EMTA Spring Forum (NYC) - May 19

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

WE REGRET THAT THIS EVENT HAS SOLD OUT.  WE HOPE TO SEE YOU AT A FUTURE EMTA EVENT. 

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

Panel at EMTA Spring Forum Review Impact of US Rates, China and Oil Title

EMTA’s Spring Forum was held on May 19, 2016, sponsored by HSBC Securities (USA) Inc. The event drew 100 market participants. Spring Forum speakers generally agreed that the EM debt asset class seemed less precarious than it did in the first six weeks of 2016, while cautioning that the recent rally was not guaranteed to continue.

HSBC’s Murat Ulgen moderated the event’s panel discussion. Ulgen opened the session by asking for views on the global economy, and asked for opinions on whether the rally was technical in nature, or was there support for EM assets on a fundamental basis.

Citi’s Guillermo Mondino suggested that three forces have determined market direction recently—the US Fed/interest rate policy, the Chinese economy and oil. Mondino outlined how each of the factors have affected financial markets in recent months, and how, since the lows of January and February, they had “aligned into a more benign outlook--the probability of a Fed hike declined, there has been a couple of good months in China, and there was a rebound in the oil price.” However, in the weeks immediately preceding the Forum, the three factors had begun to diverge, “leading to more doubt and increased volatility,” while Mondino underscored that the effects on individual EM countries varied. Technical factors (e.g., bottom fishing leading to short covering) added “pepper to the cocktail,” and volatility was likely to continue.

Oppenheimer Funds’ Chris Kelly (an EMTA Board Director) argued that, “extreme and experimental” monetary policies in recent years have had a distorted effect on the global economy.” In his analysis, “DM liquidity went to the natural resource sector; but when aggregate demand didn’t materialize, there was a sharp drop in commodity prices.” At the end of 2015, turmoil in China and commodity weakness began to affect DM countries. The current rally was sparked by the doubling-down by DM countries on easy monetary policy, with the US contributing by seemingly further delaying rate hikes. The weaker dollar and stronger commodity pricing have helped support the rally, and the US FOMC has lots of “outs” they can currently use to justify non-action. “I don’t think we will go back to as precarious a situation as we were in before,” he opined, even with recent weakness in Chinese economic data.

Jim Barrineau (Schroders) also described the factors creating the “vicious cycle” confronting EM earlier this year as the result of the European and Japanese central banks weakening their currencies, while the US prepared the market for eventual rate hikes. EM was “crushed” as the dollar strengthened. The cycle ended as the ECB refocused on asset purchases rather than weakening the euro, and China’s January yuan debacle. This then led to a “mini-virtuous” cycle, although the current situation is less clear as the Fed apparently was pushing the market to assume resumed interest rate action. “I can’t sit here and not be nervous about the Fed’s intentions; if they insist on pushing the gas pedal of rate hikes, then you have to be a bit worried about a return to the 2014/2015 risk-off, stronger dollar dynamic,” he concluded.

Turning to country specifics, Casey Reckman of Credit Suisse described a slightly negative overall view on Latin America, while observing that the continent was, in general, turning away from leftist policies. Recently, she had become more comfortable that Venezuela could avoid a debt default in 2016, even if it were unable to conclude a liability management operation. However, questions remained, such as the social response to dramatically reduced imports. “The situation is a tinderbox, and there are several potential sparks,” she cautioned, adding there was potentially much volatility in the country’s debt prices. Kelly preferred to stay on the sidelines, assuming, “it will be disorderly.”

The diagnosis for Brazil’s fiscal ills was clear, but the chances of reforms being passed in Congress was not, in Reckman’s view. Her firm, along with most Wall Street houses, remained bearish on Brazilian growth prospects, although “we could be reaching a turning point.” Barrineau saw a sea change in the country’s treatment of Petrobras as a piggybank, and expressed a bullish view on the Brazilian company despite its “sloppy” May issuance. Mondino believed the COPOM would cut interest rates faster than the market expected.

Reckman believed that the rally in Argentine debt could continue, although the “big positive movements” on the holdouts and the currency were done. No growth and high inflation were now “the reality” facing the Macri administration, and there was increasing concern that the government’s honeymoon period was slipping away. Reckman maintained a positive outlook, and listed it as her top recommendation, although “we are at the trickiest part of the process.” Kelly added that Buenos Aires had benefitted from good timing; “all the stars aligned for them to get their paper out in April; it was lucky they didn’t issue in January or February.”

Mexico’s currency continued to trade unlinked from Mexican fundamentals, in Mondino’s view, who noted its liquidity and low carry, which made it easy to trade. The Mexican economy was growing “nicely,” despite disappointment that the oil reform process has not led to stronger FDI flows and weak oil prices. The Mexican peso’s irrationality caused Kelly to avoid the currency.

Growing reserves, a weaker ruble, a potential bottoming in economic growth and the fact that sanctions have stymied new supply all supported the case for Russian debt, in Barrineau’s view. “It’s a great story if you think oil will stabilize,” he added, specifying it was a six-to-twelve month play, rather than a turnaround story. Mondino praised the country’s macroeconomic policy makers as being “heads and shoulders” above many EM peers in how they have responded to economic issues.

Panelist views on Turkey varied. Mondino saw increased risk of a policy accident, and declared that risks were not reflected in current yields. Barrineau highlighted positive growth, a lower current account deficit, and a prediction that Turkish leader Erdogan would go “no further than what the market would bear” in his consolidation of power, which he declared was “the same story as the last ten years.” A ratings agency downgrade based on politics didn’t seem logical in his assessment, as nothing had changed.