EMTA Corporate Bond Forum (London) - Jan. 16

Due to space limitations, this event is not open to members of the press.  

We regret to inform you this event is now sold out.  We hope to see you at a future EMTA event.
  

Cautious Optimism Revealed at EMTA Corporate Bond Forum

71% of attendees at EMTA’s Annual Corporate Bond Forum in London expected fundamentals to deteriorate in 2019, according to an informal survey conducted at the meeting’s outset. The event, which was hosted by ING, was held on Wednesday, January 16, 2019 and attracted a capacity crowd of over 100 market participants.

Moderator Nick Smallwood (ING) also polled attendees for their views on US rates, the main drivers of performance and corporate spreads in 2019. 55% expected US rates to remain relatively unchanged, while a plurality (41%) expected corporate spreads to widen by 50 bps or less. The poll also showed that China was viewed by 49% of attendees as the main driver of performance.

Siddharth Dahiya (Aberdeen Standard Investments) reviewed the factors influencing the corporate market in 2018, which he listed as higher US rates and the stronger US dollar, trade tensions and slowing Chinese growth. Dahiya saw reason for a more optimistic outlook to 2019, as “trade tensions might be moving in the right direction, the rate outlook might be better, and the Chinese economy may be stimulated.” He expressed surprised at the results of the attendee poll on returns, “I thought we were all feeling bullish year-to-date.” Dahiya believed that, barring unexpected idiosyncratic factors, “high single digit returns [in EM corporates] this year wouldn’t surprise me.”

Kay Hope (Bank of America Merrill Lynch) expressed a similar outlook, albeit with a more conservative return forecast of 4.4%. Her team saw the greatest potential in corporate issues from Argentina, Colombia, the UAE and Ukraine, while noting a recent change on Brazil from overweight to marketweight after issues were bid up.

An even more cautious outlook was voiced by Barclays’ Bade El Moutakawil, whose firm saw 1.5% to 2% potential returns. He warned investors of commodity price weakness resulting from a continuing Chinese slowdown, which could be exacerbated if the US-China trade truce expired without a resolution, and of expensive EM valuations relative to DM credits. Barclays predicted a flattening of the US yield curve and weakening dollar, which would reduce the cost of funding for EM corporates. In contrast to Hope, he believed EMEA corporates would outperform LatAm issues, a view he noted was driven largely by a negative view on Mexico. His firm’s default forecast in 2019 was 2 to 2.5%, weighted towards Asia.

Finally, JPMorgan Asset Management’s Eduardo Alhadeff observed that he was, “not bullish… but it’s hard to be bearish.” He agreed with the poll results showing China as having the largest influence on EM corporate performance, and agreed that the asset class could benefit from both stable US rates and a weaker dollar. The outlook for Mexican corporates was not clear to him, although he anticipated volatility in that sector.

Smallwood pressed speakers on their concerns over China. Alhadeff noted that the US-China tensions were multifaceted and included intellectual property issues and military dominance among other factors. He believed, however, that there were opportunities for investors, and saw value in Chinese property at current levels.

El Moutakawil saw an agreement avoiding an escalation of US-China tariffs as more likely than not, commenting that the US administration will want to avoid damage to the American economy one year before the 2020 elections. However, if the threatened 25% tariffs do go into effect, he expected market sentiment to suffer, with China, South Korea and Mexico being hurt the most initially (with secondary effects on other economies if the Chinese economy subsequently slows down).

Addressing other risks to the market, Hope believed that “known” geopolitical risks were priced into the market. However, she wasn’t convinced that potential additional sanctions on Russian debt (which she believed would be targeted on sovereign, not corporate, issuances) were reflected in current spreads. She held a market weight recommendation on Russian issues. Alhadeff described it as “dangerous” to be long Russian debt, “because single name sanctions, Rusal style, can wipe out everything…and valuations aren’t extremely cheap, with Russian corporate spread over the CEMBI not being too far from historical averages.”

Dahiya called attention to upcoming elections in Argentina, India, Indonesia, Nigeria and Ukraine in 2019. “Generally, it works out if you reduce an overweight before any election that is not a slam-dunk because of election-related volatility,” he summarized. The Argentine election was of greatest concern to EM investors; “the chance that former president CFK will win is probably only 20%, but it would have a big impact on the market if that’s what happens.” A market-unfriendly victor in Ukraine would have more limited effect because of its narrower investor base, he reasoned. Dahiya argued that the market is currently underestimating the potential for political noise in India. Hope added that there was reason for optimism that Nigeria’s democratic platform may be strengthening following the last transfer of power, and if the 2019 vote is relatively smooth.

Speakers offered views on Turkish issues in the aftermath of the CBT’s decision earlier in the day to maintain current interest rates. Alhadeff advised attendees to “stay market weight and trade on any extreme prices.” He compared the Turkish administration to the Dilma government in Brazil, and didn’t see Ankara having a realistic plan to address its fiscal issues. El Moutakawil concurred on Turkish corporates being a tactical trade, while seeing a shift in momentum in Turkey’s favor. Dahiya said that actions taken last year to contain the crisis were necessary, but will weaken the banking sector as NPLs will inevitably rise (“that’s not a surprise to anyone”). On the other hand, he believed there was still room for spread compression in Turkish bank issues, a view seconded by Hope.