EMTA Winter Forum (London) - Feb. 21

Winter Forum Speakers Generally Positive on Global Macro Outlook

The nearly 200 attendees of EMTA’s Winter Forum heard generally positive views on the global macro outlook and EM economies. The event was held on Tuesday, February 21, 2017 and hosted by JPMorgan at the historic Great Hall at 60 Victoria Embankment.

Luis Oganes (JPMorgan) initiated the event by reviewing panelist predictions from the 2016 Winter Forum, noting that the past year had proven “confusing and complicated,” and Russian debt’s strong performance among the many surprises. Oganes asked panelists to discuss their thoughts on macro factors, including US rate hikes and ECB and BOJ monetary policy, and how they would affect EM debt in the coming year. EM would be supported by three top drivers, asserted David Hauner (Bank of America Merrill Lynch). Lower US dollar volatility, stronger commodity markets (including oil averaging $61 in 2017, he predicated) and improving EM growth (forecast at 4.6% vs a 2.1% US growth target) would all push EM debt higher. US hikes would amount to 50 bps this year, as the US FOMC was limited by the uncertain nature of US policies under President Trump.

Kasper Bartholdy (Credit Suisse and EMTA Board Director) concurred that improving commodity prices (supported by Chinese growth), and potential US tax reforms and fiscal stimulus would prove positive for EM growth. On the other hand, increasing protectionism and likely higher G-3 bond yields (he forecast UST 10-year yields at 3% by December) would serve as negative factors. Bartholdy saw two US rate hikes as the most likely scenario, “although the probability is almost as high for three rate hikes.”

Nomura’s Peter Attard Montalto seconded a US growth forecast of 2.1%, falling to 1.8% in 2018. His firm had a neutral outlook on commodities, but was more bullish than Street consensus with a Eurozone growth forecast of 1.9%.

Finally, Renaissance Capital’s Charlie Robertson sketched a psychological portrait of President Trump, which derived from numerous biographies he had recently devoured. “The theme of self-sufficiency, and importance of not being ‘weak,’ is a major part of his outlook,” he stated, and would translate into an eventual US trade war with China. Robertson also expected oil to average $45 per barrel (“plus or minus $10”) for the next decade, and predicted a much stronger dollar.

Moderator Oganes added his own house views, agreeing with 50 bps in US rate hikes, and envisioning the UST 10 year at 3% by year-end. Oganes cautioned that US fiscal stimulus would underwhelm the market.

Oganes also polled speakers on what policies would be passed during the Trump presidency, and there was wide agreement that some sort of tax reform would be adopted. Bartholdy assessed that the probability of a Border Adjustment Tax (BAT) was 30%, “but it might be rising;” if Trump were to explicitly back the proposal, it would probably be passed into law. Even if not, several EM countries such as Mexico and South Korea were likely to be “squeezed,” and new import tariffs were possible.

Attard Montalto expressed greater confidence that the BAT would be adopted. He maintained a medium-term cautious outlook on Mexico, South Korea and Taiwan, while seeing India (post demonetization) and Thailand as possibly winners. Robertson, citing comments by Trump’s advisors, argued that “protectionism against China
seems likely.” Hauner would buy EM debt on any BAT-related sell-off, while also questioning the likelihood of large US infrastructure spending. Clarity on the BAT would continue to elude the market until the 2H, in Oganes’ view.

Daly, who moderated the event’s investor panel, asked portfolio managers for their interpretation of Trump’s effect on EM debt; most speakers expressed limited concerns. Greg Saichin (Allianz Global Investors) believed that US tax cuts would be passed, and suggested that market con-sensus of a Trump administration reflation story “couldn’t be bad,” although it was likely to fizzle out in the 2H. BlueBay Asset Management’s Graham Stock saw global growth as strong, and suggested that fears of a stronger dollar and a major renegotiation of NAFTA might be overdone.

Raoul Luttik of Neuberger Berman believed that US policy was too unclear to make an accurate assessment, although the reflation trade was likely to continue. Perhaps the greatest concern (“I’m worried”) was expressed by EMSO’s Ben Sarano, who wouldn’t rule out the adoption of policies that would prove detrimental to emerging economies. Moderator Daly added his own view that a BAT was unlikely to pass, as it would raise prices for Trump supporters.

Daly steered the conversation to EM FX. Luttik voiced optimism for local currency fund inflows following a period of EM FX weakness. He maintained a neutral outlook on Asian manufacturer currencies. Stock saw the MXN as cheap despite its recent rally, although admitting he was “wary” about adding to long positions due to “the key risk of Twitter storms.”

As for US rate decisions, Luttik argued that FOMC decisions were “not too relevant.” Instead, changes in US fiscal policy would have greater importance. Sarano argued that US rates would play second fiddle to inflation and upward wage pressures. Nonetheless, Stock maintained the most hawkish view of 4 hikes (“though maybe we are down to 3 now”) with investor speakers on average expecting one more rate hike than their sell-side counterparts.

EM-specific risks to the asset class identified by the investor speakers included the possibility of a mismanaged Party Congress in China, Trump Twitter wars vs EM trading partners, political risks in South Africa, Mexico (AMLO) and Brazil (“pension reform isn’t going to help Temer’s successor,” noted Stock), as well as Argentina’s midterm elections.

“We are very close to the end of the rope,” argued Sarano, in a discussion of Venezuela’s ability to pay; “they just don’t have the money.” His firm had recently stopped selling Venezuelan de-fault protection, after years of conviction that payments would be made. Stock could envision a path of the country “limping along,” via Chinese loans, joint ventures and higher oil pricing, while underscoring that default remained an omnipresent concern. “The opposition in Venezuela hasn’t capitalized on opportunities, the willingness by the Venezuelan people to cope continues, and President Maduro looks to be in a stronger position recently,” he added.

Saichin was perhaps most confident that Venezuela would meet debt obligations in 2017. “They know that defaulting means they will have to leave power, so they will do whatever it takes, and 2017 looks more manageable now,” he declared. Speakers concurred in predicting oil would remain near current levels, supported by the OPEC deal, and in a sweet spot that did not trigger increased shale production.

The panel concluded with a discussion of fund flows into passive index funds. “We do worry about flows going into passive funds, and we have to make the argument for the opportunities that active fund managers can make for clients,” Stock stated. “There are a lot of opportunities to invest off-benchmark, and lots of potential returns for actively managed accounts,” seconded Luttik.