EM BONDS AS AN ASSET CLASS
ERIC FINE, PORTFOLIO MANAGER: As an asset class, emerging markets fits pretty interestingly right now in terms of its fundamentals. The financial and economic world seems focused on two things: 1) debts and deficits or fiscal balance sheets; and 2) global reflation or inflation. On both counts, emerging markets look pretty interesting. On the whole, emerging markets have a third of the debt and a third of the deficits of the so-called developed world, but maybe it is just as important that the emerging markets have truly independent central banks. This is not just because they have read economic textbooks and decided it was a good idea. They have tried the opposite, expansionary central-bank policy, and it has not worked. Across the emerging markets political spectrum, there seems to be support for independent central banks – namely, central banks that will hike interest rates to fight high inflation. I feel that some emerging market central banks will not allow the fiscal authorities to get into trouble so deep that they can never hike interest rates, unlike developed economies, where the central bank may have no option to hike rates. I think these are two ways that emerging markets fits in economically and fundamentally. One other point I would like to make: JP Morgan estimates that less than 1% of U.S. pension fund assets are invested in emerging markets debt. Whatever you think the right number should be, 1% is not it, in my opinion. I believe emerging markets debt isn’t an overdone trend, and the asset class has assets left to tap.
FRAN RODILOSSO, PORTFOLIO MANAGER: That is an incredible statistic, when you think about both the size of the EM debt universe and the opportunity that's there. Your point about the central banks and monetary policy is an amazing reversal over the last decade or more. Just one other comment, when you think of credit and credit analysis and credit fundamentals, particularly if you are talking about sovereigns or corporates or lower down the rating scale, one of the great fundamentals is growth. If you are a credit investor, you tend to want to be where the growth is. You will probably pick sectors based on growth. You will probably pick companies based on growth. That means an increased ability to repay debts, and emerging markets are where the growth is in the world, at least for the next couple of years, in my opinion.
FINE: I think that is a great point. Speaking for emerging markets managers and analysts, we have experience dealing with financial crises. But the developed world had to have a book written by Reinhart and Rogoff to learn what happens in a crisis. One of their interesting statistics showed that over 200 years of U.S. economic data, the periods in which the U.S. had debt-to-GDP greater than 90% had much higher inflation and lower growth rates than average. Conversely, lower debt levels were consistent with higher growth rates and lower inflation. I think most emerging market investors care very much about debt levels and central bank policy, and so these markets and their policymakers also care. That is very consistent with what you said about the general environment for corporates.
RODILOSSO: Great point.
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