LOCAL AND HARD CURRENCY OPPORTUNITIES

ERIC FINE, PORTFOLIO MANAGER: We really like local currency right now in EM debt. Reason number one: It is where the rubber meets the road with the big themes that exist in the global economy right now. They include expanding central bank and fiscal balance sheets in the U.S., Japan, and Europe, which have the three major reserve currencies, compared to strong, well-managed balance sheets in the emerging world. I think currencies are the main beneficiary of this divergence. Number two: if the goal of policy in the developed world is to reflate, then this could be good for commodity prices. EM debt, generally speaking, has more commodity exporters than importers as issuers, as opposed to EM equity. Number three: When we look at the hard currency universe, it is very difficult to find value. The only countries that show value are Venezuela, Argentina, and Ukraine. We have held all three, but right now they are not passing additional tests. We really favor local currency debt right now.  

FRAN RODILOSSO, PORTFOLIO MANAGER: I cannot disagree with that. I will say, on the corporate side, more on an idiosyncratic basis, there are some value opportunities in hard currency debt. There are companies that have suffered because of bad macro news within their own country and companies that also might have responded poorly to bad news about other companies in their sectors. The same is true for some banks. In the corporate hard currency space, there is also a much bigger quality spread against sovereigns. In comparing a BB corporate to a BB sovereign, you may get a decent yield pickup in the corporate, which reflects relative market demand. I think on the hard currency side, corporates offer more opportunity than sovereigns.

FINE: What is going to happen to local currency corporate markets? Hard currency once dominated the sovereign market, but now local currency has become a much bigger part of it. What do you see in terms of local currency on the corporate side?

RODILOSSO: I think as part of the evolution of emerging market debt, we are going to see increased local currency corporate issuance. Several countries have very large local currency corporate debt markets. However, they are mostly domestic markets. Domestic banks are the big buyers, and they are not open to foreign investors. China, Brazil, and Korea are examples. I think what we will see going forward is an increasing number of local currency corporates available to international investors. However, we are not quite there yet.

FINE: Interesting.

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