EM Debt Positioning in the Current Environment
JAN VAN ECK: Hello, my name is Jan van Eck, CEO of VanEck, here to talk about what’s happening in emerging market debt markets with Natalia Gurushina, who is our Emerging Market Debt Strategist. Natalia, what is going on? EM debt was up in the first quarter, but there’s been a pretty hard selloff here in the middle of the second quarter for EM local currencies.
NATALIA GURUSHINA: Well, the global environment is changing. One of the biggest things that is happening right now is that key central banks are withdrawing policy accommodation. As a result, global rates go up, and this creates challenges in emerging markets. But I think what is important is that despite these challenges, it would be wrong to make a blanket statement that all emerging markets are bad. It creates challenges, but it also creates winners in a certain situation. Talking about good apples, countries that we like under the circumstances: Argentina, Poland, Dominican Republic, and Uruguay. These are countries where we have confidence, first of all on the policy level. These are countries which might encounter some problems, some challenges, but they address them in a very orthodox way.
VAN ECK: But you’re getting paid for the risk?
GURUSHINA: Exactly, and they’re getting paid for the risk.
VAN ECK: So what yields are these countries offering?
GURUSHINA: Let me just give an example. Argentina in the past few days raised the policy rate to 40%.
VAN ECK: So a lot has to go wrong with the currency if you’re getting 40% interest rates.
GURUSHINA: Exactly. These are the kind of countries where we have more confidence. There are other countries, for example, Turkey where there are very serious issues about the policy mix. And there are also forthcoming elections in literally a couple of months. In this environment when there are concerns about the economy overheating, about fiscal expansion, the response function of the central bank is completely unclear and very inadequate. This is one of the countries where we have very serious concerns about having local exposure. There are other countries, for example, Brazil and Mexico where the policy setup is much more positive compared to Turkey, but there are also elections. There is uncertainty about the direction, especially as regards to structural reforms. These are countries you want to avoid, but perhaps for other reasons. Let’s mention South Africa as well, great changes in the past two months, especially on the political arena. But a lot of the good news is already priced in. In terms of having exposure, local currency exposure in that country, there are big questions about that.
VAN ECK: Just to summarize, we’ve got some good countries where you want to buy their bonds. You’re getting paid. You get real value. And there are certain countries you want to avoid. But there is also these elections coming up in the next six months. Is it still something that you want, looking towards the end of the year, to have in your portfolio?
GURUSHINA: Potentially, but as I said, you have to pass through these certain landmarks.
VAN ECK: So there could be buying opportunities over the summer?
GURUSHINA: It really depends. For example, in the case of Mexico and Brazil, it depends on the outcome of the elections. Even though, as I said, as regards to central banks and in governments, there is definitely much more confidence as regards to the policy response.
VAN ECK: I guess one of the time delay functions is investor behavior, there have been a lot of inflows into emerging markets and bonds over the last 12 months. And now some people are changing their minds, there’s selling pressure, and that just takes time to work itself through the markets.
GURUSHINA: That takes time and also I’m just going back to these, but investors pay attention to fundamentals, worsening twin deficits, fiscal and current account are bad. And the authorities not addressing these issues also means that these countries will be punished by investors, as we saw, for example, in the case of Turkey, very clearly in the past two weeks.
VAN ECK: Alright, so it’s an argument for active management?
GURUSHINA: Absolutely, yes.
VAN ECK: Okay, thank you, Natalia.
GURUSHINA: You’re welcome.
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