Contributed by: Show Editorial Team
Mohamed El-Erian, Rebecca Breau, and Robert Koenigsberger discuss Emerging Markets at Greenwich Economic Forum (Greenwich, CT)
- Nationwide is one of the largest insurances and financial services companies in the world
- Gramercy has $3.8. billion in AUM
- In 2018, Nationwide investment portfolio totaled $101 billion
INTERVIEW TRANSCRIPTS: Mohamed El-Erian, Senior Advisor at Gramercy Funds Management, Rebecca Breau, Head of International Research and Strategies for Nationwide Investments, Robert Koenigsberger, CIO/Founder of Gramercy Funds Management
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 00:00
Okay. We’re going to start and I’m sorry, the bad news is I’m back. The good news is I’m back as a moderator so I’m not going to talk much. And I am delighted that we have two very special people on this panel to talk about investing in emerging markets. On my left immediate left Rebecca the head of international research and strategy at Nationwide Investment. She brings a wealth of expertise and her comparative advantage, they both have absolute advantages but her competitive advantage on this panel is the top down view of where emerging markets fits in an overall asset allocation. Next to her is Robert the founder and CIO of Grammercy, a very successful bottom up driven and emerging market hedge fund that I have gotten to know and appreciate and respect and work for even more in the last few months. And he’s going to provide the bottom up compliment but both of them are going to talk about top down and bottom up coming together. And what does that mean for a Metro market investment?
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 01:19
The narrative arc of the discussion is we’re going to start with the general investment environment. What does EM fit in all this? What in particular makes sense and doesn’t make sense in EM. Then we’re going to turn to you to see if there’s any questions. If not, I’m going to continue ask some questions and then to have some fun and put them on the spot. I’m going to play a long short game with them at the end. We’re going to go to 9:50, and if I look at my phone, I’m not checking about where my daughter is or if I would love to. Okay. But I don’t have a watch anymore. Okay. So Rebecca, let me start with you. From yesterday, from today, we coming from a world that at one point was unthinkable. We’re coming from a world of 15 to 17 trillion of negative yielding bonds. We’re coming from a world where investors have made money both on the risky side of the asset allocation and the risk mitigation side. Okay. You’ve been paid for both, which is great. We’re coming from a world where we could rely on ample and predictable liquidity from central banks. How do you interpret the world we’ve come from? Where do you see us going and what does it mean for how you think about asset allocation at Nationwide Investment?
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 02:43
I’ll keep it focused on emerging markets. Let me describe to you a world that we’re actually really coming from. China growing at 10 to 14, 15% growth rates in certain years. A commodity boom that had been focused on really one the rise of emerging markets, the support of commodity. So any resource a country could benefit from that resource. A corporate could benefit from that accumulation of reserves. A shift in issuance from hard currency as reserves were topped out to local currency better financial systems, better liquidity. And then the environment changes. We have hit a global macro political, geopolitical shift in the tone. And at the same time the market structure is shifting. The fed global central banks are buying debt, pushing the likes of us out to find other opportunities, whether that’s less liquidity, lower credit, or trying to give on liquidity and maintaining good credit work.
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 03:47
We’re in a pinnacle period where we’re trying to figure out where is the future of emerging markets. It’s not a one way street anymore. It’s not just anybody tied to resource boom or China. China’s restructuring and at the margin it’s going to slow growth is going to slow. They may be opening up their capital markets, but the macro implications are very different compared to the way they used to be. Is the issuance pattern going to be so robust? Will it move in that structural trend of more local currency, better financial systems? You know, I don’t know. I do know that there is a test on valuations. The central banks are in there. The global emerging market landscape has benefited. Absolutely. we’re interested in doing where I think the asset class is going to become more idiosyncratic. It’s not a one way street anymore. Do your bottom up credit work. That’s what we’re trying to do. What we’d started to do, we’re very domestically based and we’re trying to move it internationally to get some diversification. We’re first starting to understand how the world around us impacts our US domestic assets. Then we can start to understand what an emerging market looks like. So bottom-up credit work more idiosyncratic, not an asset class trends. That’s the way that I’m looking at emerging markets in this landscape.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 05:02
So let me ask you one follow up question before I pass it on to Robert. This notion of it’s no longer a one way street, but we had this wonderful secular tailwind that has stopped. I’m often struck by this statistic. If you had invested in the S and P in 2015 and sold a few months ago, you would have made 160%. If you had invested in EM equities and sold, you would’ve made zero. So how do you bring in valuations for someone who’s very naive as well? Everything you say is right, but look at the valuation differential. Surely it’s time to fade the US and go into EEM regardless of whether this tailwind has ended or not. What do you say to them?
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 05:53
I wouldn’t personally, I would agree. The strength is any, the growth is in the am I mean, just ostensibly looking at the potential returns. As you mentioned, social returns. I mean, they’re huge social returns to just simple reforms. We’ve already started the low hanging fruit. There’s were difficult reforms ahead, but I would agree with that. It’s just, it’s not that you can just get into any EM market. I think there’s going to be a differentiation across the asset class even within different currencies that you need to. We were talking this morning there’s been secular trends that have defined a macro strategy, especially in asset allocation without a clear knowledge of what the next three to five years is gonna look like. It’s hard to invest in just EM as an asset class. So what I’m suggesting is, I agree there’s lots of diversification, cation benefits, getting out of the dollar, getting out of U S assets. Getting out of developed market assets, especially negative yielding ones. But do the work needs to be done. I mean, they’re major, major, big economies in EM are, you know, China, India, Brazil, Russia make your bet across those that that’s what I’m suggesting is that it is a country selection these days. I believe at a macro point of view, it’s no longer an asset class selection.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 07:15
So Robert, to do a hypothesis for your direct one to one, it’s no longer a one way street is that means that the investment options, Trinity is not the asset class as a whole. It is selectively within the asset class. Can you react to both here and there?
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 07:25
They’re obviously correlated, but I would agree with this notion that this label of emerging markets is a bit intellectual and lazy. I’ve been in the asset class actions since before it was an asset class and then they just call it the EM. And it was kind of risk on risk off and it was just appendage and you didn’t really get paid to think about differentiation within emerging markets as an asset class. So we think about it in the way that we’ve evolved our platform is around the different return streams that are available in emerging markets. And to think of emerging market return streams on a blank piece of paper and then see where, where the best return is relative to an objective and relative to the, to the risk that you can tolerate.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 08:14
But you know, people always ask me, you know, where do you invest, you do in emerging markets. And, and I take kind of the old world approach, which is I don’t want the world bank or Goldman Sachs or someone else or JP Morgan and tell me where I can invest because they’ve created an index. But I kind of look at the you know, still what I called the former Soviet union and Eastern Europe, Asia and Latin America. And then dig in or people like to use terms like frontier markets will everywhere that you and I’ve ever invested at one time was a frontier market. So I don’t want to eliminate things just for the sake of labels.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 08:51
So, one of the issues of the American market has been the structural imbalance. Between the decade dedicated investors who think like the two of you and then the crossover investor who thinks much more genuinely. And these days increasingly has come in, we index products with low cost index products. Speak a little bit about what does that mean for the world you live in. To what extent is that a frustration or is that an opportunity?
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 09:15
All of the boats. So you know, I again, having spent 32 years in emerging markets and we’ve been talking to this conference for the last two days about global liquidity and how much, how many dollars are floating around. And I’ll just stop and say that in the 32 years, it’s certainly in the 25 past 25 years. I think emerging markets, fixed income particularly in corporates is potentially as illiquid as it’s ever been. Right. And then now we have to talk about where that risk resides, where it used to be and where it is today. So if I go back to emerging market, corporate credit back, you know, before the crisis, it tended to reside in a 90 day vehicle called a hedge fund and post the crisis, you know, allocator said Whoa, that 90 day vehicle way too liquid for the underlying illiquidity of the emerging market corporate debt.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 10:01
So we’re going to redeem and we’re going to go do something safe, we’re going to get liquid and we’re going to go buy ETFs, we’re going to go buy, use it and we’re going to go buy four yaks. And what do they do? Cause we were liquidating the bonds, they bought the same bonds and put them into one day vehicles. So we went from 90 day money to two to one day money. But that’s only part of the story. The rest of the story is since 2010 emerging market corporate credit in CUSIP form is about five times larger than it was. You know, today it’s five times larger than 2010. And the street, you know, there used to be a Xhosa broker dealer or the D’s gone. Everybody’s a broker and we’re not really seeing the impact of it yet because as the market has grown, there’s been inelastic supply at every price there’s an issue or that’s always willing to take money from the market.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 10:48
And we take somewhere like Brazil and they’ve issued a 4% and they’ve issued a 14% and everywhere in between. But demand itself won’t be elastic when there are outflows. And then there will be outflows. And there’s this complacency out there as though the current allocation is the one that everybody’s going to keep forever. What I’m concerned about and also excited about is this dislocation that’s going to occur. And as you were saying in your previous panel, if you understand that you embrace it and you underwrite it today, there’s a huge opportunity and we call it plan the trade in and trade the plan. But wouldn’t you have liked in 2006 in 2007 two of calmly underwritten the credit crisis said this is silly, this can’t go on forever. I don’t know how long would go on, but in Marcelo nine have some sort of draw down structure in place where you plan the trade, trade the plan and all of the psychologies out of it and that you pre-committed your governance committees to that structure. That to me is, you know, following up from your conversation this morning, how to embrace the volatility.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 11:46
So Rebecca, talk about that in particular, talk about in the context of a traditional governance system where you have very well defined asset classes, right? And we heard two things is EM is no longer a simple asset class. It has features that go all over the place. And two, and I don’t know whether you agree with Robert, but this powerful notion of his, of illiquidity in the midst of global liquidity. How do you talk to people who are conditioned to think in a certain way?
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 12:19
Well, it’s funny cause we put our at nationwide we put our EMD products into a class called liquid alternatives, which it’s just silly to me. EM even in the past to me does not seem to be all that liquid, especially when you want to sell or you never need to buy. So we’ve already kind of come to the understanding that EM really isn’t all that liquid and I agree that it seems, especially if the asset class is no longer going to be on a wait and one way street, it’s going to be more idiosyncratic. You’re going to need to find those pockets of liquidity. We are actually our strategy with more barbell than the way we think of liquidity and investment grade corporate public credit markets. And then we’ve got a slew of asset classes that are very illiquid that we’re very comfortable with.
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 13:05
Our bottom up credit work. EM though I think is very prone to this. These gaps in liquidity in this re very quick repricing and it’s just because the market structure has changed so much. Where is the lending coming from where you know, what is the actual real debt load? You know, I was just reading a Moody’s report and they had an increased number of sovereigns that were rated by something like 100 to 106 just over the last year. Largely in Africa. Africa is the growth story. You know, population growth. They’ve got resources. If they just reform every single one of those in the public markets on the sovereign side, every single one of those issues are oversubscribed. They just can’t issue enough paper. People want it. And I think there’s, you know, there are pockets of areas of the world in emerging markets, whatever that I like to call the, what the world bank calls it, low and middle income countries where you are going to be susceptible to poor credit work done along the way.
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 14:00
And I think I’m over at the keel Institute. They’ve done some really neat research on China’s capital lending programs and global capital flows. And I’m sure you’re familiar with this, but basically there’s a whole ton of hidden capital coming from China and they accumulate the estimate on the low end, around 200 billion through 2016 and we’ve had three years since then. These are hidden debts. This is not measured by the rating agencies. This is not measured by the IMF, the world bank because China’s not part of the Paris club. So they don’t have to they have reporting seats. So I think there’s all sorts of skeletons that will come out of the markets in that is in the emerging market space and kind of out of the closet. And I think, again, if you just do the credit work and you understand that there are skeletons and you can sit through the liquidity events, you’re going to be confident in the credit work that you’ve underwritten going into it. And I think that’s one thing we talked about this morning that I was very attracted to in terms of your opportunity set at Gramercy.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 15:01
The barbell that you spoke of is, is the way that we’re thinking about it, which is, and we hear it all day yesterday that, you know, people need return. So you need to take risk to get return, but you need to take intelligent risk. And I think the intelligent risk in emerging markets today is to, you know, one of, if you’ve got a liquidity in your portfolio, make sure that it’s your potential liquidity, that you’ve underwritten high quality credit and probably have short duration. I’m not saying you have to get out of every CUSIP in your portfolio, but to the extent that you really don’t need one day liquidity, you can move out the illiquidity spectrum. And you know, when you talk about equity returns, you know, if you were sitting in private credit contractual income and emerging markets over that same period of time, you may not have kept up with the S and P but you definitely kept up with the returns that your endowment or your pension fund needed.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 15:48
But so I think that the barbell that we’re thinking about as underwrite take down the risks that you really get paid. And for me today, that’s private credit and emerging markets. Talk a little about that. You get much higher yields, you get explicitly paid for the illiquidity and you get less risk because you have great security packages. And then the other part of the bar bell, which is kind of embracing that dislocation before it occurs, having some cash, having the courage to have some cash, understanding the option value of cash, but then let’s unpack what those dislocations have looked like and what are the return potentials that have come behind them. And I think it’s fair to assume that, you know, there’s, there’s been nine in the last 20 years. The peak to trough has been down about 20% we’re talking about bonds here, fixed income, liquid bonds in emerging markets, peak to trough down 20% in five months.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 16:36
In 12 to 24 months the returns have been 30 to 50% now. I personally think it’s those returns at that part of the cycle and that are not only obviously the most interesting, but the ones that have driven a lot of capital into long emerging market debt. So I’d rather like to think about countercyclical and underwrite it before it happens. It’s going to happen, you know, just, just like the taper tantrum, you know we did the same thing before the taper tantrum. Underwrited it’s going to happen when it happens, you calmly take it down and you’re pre-committed because you know, I started my firm during the Russian debt crisis and I ran around and told a lot of LPs, a few in the room here that you know, Russia’s really cheap at 6 cents and most of them were under the table. Like, in their words, you couldn’t get them on the phone and you couldn’t get anybody on the phone in March of Oh nine. So you know what I’m saying to people now is let’s have the conversation now. It’s called let’s underwrite it when it happens, let’s take advantage of it.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 17:23
So, there’s a reason why you can’t get them on the phone. Right. so let me take two examples that you’ve cited previously. I’ve heard your cite them and how do you explain them? Because on paper they make no sense. One is Mexico. You have a choice. Either you lend to Pemex via the public markets at 4% or you can learn via opportunities that you saw as a double digit with better collateral. Okay. And yet this is crowded, this is not. Argentina, the a hundred year bond at seven and a quarter percent was oversubscribed. 30 to 40 cents. No one wants to touch it. Okay. So, so talk a little bit about when you sitting in front of people and they see these big contrasts, how do you explain to them to get over the behavioral challenges that make you do the wrong thing at the wrong time?
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 18:17
Yeah, we typically talk about sending, I’m going to come to questions by the way. So we talk about in those situations are a little bit different. There’s something broken, there’s some element of distress. And for something to be cheap, not just cheaper than it used to be, you have to be able to clearly identify like what’s the element of distress. And then number two is like what’s the catalyst that’s going to change yellow? I’m distress because things can stay cheap for long periods of time. And you talked about grease at negative yields a while ago. Well there was a time that, you know, Greece was trading at 60 and 40 cents and people would come to me and say it’s cheap and why don’t you get involved? And I said, well, it’s just cheaper than it used to be because when you want a debt, sustainability analysis is a 20 cent asset.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 18:53
So in the case of Pemex, you know, 4% for liquid credit versus 15% or 17% for your liquid credit. I think part of it’s the way that the markets are, are organized today, that that everybody has to quote stay liquid and they’re not allocating some capital towards the illiquid. But what’s broken is the banks, the prop desks, you know, we used to compete with prop desks on every, every desk on the street and they would crowd us out. Now they’re not there. And you know, we talked about Turkey earlier too. It’s like, you know, you can write mid-teens paper and Turkey only because the banks that used to spoil all the borrowers there aren’t, aren’t lending anymore. So that’s, that’s something broken there. When you take the case of Argentina and Argentina is this, it’s this feast or famine asset. And it’s a great example of what we’ve seen in emerging markets for long periods of time.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 19:39
But I also think it’s a good indicator what you can expect as a, as I’ve talked about these dislocations, you know, at the first part of the cycle when it was trading at 40 cents, the real money, long noise of the world didn’t want to participate in it. I think you even said maybe it was one of the most painful, not things not to have in your portfolio one period of time. Nobody wants to have it because all they’re seeing is yes, yesterday’s risk and they’re not seeing what they’re getting paid for it. Then you get the transformation and you get the, the a hundred year bond. When they issued that hundred year bond, they had been in default in 29 out of 35 years. That’s when we decided to return about a billion dollars of capital to our LPs. And we said, you know what, it’s kind of over that 40 cent bonds now trading at 118.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 20:18
We’ll give you a call when it’s back. And I think the other factor is did you make the call? About two thirds of it’s come back. So look, I mean that’s, that’s the way we’ve, we’ve thought about emerging markets. It’s a dynamic asset class. I don’t want to and multiple return streams, but for us it’s not about let’s be in Argentina forever. It’s not, you know, there’s times where it makes sense and absolute terms and times when it makes sense in relative terms. A hundred-year bond at seven and an eighth I’m trading up to a 105 made no sense to us. That same bond trading sub 40 makes a lot of sense to us.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 20:56
Questions, I can go on and we’ll go on. Questions. Go ahead please. Sir.
Speaker 1: 21:05
Robert, yesterday at a rough table, you refer to a concept called that critic culture looking at credit culture when you’re selecting, when that’s purging, markets were invested. Could you elaborate on that? Because I thought it was interesting.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 21:17
Yeah. So let me just repeat the question for people. Speak to this notion of credit culture investing.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 22:06
Yeah, that’s a great question. And I think emerging markets credit is like all other credit, but then there’s a lot more work. And I think at the end of the day you’re underwriting people, you know, and we talk about jurisdiction, you know, is it under New York law or UK law or what have you what are the collateral structures you have? But you know, all that service mitigation tool or risk management tool if you make a mistake on people. So that, so the first thing we think about is who are the people that we’re lending to? Whether that’s, you know, who’s the president, who’s, who’s the CFO’s, who’s the CEO? Who’s the family behind it? What’s is their behavior in the past? Been in times of duress to predict how they may behave in the future. And that’s all analysis of people and the notion of culture. And sometimes I’m too tight of a bias on credit culture, but you have these tire treads on your forehead that remind you of mistakes you’ve made. And you know, I still think of Columbia as a culture of payment. You know, they pride themselves on the fact that they didn’t go into the Brady debt restructurings when everybody else did. And I can still see that in corporate obligor’s today in conversations that you have a, we talked about Mexico yesterday. I think it’s a culture of collection. You know, if you work the credit and you have good credit rights, you’ll get paid. They may take a little bit more work. We’ve been in other jurisdictions where maybe credit cultures and oxymoron where ultimately they can have a bankruptcy that occurs in a remote place that creditors aren’t present and you read about what you’re getting in the morning. I’m not interested in that culture. So I think at the end of the day, if you do your people analysis right and your culture analysis right, then you’re willing to have to rely on the jurisdiction and the collateral.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 23:06
And Rebecca, how easy is it to judge credit culture?
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 23:07
Credit culture I think is very difficult, especially in this shifting political environment from the top down. We were talking about earlier just how you just brought up the example of CEOs being kind of side heavy handed into acting or running their business in a very, a different manner that’s going to filter down to the, the, the, the culture of any corporate. I will say we look to corporates as a spread above. So I mean, we like the spread. We are more confident in the ability to assess a corporate structure rather than a sovereign structure. And so we do believe in the, the future of emerging market corporates on your point about ability to strategically react to gaping liquidity events. We’re good at not selling. We have a very well-defined investment thesis and we’re confident where we are.
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 24:04
But taking advantage of the gape events is proving to be more challenging for us since we don’t really know where we are so we know where we’ve been, but we don’t know where we are. So therefore, how can we be confident about where we’re going? And from an investment strategy point of view, I think that is difficult and it creates asset allocation at a very broad level. It creates a, that makes it a little bit problematic in terms of having confidence. So we’re increasingly looking to the bottom up to understand where we are and where we’re going to go. So that’s earnings, that’s cultures. That’s really relying on the bottom up more so than I ever have.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 24:43
I agree that we don’t know where we are, but we can plan for different places that we might be. And mom, and I know you like football even as challenging of years has been for the jets, The 49’s are eight, and 0, by the way but you know, the PM’s in the room and they’re with me, they know that when I hire them, they, they get the wristband that the quarterback words and it says, plan the trade, trade the plan. And the idea is that you open it up. We don’t know where we are, but we can make plans for, you know, if it’s fourth and one if it’s, you know, two minute drill. So then when we get there, it’s just calm, you know, they only have 30 seconds to get the ball off.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 25:18
We’re the same thing. And when that, you know, these V-shape recoveries happen very quickly. So I don’t know what it’s going to look like, but I could set up plans for different places that we might end up. And that’s what I’m asking LPs to do at the same time as think about it now. And let’s, you know, let’s, let’s put the risk brand on and then when we get to, you know, third and third and 10, we know what to do.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 25:01
There was a question there. Is it still there? No, we have one here before that. Let me just see what the address. I have a very easy answer. Just give the ball away. You don’t have to worry about the word context please, sir.
Speaker 2: 25:52
One of the really is that ability and the driving group by Modo for all of these debt because technology especially in the specific technologies in the area of digital transformation and also the global connectedness by this digital enabled breakdown on the classical barriers. And in an emerging market, you’re really dealing with many chances. Do you have a different type of a boundaries? Is that with this really smart people could, that we design that boundary and the global connections to help those people can have the foresight to take the unfair advantage from which it does not have the insight, the digital connected world to be redesigned. So then we can balance the vulnerability bio steel and the global capital growth.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 26:44
Great question. Let me generalize it to technology. Climate change and demography is making the, the bi-modal world more likely. So is it an opportunity to leapfrog is what I hear you say to live frog for measuring markets or is it just a set of additional headaches?
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 27:21
Oh, well I think that all those, the objectives and a degree of planning in any one of those areas for any particular emerging market, sovereign or corporate is going to justify investing in that, that corporate or sovereign, I mean those are the objectives. Those are the, the IMF, all SMA, many central banks, not the U S for example because it’s clearly a across Europe climate change is very, very important. So coming in line, that’s one reason you like, or people have like in the recent past central and Eastern Europe, they’re ahead of the game in terms of climate change and climate change. And that’s a job objective driven by the EU as a whole. So I think any margin market that can accommodate that, investors will want to be a part of that growth.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 28:06
I was going to respond to the digitalization part. And I think the cool thing about digitalization as it relates to emerging markets is, is the transparency of information and the quickness of the transmission of that, of that information. And that’s always been one of the disadvantages in EEM as an investor is, you know, can you get good information and can you get timely information and reliable information. And so I think the digitalization, you know, really simple strategies like, you know, data mining, social media to observe events is available today where it wasn’t five or 10 years ago. And I could give one really quick example, which is the mining disaster that happened in Brazil last year. You could for volley, you could imagine 25 years ago that might not even have made Bloomberg or Reuters or what have you.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 28:51
You know, it hit Bloomberg at 11/10. It was on social media at 10/50. It was out in the open and it wasn’t who happened to be at Bloomberg and who wasn’t Bloomberg, it was all over social media. So I think there’s all, you know, all sorts of cool applications. You know, someone asked me once, aren’t you worried about AI and digital and all that and that you, the investing is going to become mechanized and what have you. I’m actually really excited about it because we have this opportunity to get information, better information faster than we used to.
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 29:18
And it is driving market pricing as well. So I completely agree with that. It’s really very interesting. It brings it almost co it’s confusing at times too. It brings so many central, so many issues to, you have to discern and delineate which ones are important. But if you can create some of those things, create a market event and the fundamentals really haven’t changed. It’s an opportunity. So I’ve seen more pricing moves since this digitalization has come on. And you have to understand how the fundamentals changed or is this just a market move based on some new information?
Speaker 3: 30:00
Is this on? How does that affect a market like Chile with the events in the last month compared since 85, 97.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 30:11
Not the way you would have expected yet. So you know, we’ve seen the transparency, we’ve seen the information and the markets had the ability to react and it really hasn’t. And I would say not yet. And I think that similar Peru, it’s like, you know, we’ve been able to watch this unfolding of a constitutional crisis you know, and you know, they have special prisons improved for former presidents and I think five of the last, you know, presidents are in jail on the way to jail or shot themselves on the way to jail. It, you know, the problem is that’s all available to us and we see it and in the world that we live in this liquid world and this, this, this complacency world, it hasn’t mattered. And I, you know, I wish we had polling software. Cause if I described Peru and I asked you like, what spread do you think that trades at? You know, you would, most people told me six, seven, 800 today trades at, around 40 over. And that’s because the Chile, because Chili’s at 35 and so Chili’s like perceived to be the best credit in the market. That’s the anchor for the compression trade so to speak. And until that blows out, the rest of it stays the same.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 31:13
What you picked on trading let me pick on Hong Kong. How do both of you think about Hong Kong? Is it systemic?
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 31:21
I just noted so from a top down point of view in relation to Chile, I think the market is writing off this idea of some elements of security risk and political instability. So Hong Kong falls into this category and Hong Kong of course has fiscal stimulus it can add to, to offset some of the economic pain. But there’s, it’s really hard. It’s increasingly difficult for me to price country risk as it pertains to political instability and some elements of security risk. So we talked about Saudi Arabia earlier today, half of the oil production being taken out, spreads are back to one 25 or whatever they are. You know, so it’s the, these, this idea of security and political risks are being discounted very heavily in the market. And I think that’s one thing that’s contributing to lower value stretched valuations.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 32:14
I mean in the case of Hong Kong, what’s clear to me is that we’ve seen a change in the state of nature in terms of the way that that Hong Kong was perceived as a safe Harbor. And I think we haven’t seen the full implications of that, but we have seen quite a slow down in some things. But you know, the, you know, 10 20 years ago was like you could either go right to China and there was advantages and disadvantages that, or you could kind of play it safe in Hong Kong. I think that play it safe is, has kind of, that’s the change in the state of nature and back to digitalization. You know, we’re only talking about because not really because it’s necessary on the news because we also on an Instagram first.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 32:49
It’s so modern Twitter, Instagram, Snapchat.
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 32:57
And probably to the extent that she gets further involved in Hong Kong that will be more of a reflection on China and what’s going on in China. The power consolidation than it will per se. I think on Hong Kong over the near term.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 33:09
One last question. Okay, I’ll take it. Well, and then I’m going to torture you a little bit. Robert, you said it’s going to happen and it is a 20% leg down in the EM if I heard you correctly, is that correct?
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 33:29
Not 20%. Present on average in the past had been a prospectively 27 yes. A dislocation will occur.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 33:34
Okay. Define first dislocation because these days 1% of dislocation innovation.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 33:41
So on average the nine of them have been down about 20%. So you know, either side of that, a material dislocation that what people say today, like, wow, the market got wasted. It was down 30 bips yesterday or two or 3%. I’m talking about something meaningful 15 to 20%.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 33:53
Okay. And then I’m going to leave you in wiggle room. Within what period?
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 34:02
Can I ask why a senior advisor?
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 34:09
Okay. Within what period?
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 34:13
Inside of three to five years, while I was saying I think it’s, I’ll give the same answer I give to regime change in, in Venezuela. It tends to happen later than you expect and then it happens sooner than you were expecting. But you know, I, I would say that you know, I think you’ll see something meaningful in the next 12 to 24 months.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 34:33
This is so counter cultural. I didn’t wear a tie because I thought I was coming to Greenwich and, you know, headstones and relax. Everybody’s in a tie, including the hedge fund person. I thought granite was supposed to be specific. You sound more like Washington DC phone service. You don’t want to go with anything more than that. Okay. Rebecca, do you agree that it’s coming?
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 34:54
It seems inevitable. There’s just, it’s been too much of a one way street. We’ve had small liquidity events that we were talking about Q4 of 2018, something like that magnified could be coming. The global central banks are less and less capable of propping up the markets. I mean, it’s eventually fundamentals have to take over. Earnings are slowing, the economy is slowing. That seems undoubtable to me.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 35:18
So how do you get given, given that institutionally, you said it’s very hard to buy when, when price I’ve just kept, yeah. If you think it’s inevitable, quote unquote, how do you plan for it?
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 35:37
Well, unfortunately we’re not in a great position to plan, but we would have start allocating now toward emerging markets and being very specific about not where we want to be per se, but what we want to be in. Unfortunately the fundamentals right now just to me don’t justify it. So until I get a little bit more comfortable with China’s next year and a half to two years, fundamentals until I get a little bit more comfortable with the US election cycle, I think we’re not going to be big in to allocating ahead of that.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 36:02
So, Robert, what’s the structural solution to the behavioral problem of you don’t allocate when you really need to allocate?
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 36:10
It’s psychology. I mean it’s, I mean, you talked about it before, which is in your panel this morning. If we’re have these two different outcomes, why not just talk about it now? I mean, you know, everyone’s been bellyaching for years. If there’s no volatility, I can’t make any money with volatility. And then volatility comes and everybody freaks out in the height on under the table. So whatever it is, and, and you know, it is been happening already. You know, it can happen on a idiosyncratic basis in different countries. You know, it happened in Turkey last year. It’s happening in Argentina today. It happened in Brazil. And I think you could have anticipated all three of those and you could have underwritten it ahead of time. The psychologist said, yeah, wow, that 105 cent bond. If it ever went to 40, of course I would want to buy it. Then it goes to 42nd. No, no, no, no. Everyone takes the same amount, the same information, the difference between a bull market and a bear market. It’s just what interpretation you put on it. But I think the way you have to set up it’s in, you were talking to Julian about, it’s about psychology. It’s about, it’s going to happen, right. And just embrace the fact that it’s going to happen and embrace that as an opportunity and underwrite that opportunity and then stick with your plan.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 37:17
We have two minutes and the bit that I hate when I’m on the receiving end, but I love that I’m not on the receiving end. Okay. Here’s the rules. You can only say longer. Short. Okay. That’s the only answer that’s admissible. Only four questions, you ready? We want to, you can volunteer Robert first. US recession sometime by the end of next year.
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 37:57
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 38:01
By the end of next year, 2020? Yes.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 38:06
Down 20% in emerging markets by mid-year next year?
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 38:15
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 38:18
Clarifying question, because emerging markets is a broad labor
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 38:19
In the emerging market and the emerging market, I’ll give you the bond in there.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 38:24
Down 20% of the next 12 months. No.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 38:27
And then the EM equity?
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 38:30
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 38:31
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 38:33
I didn’t give you the distinction. So bonds.
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 38:36
I was answering bonds.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 38:38
Okay. And equity.
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 38:39
I think it’s, there’s fair evidence that earnings are slowing, so yes.
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 38:42
Okay. Is Argentina buy or sell?
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 38:45
That’s a firm hold until better under, sure. There’s a lot to love about Argentina in the medium to long-term basis, but I just need to be more comfortable with that. That’s actually going to happen over the next two to three years. That’s why we let people call.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 39:12
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 39:14
Sorry for this. President Trump gets reelected.
Robert Koenigsberger – CIO/Founder, Gramercy Funds Management: 39:18
Rebecca Braeu – Head of International Research & Strategies, Nationwide Investments: 39:19
Mohamed El-Erian – Senior Advisor, Gramercy Funds Management: 39:24
Join me in thanking our panelists.
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