EMTA Forum in Los Angeles - May 17

3:45 p.m. Registration 

4:00 p.m. Panel Discussion
Challenges and Opportunities in the Emerging Markets
Sebastian Vargas (Barclays) – 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 Barclays and Mizuho Securities USA LLC.    

Registration fee for EMTA Members: US$95 / US$695 for Non-members. 

Los Angeles EMTA Panel Expresses Cautious Optimism on Market Direction

Amidst the EM market sell-off as the US dollar and 10-year UST yields rose, speakers at EMTA’s Forum in Los Angeles vouched for the long-term appeal of EM assets. The event was held on Thursday, May 17, 2018 and was sponsored by MarketAxess. Barclays and Mizuho Securities USA Inc. provided additional support for the program.

Moderator Sebastian Vargas (Barclays) got to the point…was the market about to enter a prolonged sell-off, or have valuations become attractive, he asked. PIMCO’s Chris Getter replied that after holding in better than would be expected earlier this year, the market was potentially overshooting on the downside, and that “from a fundamental perspective, the EM asset class as a whole still looks good,” supported by factors which included, “relatively healthy nominal growth in China.” However, he acknowledged that the market would likely fail to stabilize as long as fears of US dollar strength persisted. TCW’s Blaise Antin largely concurred, and added that he didn’t believe that, “we are on the precipice of a long-term dollar rally, although the near-term outlook isn’t entirely clear yet.” He added that EM economies generally entered the current volatility in better shape than during the “taper tantrum,” while price corrections in the more fragile EMs would hopefully serve as a disciplining factor for both policymakers and investors.

Jeff Norton (Mizuho Securities USA LLC), who specified that he was sharing his personal views and not those of his firm, didn’t believe that a prolonged sell-off had begun, although the fact that real US rates had turned positive augured in a new era. “Whether things become more volatile depends on the policy response,” he reasoned. Payden & Rygel’s Kristin Ceva noted that the previous consensus of US rates topping up at 3% are now being re-examined, with the market now pondering terminal rates at 4%, prompting market swings. “An overshoot of 4% would cause problems, but this is not our base case,” she stated. While unsure how long dollar strength would continue, Ceva highlighted the outperformance of EM growth (in its early stage) vs that in DM (late stage expansion) as buttressing the case for allocation to EM debt.

Referring to the announcement that Buenos Aires would seek an IMF accord, Vargas asked if panelists now expected stabilization in the Argentine markets. Getter was wary. “I’m surprised how quickly the market has seen the Fund as a white knight…it kind of smells like past IMF deals,” he warned. Getter saw a change in market sentiment as being justified if the deal was “large enough, say $30 to $45 billion,” while cautioning potential investors to “at a minimum, go ahead with your eyes open.”

Ceva stressed the importance of the domestic political reaction, specifying the worst case scenario would be the Macri administration losing the presidency in 2019. Antin expressed cautious optimism that, “policy-makers and the IMF both know what needs to be done, and we think this can work.” Norton observed that the Central Bank had triggered questions on its credibility when it adjusted its inflation target well below economic consensus, but there was still time to recover. Investors should monitor the Central Bank’s FX holdings, as “we’ve all seen how quickly reserves can dwindle in EM.”

Concerns on Turkey were also a panel focus. “We all know that Turkey has run a persistent current account deficit and depends on foreign inflows; and it has worked for so many years because of ultra-low global rates and Turkey’s importance to the West,” Antin stated. However, President Erdogan’s possible pivot away from Turkey’s Western partner raised doubts about the status quo. “In the long run it’s not feasible to run an economy dependent on Western capital when Turkey is being hostile to Western powers,” he asserted. The market badly needs the Central Bank to hike rates to restore confidence, and Antin noted that, following its purchase of Russian weapons, Turkey was now at increased risk of US sanctions. “I hope that after the June 24 election, Erdogan will seek to repair relations with the US and Europe, ”he concluded.

Ceva agreed that investors have a number of concerns, “even in the short term.” She further concurred that monetary policy in Turkey has been a long-term concern, and pointed out that fiscal policy was now an issue as well -- “and we can expect further deterioration in the run up to the election.” Getter argued that, while many of the financial issues could be fixed post-election, the longer-term geopolitical issues would remain.

Moving on to Russia, Antin declared that a Rubicon had been crossed with the adoption of the April 6 US sanctions. He forecast additional sanctions would likely be imposed, though ‘when’ remained an open question. However, certain Russian assets remain attractive, especially with strength in the oil market. Getter added, in addition to higher oil prices, the ruble’s flotation, and reduced debt issuance by corporates, as reasons why Russia’s underlying credit strengths had improved since its 2014 invasion of Ukraine. For investors, the greatest concern is new sanctions that would force divestiture of Russian debt they already held.

Norton agreed that fundamentals remained supportive, adding low inflation, high real rates on local paper, and low debt ratios as buttressing the credit. He speculated that that US officials would prove pragmatic, and understood that US institutional investors own large amounts of Russian debt. Instead, “it’s an ESG issue for portfolio managers to explain the case for Russia with clients.” Ceva interpreted the April 6 sanctions as a potential warning of a future forced divestment. “We are much more concerned about corporates; we don’t think we will get sanctions on sovereign debt,” she said.

Vargas steered the panel towards potential complacency regarding the Mexican presidential race. “I think AMLO is an old-style industrial policy interventionist at heart, even if he is trying to surround himself with market-friendly folks,” Ceva commented. While the Central Bank’s independence was constitutionally protected, she pointed out that AMLO would have a significant influence on the Board’s make-up. Further possible issues were AMLO’s unclear fiscal policy, with vague talk of subsidies on gasoline, and the lack of information on how proposed expenditures would be financed. The front-runner’s animosity towards energy sector reform was well-known, and while he would face strong headwinds trying to reverse past reforms, he could undermine its implementation, she reasoned. Finally, a NAFTA deal before the July 1 elections would be the best case scenario for all.

Getter voiced optimism that Mexico’s system of checks and balances would “prevent anything too crazy from getting done,” although all bets were off if AMLO’s Morena party won a legislative majority. Norton referred to polls showing the strongest motive for Mexican voters was to remove the PRI, making AMLO’s legislative support a key risk, although Ceva judged the likelihood of an AMLO/Morena sweep as minimal. Antin suggested that Banxico would be an important anchor following the vote.

Brazil was the final topic at the Forum. Norton deemed Brazilian spreads as not reflecting political risk in the run up to the October presidential election, suggesting that the market had focused on more vulnerable Argentina and Turkey. Brazil’s fiscal situation remained unsustainable following the failure to approve pension reform, however, and the policies of many candidates remained opaque. Antin opined that Brazil’s credible Central Bank and high level of FX reserves helped maintain investor confidence, and the market had been fairly sanguine regarding the October vote. Ceva saw centrist candidates fighting an “uphill battle against anti-establishment, anti-corruption” fervor, with the race wide-open.