EMTA Spring Forum (NYC) - May 24

  
Attendance is complimentary for EMTA Members / US$695 for Non-members.

We regret that this event is not open to the media. 

US Dollar Strength Most Important Factor in Recent EM Volatility, According to Spring Forum Speakers

HSBC Securities USA Inc.’s John H. Welch noted, in his introductory comments at EMTA’s Spring Forum on Thursday, May 24, 2018, that the EM asset class was facing the tailwinds of geopolitical tensions, rising protectionism, upcoming elections, and volatility in countries such as Argentina and Turkey. He invited panelists at the event, held at his firm’s New York City office, to discuss their views on key economic issues.

Fernando Losada (AllianceBernstein) stated that the normalization of US monetary policy was not the main cause for recent EM volatility. Losada reasoned that US had been hiking rates for over a year, with the direction well telegraphed to the market, and thus the situation could not be compared to the 2013 “taper tantrum.” Losada attributed recent turbulence to a combination of factors, including dollar strength, fears of increased protectionism and geopolitical issues. He voiced concern that global trade volumes have not returned to the pre-2008 annual growth levels of five to six per cent, as the US moved away from multilateralism, and friction with China on trade was unlikely to abate. Finally, Losada pointed out that increased oil prices would be less of a positive factor for Latin America generally, with Colombia the greatest beneficiary, while countries such as Venezuela and Ecuador would not be rescued by high oil prices alone.

Citi’s Dirk Willer warned that, while EM debt could survive higher US rates, the combination of US rate hikes and a stronger US dollar would make positive returns for the asset class “very hard.” Willer argued that, despite tough talk by President Trump, “very little has happened so far on the protectionist front.” However, the enacting of protectionist measures was still possible, “and I don’t think the market is prepared for, or has priced in, more ‘bite’ on a China trade war.” He cautioned that at some threshold, possibly above $100 per barrel, higher oil prices would become problematic and could push the US into a recession; and that investors should be on the lookout for an end to the OPEC-Russia production agreement.

At current levels, “value is being created, but it doesn’t feel like the market sentiment has hit the bottom yet,” stated PGIM Fixed Income’s Todd Petersen. Petersen concurred with speakers on the paramount role of dollar strength in EM debt markets, and expected both the US dollar and the UST 10-year to stabilize around current levels. He affirmed that, “the EM growth story remains intact, and current account balances look better, except for cases like Turkey.” Petersen suggested that decreased EM liquidity may be aggravating market swings, as market makers “can’t handle retail outflows.”

Scotiabank’s Joe Kogan reviewed the relationship between historical EM defaults and spreads to argue that, “there is clearly value left in EM.” Spreads, in his analysis, included fundamental factors such as the likelihood of default by ratings category, but also reflected technical factors such as liquidity. Kogan detailed two specific cases, the Colombian local debt market and overall Latin American utilities, where his fundamental analysis suggested that “there are still pockets of value that have not been exploited by crossover investors.”

Speakers addressed Venezuela’s default, with Kogan pointing out that contagion (“when you have to sell liquid things to address unrelated topics”) has diminished considerably over the past twenty years. The impact of Venezuela’s default has been limited because it represents a small percentage of the GBI-EM index, prices are so low that losses have already been accounted for, and funds which have restrictions on owning the debt have sold it. Losada stated that current Venezuelan debtholders were largely specialist in nature, and included investors able to wait multiple years before an eventual settlement (“the uncertainty regarding the timing of a deal is massive”).

Panelists agreed in their cautiously optimistic outlook on the results of the Italian election and its effects on global finance. Willer noted that the market appeared to be factoring in the historical fragility of Italian government coalitions, and “the hope is that the new government will fall apart before it causes a lot of damage.” Petersen noted that the need for Italy to tap the financial markets would likely serve as a limit on what economic measures the new government could adopt. Losada agreed that a disorderly exit from the euro and the disintegration of the EU were not his base case.

Moderator Welch concluded the panel with a discussion of Brazil. Brazilian assets looked cheap in his view, although he cautioned that the huge amount of uncertainty in the country’s elections made volatility highly likely over the next five months. “The path for the election of a reformist president is not clear,” he noted, while pointing out positive fundamentals with the notable exception of Brasilia’s fiscal deficit. He believed that free TV advertising time would lead to an entrenched Congress, and that a key question would be front-runner Jair Bolsonaro’s willingness and ability to “play politics and cut deals.”

Losada predicted that, following the decision by Chief Justice Barbosa not to run, the leftist vote would splinter rather than consolidate, while fears concerning Bolsonaro were “probably” overdone, “as he has surrounded himself by more-or-less reasonable economic advisors.” Willer advised clients not to be tempted by cheap debt prices, at least for the next several months.