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EM Debt Boom: EM Debt No Safe Haven

edited September 2011 in Fund Discussions

In a research note on Tuesday, Riddel said he became concerned a couple of months ago when the "implied risk premium on emerging market debt suggested that the market was treating (emerging market) debt as a safe haven."

Bluntly, Riddel warned the "market was therefore smoking crack."


  • Of course there are risks. On the other hand, Michael Hasenstab wrote an extensive piece on emerging market local debt that suggests it is an appropriate diversifier away from the dollar, and that countries that are in stronger financial condition than the U.S., Japan, and much of western Europe, should continue to see the ratings of their debt increase. To put all of our faith in the U.S. dollar for the long term, to me, is more risky than having a portion of my investments tied to non-dollar currencies.

    Given the experience of Riddel and Hasenstab, as well as the funds they run, their comments are not unexpected. One deals with the Euro, Dollar, Yen, and other major industrialized currencies. The other uses all of those, plus most other world currencies. One is obviously comfortable hedging, owning, and making bets on different world currencies, including those from emerging market economies. The other, from what I can tell, is not.
  • The question now that Hasenstab's fund is now suffering the affects of Euro in the recent week, is another indication of no place to hide. Time to leave or wait it out? He has a huge cash position that is available, but where to go? I thought his short the euro and em debt would be helpful, but not so.
  • edited September 2011
    Reply to @BobC: There's probably not too many people on the board more pro-diversifying away from the dollar more than me. I agree on the diversification benefits of EM/EM local debt, but the explosion of products in regards to EM/EM Local debt would suggest caution at this point, which I've discussed in the past. A couple of years ago, I had people on fundalarm asking (literally) "how you could you trust those governments?" when I had a huge position in TGINX. Now the discussions regarding these products is quite different and some media have acted as if EM debt is "lower risk".

    Given how not well EM stocks have done recently, I'd suggest posters also look at some of the lower-key EM stock funds (MAPIX/MACSX and Pimco's balanced PEAEX). I'm not saying that one shouldn't own EM debt, but I actually agree with investor, who I believe said a couple of weeks ago that EM debt was overvalued and EM stocks may be undervalued.

    You (Bob) doing what you do certainly know appropriate allocation and the level of risk involved with these products. I don't think "the market is smoking crack", but do want to suggest posters who do not have any EM debt positions DCA in rather than jumping in - and be aware that EM debt is capable of significant volatility. In terms of funds doing currency hedging, I don't know if there's anyone who I trust to do that more than Hasenstab, but with the kind of reactionary policy events, I think that hedging against currencies that could make an increasing amount of sudden moves could lead to funds being whipsawed.
  • edited September 2011
    Local currency EM bond funds have been getting hammered the last couple of weeks with the flight-to-safety trade into the $. I'm out of them (had ELD and ALD) and going all but 100% of my EM bond allocation with Luz Padilla at Dlenx (DoubleLine, formerly with TCW).

    Padilla has a broad mandate, but is very concentrated now in higher quality, $-denominated EM corporates, largely in Latin America. In her analysis (available on web cast on the DBL site, although I can't get it to come up as I write this), that's the one reasonable place to be in EM debt right now (and it's still slightly negative in the short term).

  • Reply to @scott: Yes, I believe EM stocks are a better deal at this time in terms of valuations. I've been accumulating EM stocks gradually in the past month. For those that are more cautious than me, dividend oriented EM equity funds like you mentioned MAPIX/MACSX.
  • I've stayed with TGEIX and have a little FNMIX. I see that TGBAX managed by Hasenstab has almost 50% cash and is short the euro, but still had a tough week. I'm sure he will spend the cash wisely and its a good time to add to his fund.
  • I've been in MACSX Matthews Asia Gr. & Inc. for almost 10 years. MAPIX Div. Value is younger. I'm satisfied, but not exactly happy, since the whole global Market is getting shellacked lately. I started my position in PREMS TRP EM Bonds in 2010. As it happens, my decision to get out of Royce and fold-over the $$$ into PREMX is happening while the fund is near a 52-week low with regard to share price. After looking at the numbers, I could recommend MWTRX, though I'm not in that fund---yet. Once my Royce money arrives in my TRP account, I'll be 40% EM bonds and 6% in a foreign gov't individual bond. My equities: 41% in MAPIX and MACSX, with the lion's share in MAPIX. Also, 14% in PFE Pfizer. I'm holding it, trusting other opinions, despite my distate for that stock.
  • (Typo PREMS=PREMX)
  • Quoting from another message-thread here: "...Grantham advised taking a page from GMO and buying shares in companies with strong finances and which produce goods that people need, as opposed to luxury items. Look for dividend-paying opportunities in emerging markets especially. “I would own emerging and EAFE (the MSCI Europe, Australasia, and Far East Index), including Japan,” Grantham said."

  • It's not unlike the bond/CD/fixed-income vs. dividend-paying stock decision domestically. The difference, and PERHAPS a significant one, is that EM sovereign bonds pay significantly higher yields than comparable US govt bonds. One of the issues is that when folks are scared, the dollar is seen as a "safe" haven, hence the recent flight to "safety". As another poster said, Hastenstab and similarly bright managers, will likely use this time to watch for particularly good bargains. IMHO, shareholders of TGBAX who sell now, looking to move to cash until the problems are past, could be doing themselves a big disservice. This lemming-like reaction has happened before, and Hasenstab has shown he and and his team are darned good at navigating the storms of currency upheavals.
  • Just to clarify: I'm not saying sell EM bonds - far from it. As I said before, I completely agree with the idea of diversifying away from the dollar. I think that people SHOULD have EM bonds as part of a diversified portfolio. I'm just saying be aware of the risks (while you are aware of the risks, there have been stories on CNBC and elsewhere acting like EM bonds are low risk) and if one has no exposure to EM bonds YET, then to start DCA'ing in gradually, because they have enjoyed a significant run (and an explosion in interest and a ton of new funds being launched to capitalize on it.)

    Templeton Global Bond investors should hold, especially given the multi-layered approach, with currency hedging and outstanding management that has - as you've said - been able to navigate these periods well. I also continue to like the few funds that can hold EM corporates (TCW EM/TCW EM Local, for example.)

    Additionally, Hasenstab's other fund, Templeton Global Total Return (TTRCX) is also worth a look.

    Again, not saying people shouldn't own EM bonds, not saying that people should sell if they understand the risk and feel they have an appropriate allocation. Simply saying the asset class has gone from being underowned to having tons of new funds pop up (or change name in the case of a Pimco fund) to capitalize on it. So, those who are looking to get in may want to gradually DCA in and understand the risks rather than jumping in to something that has become a "hot" asset class.
  • edited September 2011
    Reply to @MaxBialystock: You could fix your type by Editing your original post. I find this very useful.
  • correction, I said TGBAX had almost 50% in cash since I was using what *M is showing.
    Here Templeton shows 7%
  • can you believe this with Morningstar? On the subject of cash in TGBAX which shows 48%. Templeton shows 7%.

    This has come up with other funds. M* puts real cash and securities maturing in 12 months or less under "cash". M* does process the data from funds and applies its own layer of assessment.

    "% Cash
    This data point identifies the percentage of the fund's net assets held in cash. Cash encompasses both actual cash and cash equivalents (fixed-income securities with a maturity of one year or less) held by the portfolio plus receivables minus payables. Negative percentages of cash indicate that the portfolio is leveraged, meaning it has borrowed against its own assets to buy more securities or that it has used other techniques to gain more than 100% exposure to the market."
  • edited September 2011
    Regarding EM, I'd suggest reading this article. Some may not like the source, but some of the points made regarding currencies and EM may be of interest, whether in regards to EM stocks or bonds.
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