.

More bullish was Hariharan, who believed that more progress could be made during the 90-day tariff “truce” than the market expected. EM could suffer, however, as China will need more external capital to finance current account deficits, diverting funds from other EM issuers. In order to attract such FDI and portfolio inflows, Chinese leaders will avoid wild gyrations in the RMB, which would be positive for EM overall. President Xi’s attacks on the private sector are likely to be redressed in 2019, in Hariharan’s view.

Khan did not expect a trade war to be a major issue for China in 2019, and was “encouraged” by the restraint on leverage demonstrated by China in 2018. She believed Xi would revisit policies on SOEs at some point, and noted the large number of zombie companies in the commodity sector.

Lubin prompted further thoughts on capital flows. Goldberg noted that expectations of inflows into EMD in 2018 had proven wrong, disappointing investors. Barrineau commented that inflows into passive EM investing had been notable in 2018, “but it doesn’t feel like it is going into bonds.”

The panel concluded with a discussion on Brazil. Khan reasoned that, with the country having a new post-PT regime, political negotiation has entered a new chapter and bills will be passed in a new way. In addition, the role of the public sector in the economy will shrink. She concluded that, “the honeymoon [of a new government being elected] may end, but the marriage may last.” Goldberg observed that real rates have contracted, and the Central Bank is entering an era of high credibility.

Hariharan disagreed, anticipating a “classic pump and dump” situation, with locals holding Brazilian assets waiting to sell to more gullible foreigners who expect more improvements than are possible. Barrineau believed there were “better places to invest in…and the story doesn’t make my pulse race [at current prices.]” There was a significant risk that pension reform could be watered down, and spreads may be pricing in a more positive outcome.

Moderating the event’s sell-side panel for the 23rd consecutive year, Joyce Chang (JPMorgan) rued that “cash is king in 2018 and has so far outperformed every other asset class.” Noting that the consensus view called for a further US rate hike the following week, Chang asked speakers to identify their greatest concerns for 2019 EM debt performance.

Christian Keller (Barclays) noted that the major stumbling blocks in 2018 for EM had been concerns over Chinese growth, trade tensions, a strong dollar and the oil markets, along with several country-specific factors. In his view, the US rate outlook was the factor which was most visibly changing, possibly reducing some pressure on the asset class.

Bank of America Merrill Lynch’s David Woo anticipated gridlock in the US government following the 2018 Congressional elections. In his view, the biggest takeaway from the highly-anticipated Trump-Xi talks during the Buenos Aires G-20 submit was that “China gave nothing; and all Chinese ‘concessions’ were meaningless.” Woo did not expect future Chinese concessions either, and “wouldn’t buy EM with a ten-foot pole until there is a resolution of the US-China trade war.”

Pressed further, Woo opined that the US-China trade tensions are really about intellectual property theft, which could be costing the US as much as $400 billion a year. The enormity of this cost makes it extremely difficult for Xi to make changes, in Woo’s view.

“We are hopeful pessimists,” declared Alberto Ramos of Goldman Sachs, who saw a narrow path for performance in EM in 2019, in the “very low single digits.” He saw modest growth in EM (ex-China), with the US economy decelerating and China “moderately decelerating.”

In contrast, Drausio Giacomelli (Deutsche Bank) declared that, given the low bar set by other speakers, “I might be the most bullish person here!” EM had held up relatively well despite US rate hikes, he reasoned, and would be bolstered by synchronized growth (albeit at lower levels). Giacomelli believed that the dollar had peaked, and saw the US as avoiding a recession in 2021, unlike some other economists.

Addressing individual countries, Keller expected the contraction in Turkey to peak in Q1, with the country benefiting from lower oil prices. Keller saw inflation stabilizing at 20%, with a premature rate cut by the CBT as a major risk. Additional pain would be felt by Turkish banks as NPLs rise, although some issues may be attractive at current levels. Volatility was possible in the run-up to local elections in March.

Ramos was “inspired” by policy direction in Brazil, while “quite concerned” about decisions being made by the new Mexican administration, which has a lot of power because of its congressional support.

These views were seconded by Giacomelli, who stated that, “the conditions in Brazil are the best they have had in a decade.” He believed capital would likely flow in during the 1Q. Mexico, on the other hand, lacked a fiscal responsibility law, and president AMLO will be able to change the Banxico board, although it will remain independent, unlike in Turkey.

Overall, Keller viewed EM FX as likely to outperform in 2019, and sovereign dollar bonds were likely to demonstrate better returns than their corporate counterparts. Oil-exporter credits could be hurt by continued weakness in the oil markets, he added. Ramos favored EM equities hedged against US equities, followed by local currency debt.

Woo noted that the widening US budget deficit will be financed less by short-term bills and more by bonds. “I don’t know where that $1 trillion is coming from, but a lot of that may come out of EM, so that should worry you,” he cautioned.