Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: And now onto today's show.
Speaker: Welcome to the Emerging Market Spotlight, a podcast series from HSBC.
Speaker: The emerging markets landscape is more complex than ever at a time of divergent monetary policy, high commodity prices, supply chain disruptions, and geopolitical tensions.
Speaker: Join us as we speak with world's leading institutional investors, experts, policymakers and thought leaders to explore the challenges and opportunities.
Speaker: Make sure you subscribe to HSBC Global Viewpoint and stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now on to today's show.
Speaker: Hello and thank you for joining us today.
Speaker: My name is Dr. Murat Ulgin.
Speaker: I'm the Global Head of Emerging Markets Research at HSBC.
Speaker: Today, I'm going to be talking to Mary-Thérèse Barton, Head of Emerging Market Fixed Income at Picta Asset Management.
Speaker: And we'll talk about emerging markets, especially at a very challenging juncture with the global environment, with so many things moving on with risk of
Speaker: slower growth, recession, high inflation, hawkish center bands, so clearly very, very complicated external backdrop.
Speaker: So let me briefly introduce my guest.
Speaker: Mary Therese Barton has been in the industry for over 20 years.
Speaker: She joined Picto Asset Management in 2004, and she is now the head of Emerging Markets Fixed Income.
Speaker: Before taking up her current position in 2018, she was a head of emerging sovereigns and senior investment manager in the team.
Speaker: Prior to joining PICTE, she worked at Dun & Bradstreet, where she was an economist responsible for European countries.
Speaker: So Mary Therese, welcome and thank you for joining me today.
Speaker: Thank you, Murat.
Speaker: I'm looking forward to it.
Speaker: So Mary Therese, I know that emerging markets have been a long-term passion of yours.
Speaker: Can you tell us a little bit about your background and what attracted you to this asset class?
Speaker: Absolutely.
Speaker: You're quite right.
Speaker: It's been a passion and that passion was ignited at a young age via the school I attended.
Speaker: It's part of a broad community of schools worldwide.
Speaker: And I visited communities in Ghana and Udanda for over four summers.
Speaker: at a very formative age where we built those linkages and it really fired the decision to focus my studies on economics and politics.
Speaker: And while I did that, the focus again really fell on the politics and the economics of emerging countries, Sub-Saharan Africa and South Asia, and really that interest developed from there.
Speaker: And really it was the Halkian days, was it not?
Speaker: You know, and there's the campaigns of Jubilee 2000, there was talks about the future and the optimism
Speaker: regarding emerging markets, which was really an exciting time to start in the industry.
Speaker: But Marit, what about you?
Speaker: How did you get focused on emerging markets?
Speaker: I mean, your story is amazing.
Speaker: I think in my case, it's fair to say that I've been looking at the emerging markets all my career.
Speaker: It's more than a quarter of a century.
Speaker: It sounds pretty long if I say it this way.
Speaker: I started off as the Turkey economist for a few banks and then finally for HSBC and then broadening my coverage to Central, Eastern Europe and eventually all emerging markets.
Speaker: And I think it's fair to say that emerging markets as an asset class started to surface more like early 2000s, which kind of coincides with the earlier part of my career.
Speaker: Previously, it was mostly euro bonds, external debt.
Speaker: But then it really became a lot more broad based with different instruments.
Speaker: And it always fascinated me.
Speaker: Lots of ups and downs, cycles, weaknesses, volatility, but then strong growth.
Speaker: And I also think there is so much catch-up potential.
Speaker: I mean, if you look at emerging markets today, they make up more than 60% of world GDP.
Speaker: They contribute more toward growth.
Speaker: But then in the equity indices, it's only 20% of market capitalization.
Speaker: It's only 10% of global world indices.
Speaker: So I do believe there is lots of catch-up potential, especially these days.
Speaker: I'm a lot more passionate about emerging markets because I try to look at developed markets from the lens of EM, especially when it comes to
Speaker: Volatile and high inflation.
Speaker: So I make that connection and really excites me a lot.
Speaker: So why don't we talk a little bit about the investment backdrop?
Speaker: And clearly, it is rather difficult out there.
Speaker: And obviously, one of the major headwinds for emerging markets is
Speaker: these hawkish global center banks fed has hike rates in a pretty large step and other central banks are combating inflation so global cost of funding is going higher and perhaps my first question to you and obviously very happy to give my view as well how do you think this is impacting em at the current juncture
Speaker: It's absolutely the question at the top of our mind and also at the top of our investors' minds at the moment.
Speaker: We can already see it in returns across the asset class, how it has impacted returns.
Speaker: So if you look at the breakdown of our local currency debt index, the majority of the negative returns has come the interest rate component, where we have seen the biggest drawdown happen in the duration component of our index.
Speaker: And similarly, in hard currency debt,
Speaker: Again, one of the largest proportions of the negative drawdown has actually been from the Treasury component of the total return.
Speaker: So we're seeing that.
Speaker: But it has been more than that.
Speaker: And how that feeds through to financing, we're seeing in particular in the high yield spread markets of our index, which is 50% of our overall universe, which is trading close to 1,000 basis points.
Speaker: And really, that is really reflective of the more stress financing conditions that we're seeing in EM at this juncture.
Speaker: And perhaps just to follow up on that theme and maybe slightly shifting gears, I mean, there is clearly lots of focus on global cost of funding, Fed funds rates, and very understandably so.
Speaker: But I feel like there is not enough discussion on an equally important topic, which is the quantity of funding, which is global liquidity.
Speaker: And obviously,
Speaker: the Fed has started shrinking its balance sheet in June in earnest, and they're probably going to size it up towards the end of the year.
Speaker: That's the plan.
Speaker: So I wonder whether you think this is important for emerging markets, is it relevant or equally relevant?
Speaker: And how is it impacting the asset class sort of in the background with global liquidity environment changing?
Speaker: Clearly, it's not just about the rate rises.
Speaker: I think we have to figure more broadly in terms of the tighter liquidity conditions and QT and what that means.
Speaker: And
Speaker: I would actually propose to a degree, again, that that's in the price.
Speaker: When we look in particular in the spread market and look at overall spreads in NBIG around 500 and, as I said, the high yield portion, they're really trading at these distress levels across many individual names.
Speaker: And I also think it's being shown in terms of issuance that we're seeing as well.
Speaker: So we're seeing US financials come to market and there is a concern, but actually EM issuers who do need to come to market are getting crowded out as well.
Speaker: So there is a sense in particular when we look at the financing needs of emerging countries going forward, but the longer this goes on for, in particular, as you head into 23 and also 24, when the rollover needs actually become more acute in these markets,
Speaker: is how will that actually feed through and what will that actually mean for our markets in terms of very basic financing requirements, back of the envelope calculations.
Speaker: But so far, we're not seeing the issuance.
Speaker: When we do see issuance, as for example, we saw in Indonesia, it has been performing relatively well, but there is a reluctance for emerging markets to be coming to market.
Speaker: And I think this is going to be feeding through more generally in terms of how we think about financing in an asset class, which has changed hugely from when you and I started.
Speaker: So when we were starting our careers, you could probably
Speaker: count between our two hands, probably our investable universe.
Speaker: And actually now we're talking through from frontier markets through to manufacturing high grade countries.
Speaker: EM is really the catch all.
Speaker: And I think you and I have discussed more over the years is sometimes emerging markets are right term because we go through from discussing some of our high manufacturing countries in Asia through to sub-Saharan African, more frontier type markets.
Speaker: So
Speaker: Moet, at this point, we can't talk about the Fed and we're not being able to talk about emerging markets in relation to Fed and quantitative tightening without talking about inflation and also without mentioning global supply chains.
Speaker: What are your views here?
Speaker: Well, I think you're absolutely right.
Speaker: I think the word has been on this demand and supply imbalances for quite some time.
Speaker: which is the primary cause of high inflation from a cost perspective.
Speaker: And perhaps there is a bit of a good news recently.
Speaker: We are seeing the pressure on supply chains easing and Baltic Dry Index has actually fallen a lot.
Speaker: There was an episode late last year where the supply chain stress was coming in lava, which encouraged us a lot.
Speaker: But then this was interrupted by the war.
Speaker: between Russia and Ukraine and we had another disruption to supply chains.
Speaker: But over the past month or so, there is a genuine improvement and commodity prices are coming in lava, which should help contain inflation.
Speaker: And there are certain parts of emerging markets, particularly Latin America, where actually the producer inflation has been coming in lava and with some lag, this may have an impact on consumer inflation already
Speaker: In countries like Brazil, inflation is losing momentum.
Speaker: So I think there are some good news from supply chain, but this is maybe near-term cyclical, more long-term and structural.
Speaker: You can make an argument that we have been in this era of, I call it reversal of earlier globalization gains.
Speaker: with trade tensions that started even before the pandemic and then pandemic came in waves and then obviously disruption by the war and all these things where global trade becomes a smaller part of global GDP, where EM's trade openness is going in lower, where there are reshoring and regionalization trends rather than globalization.
Speaker: They are adding unwanted cost layers on inflation and they are lowering economic activity as well.
Speaker: But perhaps tying it from here to lower growth environment or even a recession in some parts of the world, ironically, sometimes low growth and recession can cause inflows to EM, maybe more on the fixed income side, if it contains rate rises.
Speaker: What is your view from an asset allocation perspective?
Speaker: Can we enter an episode as such?
Speaker: It's interesting you ask that question and also putting it in the context of the debate you've just mentioned about globalization and, you know, the era we're in at the moment.
Speaker: And
Speaker: We are in terms of positioning, particularly in EM local markets at five to 10 year lows.
Speaker: So no could argue that was another form of a sign of de-globalization is there was a much less sense of asset allocators wanting to look at EM local markets.
Speaker: However, we think it's more nuanced than that.
Speaker: And actually a lot of the discussions we're having now in particular, thinking about, you know, globalization of services and regionalization and French shoring, et cetera, that you've mentioned before.
Speaker: is actually feeding into the consciousness of asset allocators and actually also understanding some of the pitfalls of de-globalization and what we've seen with Russia and the impact that's had on developed markets is, I think, actually begging the question among a lot of our large institutional investors is what will this world continue to look like?
Speaker: And actually thinking, arguably, that it's going to be a step too far for this path to continue in terms of the pain it's going to inflict on developed markets as well.
Speaker: And
Speaker: I think the pain we have been seeing in developed markets is actually almost perversely encouraging asset allocators to look again at EM.
Speaker: It's often a discussion that we have is, you know, we talk about EM and a potential for convergence, which you mentioned at the beginning of our discussion, that convergence can work the other way as well.
Speaker: Some of the trends that we've been seeing, income inequality in developed markets as well, and again, making it very blurred in terms of EMDM.
Speaker: But regarding asset allocators and recent flows, we're starting to see a pickup in interest and
Speaker: There's very much an interest in terms of thinking, well, if we think about poor growth in DM, while there may not be a big poor factor to EM, it's the difference between EM and DM is looking not as bad as perhaps in the past when they're thinking about the disappointment in terms of reform, etc.
Speaker: And we've actually seen periods, I'm thinking 94, 96, even 09 to 2011, when actually weakness in developed market growth
Speaker: we did see asset allocators move into EM and we did see good capital flow into EM and potentially we're at that juncture again.
Speaker: And I think that's incredibly interesting.
Speaker: And just from a valuation perspective as well, when we think about 500 bps in spread on MB and we think about yields of 7% on EM local,
Speaker: there is an attractiveness that asset allocators are looking at in EM fixed income in general.
Speaker: Those are all great points.
Speaker: And maybe at this juncture, I can ask you, how does China fit into the picture?
Speaker: I think we should open up a chapter on China.
Speaker: We saw 11, 4EM from a trade perspective, capital markets connections, renminbi currency, a lot of related areas and the linkages between China and EM.
Speaker: So how do you see the outlook from here?
Speaker: Clearly an important party conference is coming up.
Speaker: But maybe it's fair to say that there has been a bit of a divergence in cycles between China and the rest of the world or emerging markets because of zero COVID strategy.
Speaker: There are clearly certain challenges.
Speaker: How do you see the growth outlook from here?
Speaker: And to what extent this is going to be important for emerging markets maybe going into 2023?
Speaker: China is always an important factor in how we're thinking about EM.
Speaker: Indeed, those periods that we spoke about previously when we saw capital inflow into EM, one of the pull factors was the structural narrative surrounding China, integration in a global economy, the impact on commodities, the impact on the narrative of globalization as well.
Speaker: And I think you and I can agree the narrative has changed significantly.
Speaker: If anything, our views on China right now are quite nuanced.
Speaker: We think we are over the worst in terms of sentiment towards Chinese growth.
Speaker: We see continued revisions lower.
Speaker: We ourselves have been revising our outlook lower for Chinese growth as well.
Speaker: However, we do recognise we're at this important juncture coming into October and Congress and how that's going to be feeding through into perhaps some nuances in terms of the policy.
Speaker: Ultimately, there's recognition that there's going to need policy support on the monetary, on the fiscal side, but there's also a real sense it's going to be piecemeal.
Speaker: Now, are we going to be seeing that big bazooka which really turns the cycle and turns the narrative for emerging markets?
Speaker: We think not.
Speaker: So at the margins,
Speaker: It's going to be more of a nudges in a positive direction and a move away from the more overt negativity that we've been seeing in the market as we've seen kind of a zero COVID policy lightening up.
Speaker: And perhaps we see more of that going into the end of the year post-Congress.
Speaker: Perhaps we see the narrative regarding common prosperity start to be much more nuanced in terms of how it's reflected.
Speaker: We start to see that it's that delta that move away from that extreme negativity that actually can have more of a drive on sentiment in our markets.
Speaker: But we're not going back to those Halkian days of WTO recession in terms of, you know, a big bazooka.
Speaker: But I think that just that stepping away, that delta, that change from the extreme negativity, I think is going to be meaningful in and of itself.
Speaker: And I think it's great to talk about EM other than China.
Speaker: And I think on the flow side and the asset allocator side, one of the reasons we weren't seeing flow into our market potentially was actually for crowding out of China for the rest of EM.
Speaker: So actually now, perhaps this is creating more space to look at Yemen and more understanding the idiosyncratic opportunities, the huge diverse opportunities in our space, away from solely the China narrative.
Speaker: You're spot on.
Speaker: You and I, we both know EM is not a homogeneous asset class.
Speaker: There are so many different stories, idiosyncratic bottom-up.
Speaker: One good news about emerging markets is perhaps more the technical picture.
Speaker: I mean, obviously, fundamental outlook is quite challenging, but the technicals are very supportive in the sense that
Speaker: In certain cases, valuations and return profiles are attractive.
Speaker: Sentiment is already very depressed.
Speaker: Positioning is very, very low.
Speaker: We do this emerging market sentiment survey every quarter.
Speaker: And for the past year and a half, in the previous five, six surveys, institutional investors have been constantly increasing their cash levels.
Speaker: If you think from the other side, when conditions stabilize, when there is attractive investment opportunity, there is cash that could be put at work.
Speaker: But maybe I can ask you in that sense,
Speaker: Are there areas for optimism where you would expect institutional investors to deploy their cash?
Speaker: I mean, we all talked about global macroeconomic challenges, but individually and idiosyncratic, there are certain areas which look relatively better than the others.
Speaker: So what are the areas of optimism in your view?
Speaker: There's always areas for optimism in emerging markets.
Speaker: I think that's the beauty in our asset class as well.
Speaker: And I think actually all EM investors and economists at heart need to be optimists.
Speaker: I think that's what keeps us in
Speaker: in the business.
Speaker: But I think there is some regional dispersion.
Speaker: And that is something that we're discussing a lot more within our team.
Speaker: And I think the one which is clearer to us, really, at the moment is LATAM v. Asia.
Speaker: LATAM, in particular, with regards to monetary policy, and the potential in particular in the local bond markets.
Speaker: And I'm thinking Brazil here.
Speaker: When they were hiking rates, they went fast and they went hard, close to 1,200 basis points of interest rate hikes.
Speaker: And actually, this is the first market where we've started to see inflation momentum start to turn.
Speaker: And we're seeing that across many measures.
Speaker: Rather than just following the inflation prints, we were getting too many false signals.
Speaker: We've been focusing on that momentum.
Speaker: And as we start to see that come lower, there is a sense that
Speaker: And we can see the risk premia, particularly on the long end of those curves, start to come down.
Speaker: Now, we're not going to say that we're going to see significant policy rate cuts and potentially not.
Speaker: We are more in the camp of rates higher for longer.
Speaker: But we do believe the success of risk premia in these markets should start to come lower.
Speaker: And actually, if we're not going to see the policy rate cuts, that's a strong anchor more for the long term.
Speaker: You know, with an anticipation, we could start to see inflation come lower.
Speaker: And we've
Speaker: watching very closely the data in Mexico, the data in Colombia as well.
Speaker: And then this also feeds into the narrative regarding the French shoring that we potentially see.
Speaker: And, you know, Mexico is a case in point here.
Speaker: Obviously, I'll stand corrected, Murat, I'm sure you know the data, but there was time at the beginning of our careers where the concern was unit labour costs in China v. Mexico and the implication of that.
Speaker: Well, actually, that's turned on its head.
Speaker: And I think there's some really interesting aspects that we'll be exploring in the next few years about how these new trading relationships will develop and where we do see supply chains developing as well.
Speaker: Excellent.
Speaker: So maybe one last question to Amir, or a discussion that we can raise is, you know, clearly the way emerging markets are funded is changing and there are new vehicles in the market.
Speaker: So what do you think about sustainable bonds as a part of your portfolio?
Speaker: How is the outlook in your view?
Speaker: It's becoming a more important part of our job, just in terms of the amount of issuance.
Speaker: So last year in the sovereign space, it was close to 20% of primary issuance was ESG-labeled or a sustainable bond, whether that be green-labeled, social-labeled, sustainable-labeled.
Speaker: So really, it's just having to be part of our toolkit in terms of how we think about emerging markets.
Speaker: But I feel quite passionately that there needs to be a reason why you would own that sustainable bond v...
Speaker: a conventional bond.
Speaker: And that really feeds into the concept of being able to have the see-through in terms of use of proceeds and actually being able to have those discussions with the issuers that you and I and all our colleagues in this industry are really privileged to have to actually talk about more of those longer term sustainable outcomes.
Speaker: So you and I have been talking about financing and QT and impact of Fed policy rates rise and what that's going to be meaning for emerging markets right here, right now, but actually
Speaker: this gives us the benefit and the privilege of being able to really talk about the long term for our markets and really maybe tackle some of these issues that you mentioned is what is holding back convergence?
Speaker: You know, what is it about productivity, investment in human capital?
Speaker: And now this is, we're being given more of an opportunity to have those discussions through the invent of this market in sustainable bonds.
Speaker: And I think it's going to be growing as well, just
Speaker: in terms of the amount of capital for regulation or from our asset owners who are going to have more sustainable criteria linked through to their investment case.
Speaker: And actually for EM, I think that's a great investment case for positive change and impact.
Speaker: And I think this is going to be a really important part of the conundrum for us in our next stage of our careers, the next 20 years.
Speaker: Fascinating, fascinating discussion, Mary Therese.
Speaker: Thank you so much for joining me today.
Speaker: But perhaps before you go, I can ask you a question more on a personal level.
Speaker: So is that a book that you've been reading these days or any podcast you've been listening to that is inspiring you?
Speaker: I'm reading the book everybody's been reading, which is Putin's People by Catherine Belton.
Speaker: I think if you asked any EM investor, it's been a really difficult year.
Speaker: Actually, I think back to my early career and probably one of
Speaker: The assets I traded the most was the Russia 30s.
Speaker: And then March came along and it was a market that was closed, but not only a market that was closed.
Speaker: Friends and colleagues across the industry that we had, where interactions also ended as well.
Speaker: And it was a real, felt like a break point in the narrative from the start of my career and brought us in in terms of this optimism and really trying to understand it more.
Speaker: And I would highly recommend it.
Speaker: Fascinating, fascinating book.
Speaker: Thank you so much, Mary-Thérèse.
Speaker: I think it was a great discussion.
Speaker: Really enjoyed it.
Speaker: Talked a lot about emerging markets.
Speaker: We talked about the macro challenges, FEDs twin tightening, supply chain issues, the outlook for China growth.
Speaker: We've also talked about opportunities.
Speaker: They always exist in the EM space, such a diverse universe.
Speaker: And Mary-Thérèse has kindly reflected her own experience in various parts of some new funding vehicles.
Speaker: She made great comparisons to the past when
Speaker: there is a slower growth in the global economy.
Speaker: Sometimes emerging markets do get inflows, but then the funding is changing as well.
Speaker: And obviously the concept of globalization or its reversal or the reversal of earlier gains is a structural phenomenon.
Speaker: So we'll talk about near-term cyclical issues, long-term structural issues.
Speaker: Hope this was a useful podcast, but please do follow up if you have any other questions.
Speaker: Thank you for listening.
Speaker: And Mary-Terez, thank you very much for joining me today.
Speaker: Thank you for joining us for this episode of Emerging Market Spotlight.
Speaker: We hope you enjoy the discussion.
Speaker: HSBC is uniquely positioned to connect investors and corporates internationally.
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