EMTA FALL FORUM
Wednesday, September 16, 2015
UBS Offices
1285 Avenue of the Americas (at 51st Street)
14th Floor, New York City
3:45 p.m. Registration
4:00 p.m. Panel Discussion
Current Events in the Emerging Markets
Rafael de la Fuente (UBS) – Moderator
Guillermo Mondino (Citi)
Gunter Heiland (Gramercy)
Chris Tackney (Greylock Capital Management)
Gordian Kemen (Morgan Stanley)
5:00 p.m. Cocktail Reception
Attendance is complimentary for EMTA Members / US$695 for non-members.
Fed Decision and China Remain Industry Focus, Note Fall Forum Panelists
UBS once again hosted EMTA’s Fall Forum on Wednesday September 16, 2015, with a standing room-only crowd of over 125 market participants. The panel was led by UBS’ Rafael de la Fuente, who guided the panelists through a series of topics, including the much-anticipated FOMC meeting, which had begun that day.
De la Fuente started the session by asking panelists to discuss what they believed was the greatest risk to the EM markets – the Fed tightening, China—or some other external risk, such as the Eurozone.
“The particular date that the Fed moves on rates is the least of our concerns,” declared Gramercy’s Gunter Heiland. In his assessment, it was clear that US rates would soon be hiked, and that the Fed’s confidence in hiking rates should be interpreted as an indicator of their confidence in US growth. Heiland saw greater risk in the structural changes occurring in the Chinese economy that may in turn cause a further reduction in demand for some commodities.
Other panelists concurred that the eventual Fed hiking was largely priced in. Guillermo Mondino of Citi expressed the greatest concerns on China. “I have no doubt that we have already gone from soft landing to a hard landing…what worries me is what happens if we go from a hard landing to a crash scenario,” he stated. Mondino noted that the Chinese economy appeared to be responding less to stimulative measures enacted by Beijing, and “we all know that China will need to do a lot more than 25 bp interest rate cuts.” For him, the greatest threat to EM was Chinese growth dropping to 2 to 2.5%, although he also worried about a general slowdown in global trade and the ability of domestic forces to replace external-led growth.
“The Fed is a risk that the market is choosing to focus on…but it has probably been the most-telegraphed rate hike move ever,” commented Greylock Capital Management’s Chris Tackney. In his view, the EM markets could adjust to slow and steady US rate hikes, and the sooner the process started, the sooner the market could redirect its focus to the more important Fed language. Tackney expressed a more sanguine view on China, citing Chinese financial buffers and successes in rising real wages, employment gains, and the resilience of services. “The transition to consumption-led growth will take a while, but the Chinese consumer is in good shape, so I think the hard-landing scenario is an overpriced risk,” he concluded.
Morgan Stanley’s Gordian Kemen agreed that China posed a key risk now to emerging economies and that it could exacerbate policy dilemmas for EM policy makers, especially in countries with already-low growth. In addition, China could be a source of future market volatility, although a crash was unlikely.
De la Fuente also asked panelists to discuss inflows into EM. Heiland observed that the market has evolved over almost three decades from a dollar-denominated sovereign-only Brady bond market to the emergence of local market instruments and now corporate issuance. Client inflows are now coming into corporate-bond mandates, and both he and Tackney saw increasing flows into blended products.
The recent downgrading of Brazil’s credit rating by Standard & Poor’s was also a topic for the panel. “The best case scenario is sideways given lack of growth and fiscal challenges,” stated Kemen, who hoped that the downgrade had sounded alarm bells in Brasilia. He wondered if the fractured political environment would allow measures to prevent further downgrades, and urged caution.
Mondino admitted he was no more optimistic. “I doubt we can say we see light at the end of the tunnel, but if they are successful in their economic programs, they might avoid another downgrade and a worse recession,” he commented. The political crisis caused him great concern, and the next move in spreads was “probably 100 bps wider, not tighter.” Some corporate bond opportunities existed and local-currency bonds could become interesting, but Mondino saw most trades as more tactical.
“Brazil is in a quagmire, and it feels like no one is really motivated to do anything,” in Heiland’s assessment. Off-benchmark names offered the most value, although there would be “bagels.” Heiland stressed that the willingness of investors to roll over debt for issuers facing 2016 or 2017 payment issues should not be overlooked, especially for issues who had demonstrated good faith by paying coupons, and keeping investors up to date on its financial issues. Tackney believed that forced-selling was starting to create some long-term values in Brazilian corporates.
Mondino, a former Argentine Secretary of Finance, was using a first-round victory for presidential candidate Scioli as his base case in that country’s elections. “His team appears to be under-estimating the economic issues in Argentina, and over-estimating their abilities to get economic measures passed,” he observed. Their gradualist approach to devaluation seemed implausible, but he believed that, in order to establish credibility, a Scioli administration would try to carry out a fiscal adjustment and a partial devaluation, i.e., a “muddle through” approach. “Some issues will be dealt with partially, but there will not be a full resolution,” he summarized, while adding that the market would give them the benefit of the doubt and perhaps be more forgiving than justified. Kemen noted that, if the hold-out issue were resolved and Argentina could regain access to international capital markets, its weight in EM debt indices would likely increase significantly and lead to technical buying.
Venezuela’s willingness to pay despite a “clearly dysfunctional economy,” and an internal analysis that suggested the country faced a liquidity, not solvency, issue made Tackney see value in the country’s debt. Investors should monitor the election process carefully. Heiland agreed that the possible transfer of power was something that needed to be analyzed, and that investment managers had to be selective in which accounts could hold the paper, in case of a suspension of coupon payments. Kemen agreed that long-end bonds near, or below, possible recovery values offered value. Mondino was emphatic in advising investors to shun the credit.
The panel concluded with speaker investment recommendations.