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M*, Day 1: Michael Hasenstab on emerging markets

Michael Hasenstab, a CIO and manager of the four-star, $70 billion Templeton Global Bond Fund (TPINX), was the conference keynote. Over 40% of the fund is now invested in emerging markets (including 7% in Ukraine. He argued that investors misunderstand the fundamental strength of the emerging markets. Emerging markets were, in the past, suscepitble to collapse when interest rates began to rise in the developed world. Given our common understanding that the fed is likelier to raise rates in the coming year than to reduce them, the question is: are we on the cusp of another EM collapse.

He argues that we are not. Two reasons: the Bank of Japan is about to bury Asia in cash and emerging markets have shown a fiscal responsibility far in excess of anything seen in the developed world.

The Bank of Japan is, he claims, on the verge of printing a trillion dollars worth of stimulus. Prime Minister Abe has staked his career on his ability to stimulate the Japanese economy. He's using three tools ("arrows," in his terms) but only one of those three (central bank stimulus) is showing results. In consequence, Japan is likely to push this one tool as far as they're able. Hasenstab thinks that the stimulus possible from the BOJ will completely, and for an extended period, overwhelm any moderation in the Fed's stimulus. In particular, BOJ stimulus will most directly impact Asia, which is primarily emerging. The desire to print money is heightened by Japan's need to cover a budget deficit that domestic sources can't cover and foreign ones won't.

Emerging markets are in exemplary fiscal shape, unlike their position during past interest rate tightening phases. In 1991, the emerging markets as a whole had negligible foreign currency reserves; when, for example, American investors wanted to pull $100 million out, the country's banks did not hold 100 million in US dollars and crisis ensued. Since 1991, average foreign currency reserves have tripled. Asian central banks hold reserves equal to 40% of their nation's GDPs and even Mexico has reserves equal to 20% of GDP. At base, all foreign direct investment could leave and the EMs would still maintain large currency reserves.

Hasenstab also noted that emerging markets have undergone massive deleveraging so that their debt:GDP ratios are far lower than those in developed markets and far lower than the historic levels in the emerging markets. Finally we're already at the bottom of the EM growth cycle with growth rates over the next several years averaging 6-7%.

As an active manager, he likely felt obliged to point out that EM stocks have decoupled; nations with negative real interest rates and negative current account balances are vulnerable. Last year, for example, Hungary's market returned 4000 bps more than Indonesia's which reflects their fundamentally different situations. As a result, it's not time to buy a broad-based EM index.

Bottom line: EM exposure should be part of a core portfolio but can't be pursued indiscriminately. While the herd runs from manic to depressed on about a six month cycle, the underlying fundamentals are becoming more and more compelling.

For what it's worth,



  • Thanks David for these insights. Japan has their issues with China regarding the So. China Sea claims and they are boosting aid and other assistance to countries like Philippines and Vietnam who are in the same boat. The assistance does have some military component to it but also investments in real estate development and relocating industrial and commercial assets into these countries. This may be part of what Mr. Hasenstab was referring to.
  • beebee
    edited June 2014
    I would think a trillion-ish dollars of stimulus would slightly water down the value of the Yen, but this doesn't seem to be the case.

    Article quote from the "Short Side of Long":

    "We’ve seen close to record high levels of short bets against the Japanese Yen in late 2013, together with group-think expectations of more BoJ stimulus to weaken the prices even further. However, the currency has not weaken so far.

    On the contrary, the Yen seems to be threatening to rally above the 200 MA and break out from a current triangle consolidation."
  • Thanks for the report, David. Great to have!
  • Worth a lot, sounds like. Thanks David.
  • edited June 2014
    By the numbers, TPINX has great long-term, life-time numbers, and even "recent" cycle performance, but it's struggled the past 1, 3 and maybe even 5-year periods...

  • @David_Snowball An interview with M. Hasenstab appeared in the FT yesterday. There is more substance in your synopsis of his talk than in the FT article. Is that because you are more attentive, or a better transcriber, or because M. Hasenstab just doesn't do "good phone"?:)
  • Hey you... watch it!
  • giggle. But I'm not surprised at all if David's report to and for us is meatier. Yup.
  • edited June 2014
    The user and all related content has been deleted.
  • I suspwct that some of the stories are mostly prewritten. Morningstar has an onsite newspaper that reports, in advance, on what the speakers are going to have said. (Neat verb cluster.) So reporters start with that and add snippets from the post-presentation melee in the press room.

    Just guessing.

  • re: neat verb cluster- I think that you succeeded achieving the rather rare future pluperfect past tense dangling participle thingy there. Congratulations!
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