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Emerging Markets Bonds

Video Transcript

Van Eck Rapid Fire: Emerging Markets Bonds Roundtable


 

TOM BUTCHER: Hello and welcome to Van Eck's Rapid Roundtable, where we offer quick, on point, expert insight into some of today's most pressing investment themes. We will do this through a series of rapid fire questions directed at Van Eck's thought leaders. I'm Tom Butcher, your host and mediator. Today I'm joined by Eric Fine, who manages Van Eck Global's active emerging markets (EM) debt funds, and Fran Rodilosso, who manages its passive emerging markets debt funds under Market Vectors ETFs. Both gentlemen are seasoned veterans of emerging markets fixed income and will, with some restraint I hope, address each of my questions in 30 seconds or less. Fran, my first question for you is: what is the greatest advantage of investing in emerging markets debt over developed markets debt?


FRAN RODILOSSO: With emerging markets debt, prices tend to reflect the risks involved and so do yields.


BUTCHER: Eric?


ERIC FINE: Higher yields, lower risks.


BUTCHER: Second question: Eric, what are the most important lessons learned by the emerging markets central banks from the crises of the 1990s?


FINE: Preserve reserves.


[Laughter]


RODILOSSO: How can you come back with that? Preserve reserves.


BUTCHER: Fran, what has been the greatest catalyst for local currency emerging markets debt growth?


RODILOSSO: Rational balance sheet management. Countries have learned to issue in their own currency. It makes them more solvent.


FINE: Additionally, countries have savings rates and central banks to anchor inflation expectations, which are required to be able to borrow in local currency. You're not going to borrow in local currency if you don't trust your central bank and you think inflation will be a permanent risk.


BUTCHER: Thank you. Eric, why is the hard currency sovereign debt market size of the pie becoming smaller?


FINE: They used to have only one choice: borrow in dollars from U.S. banks or from the U.S. financial system. Now, because they've anchored inflation expectations and have strong financial intermediaries domestically (pension funds), they're able to borrow domestically. They're able to intermediate the savings of their own populations.


RODILOSSO: Corporate issuers are now able to tap those same markets and are taking up a larger and larger part of the pie.


BUTCHER: Thank you.  Fran, can we follow up on that by looking at defaults?  How did defaults in emerging markets corporate debt differ from those in developed markets corporate debt?


RODILOSSO: Defaults in emerging markets tend to happen the same way they happen in developed markets. It's in the recoveries where differences start appearing. Companies may default because they have a liquidity issue, because they have a solvency issue, or because there was fraud—it happens in the U.S. just as it happens in emerging markets. The resolution process, however, is a little bit different because you may end up under local jurisdiction, even if your bonds are issued under New York law, which most emerging markets bonds are. The main difference in that process is that in emerging markets, resolution tends to happen in an extrajudicial fashion, i.e., out of court and on an ad hoc basis.


BUTCHER: Have you anything to add to that?


FINE: On the sovereign side, developed markets economies have tended to not default, or their sovereigns have tended not to default, because their debts are largely in their own currency. That may create many other problems but normally reduces the likelihood of a default.


BUTCHER: Thank you.  Moving on to current events, Eric, how is a strong U.S. dollar rally impacting emerging markets bonds?


FINE: Well, first, it's negatively impacting local currency bonds. By definition, the dollar has to rally against something.  Even if it rallies against the major currencies, it tends to mean that it's rallying against EM currency. Second, dollar rallying is a rate hike. It's a tightening of policy. I think it will end up being very good for duration.


BUTCHER: Right, thank you.


RODILOSSO: If a strong dollar is a reflection of a stronger economy in the U.S., eventually there are going to be positive spillover effects. You may not be seeing that play through now but over the medium to long term, it can be an important benefit.


BUTCHER: Thank you. Fran, looking at China and what's happening there at the moment, do the protests in Hong Kong affect credit markets?


RODILOSSO: They may affect sentiment in the very short term. What has happened in Hong Kong is more a reflection of a transition that has obviously been happening for almost two decades, as Hong Kong has come under Chinese rule. China is not a democracy. However, this is not a replay of some other types of things we've seen in China in the past, and it has had greater impact on some stores in Hong Kong than on credit markets.


FINE: Hong Kong doesn't matter that much for credit markets in any direct sense. I think that these types of protests, however, are going to increase around the world. I think atomization is happening and we're going to see a lot of this in Europe and perhaps in other countries. It might be another example of something that's happening around the world, but I don't see much credit impact.


BUTCHER: Thank you. One final question that I've popped in at the end here.  What have you learned on your roadshow?


FINE: Investors are increasingly aware that, although they've gotten the case for emerging markets bonds right—low debt-to-resource ratios, stronger balance sheets, and better economic management—they haven't gotten the implementation right. Seven years ago it might have been hard currency sovereigns and investors didn't make much money. Then they went into local for several years and it turned out to have lower returns and higher volatility.  Then they went to EM corporates. I think investors are increasing their understanding and acknowledging that the case for EM bonds still makes sense, but they want someone else to optimize local, hard, sovereign, and corporate, as well as optimize within the country choices as well. That is the biggest thing I've noticed: investors are increasingly aware that they haven't done the best job they could have in implementing their largely correct decision to invest in EM bonds.


BUTCHER: Thank you. Fran?


RODILOSSO: I think I've been surprised that a large percentage of the people that we've met with and spoken with have already accepted the notion that emerging markets makes sense as a permanent part of their portfolios, as Eric described. The question that comes up is not only in which markets and when, but also how much and what percentage are optimal? Investors are looking for answers.


BUTCHER: Gentlemen, thank you very much for joining us at this session of Van Eck's Rapid Roundtable.  


RODILOSSO: Thank you.


FINE: Thank you.


 

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IMPORTANT DISCLOSURE


The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com


Duration: measure of sensitivity of the price of a fixed-income investment to a change in interest rates.


Please note that Van Eck Securities Corporation offers investment products that invest  in the asset class(es) included in this video.

Principal International and Emerging Markets Risk Factors: Fixed income securities are subject to credit risk, call risk, and interest rate risk. High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities. International investing involves additional risks which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Changes in currency exchange rates may negatively impact a Fund’s return. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability. Investors should be willing to accept a high degree of volatility and the potential of significant loss. Diversification does not assure a profit nor protect against loss. Fund assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors. Please see each Fund’s prospectus for full disclosure information. Any investment in the Funds should be part of an overall investment program, not a complete program.


Risks Associated with the Funds: You can lose money by investing in the Van Eck Unconstrained Emerging Markets Bond Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks associated with its investments in emerging markets securities. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. As the Fund may invest in securities denominated in foreign currencies and some of the income received by the Fund will be in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s return. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Derivative strategies often involve leverage, which may exaggerate a loss, potentially causing the Fed to lose more money than it would have lost had it invested in the underlying security. The Fund may also be subject to credit risk, interest rate risk, sovereign debt risk, tax risk, non-diversification risk and risks associated with non-investment grade securities. Please see the prospectus and summary prospectus for information on these and other risk considerations. Please note that, generally, unconstrained bond funds may have higher fees than core bond funds due to the specialized nature of their strategies.  An investment in the Market Vectors Emerging Markets Aggregate Bond ETF may be subject to risk which include, among others, credit risk, call risk, interest rate risk, and sovereign and quasi-sovereign defaults, all of which may adversely affect the Fund. High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities. International investing involves additional risks which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Changes in currency exchange rates may negatively impact the Fund's return. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability. The Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors. Please see the prospectuses for full disclosure information.

 

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. Underlying securities may be subject to call risk, which may result in a Fund having to reinvest the proceeds at lower interest rates, resulting in a decline in the Fund’s income.


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