TOP EM PLAYS FOR 2013
ERIC FINE, PORTFOLIO MANAGER: The top four emerging markets I like right now are Nigeria local market, Mexico local market, Russia local market, and Indonesia local market. What they have in common is yields that we think are too high, independent central banks, and also very strong balance sheets. All of these central banks will likely hike interest rates or take other tightening action if they perceive an inflation problem. Russia, for example, could buy back all of its sovereign external debt in one phone call. Also, they have far more reserves than debt. We also have markets that show up positively in our models but don’t pass further tests. In other words, if we depended totally on our frameworks and models, we should own them, but we don’t. They include Argentina, Ukraine, and Venezuela. I've just visited each of these on several trips, and they don't pass for a variety of reasons: Venezuela because of the politics, Argentina due to technical default and political risks, and Ukraine because of policies, and it’s not clear that the new government will reach an agreement with the IMF.
FRAN RODILOSSO, PORTFOLIO MANAGER: Interesting. Here is one question I think investors will ask. Eric, your top four are significant oil-producing nations, even if they are not net exporters. In a couple of cases, oil revenues are a very significant part of government revenues. How do you think that factors into the setup for 2013?
FINE: I think that's a great question. All four countries are perceived as oil-exporters. However, I think Mexico and Indonesia clearly are different. In Mexico, lower oil prices would demonstrate the country's gearing to the U.S. All else being equal, I believe lower energy input prices should be positive for U.S. growth. In my opinion, Mexico is much more geared to U.S. growth than it is to oil prices. Indonesia similarly has a very high energy component in its consumption basket, and domestic energy subsidies are a drain on the fiscal resources of the country. So a decline in energy prices would have the effect of making interest rates look higher. Russia and Nigeria are basically oil stories; they have a relatively comfortable price spread over their break-even levels, whether you're talking about the external accounts or for the budget. While they do have oil price risk, there's a significant cushion in the form of their budgeted assumption for oil prices. There is also a significant cushion in the fact that they don't have a lot of debt, so they can lever up if needed.
RODILOSSO:Right. The best fundamental of all.
FINE: Fran, similar question to you -- what do you think about the impact of commodity prices on the corporate debt market?
RODILOSSO: That's a great question, and as in the sovereign space, it is a mixed answer. Using oil as the first commodity price, your example of Mexico is great. Mexico has a very diversified economy, even if oil revenues are an important part of government revenues. There are companies that produce metals or cement and have high energy input costs. They will likely benefit greatly from lower energy prices. Obviously, higher iron ore prices might help certain companies in Brazil. But net-net, I think an increasing part of the emerging market corporate universe are not energy or pure commodity-based producers. It is a much more diversified universe than it used to be. We believe a lot of companies could benefit from lower energy prices.
MEASURING RISKS IN VENEZUELA
ERIC FINE: On Venezuela, I think the market has put a premium on President Chavez's deteriorating health. Generally speaking, the market has viewed Chavez's demise as a positive for long-term economic outcomes, so negative health reports have increased the premium. In my opinion, I think the legal, political and constitution risks are pretty high. So, I think we've got a premium that may be a bit overdone, and some risks are understated. Venezuela does have one pretty important positive. If you add up all of Venezuela’s reserve sources – not oil reserves, actual money – most of their central bank reserves are in gold and the value is higher than their external debt. They are a net creditor in dollars.
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