$11 Billion EM Investor Is Sticking With Brazil Despite Strike

in Brazilian supermarkets have dwindle, flights have been canceled. Many schools and universities have suspended classes, all because of a truckers strike. Paul McNamara is Investment director for Emerging Markets for g A m UK Limited, helping to manage more than eleven billion dollars in developing world assets, and he joins us from London. Paul, explain what's going on in Brazil. Well, what we've seen is a combination of the high oil prices that we've seen everywhere UM, plus a weakening in

the Brazilian rail um. You know, there's a bunch of things gone on lower. They've had big interest rate cuts there. It's one of the most popular emerging currencies, so there's emerging currencies have sold off, but that combination means that the price of oil in rail has really shot up. And um, and you know it's not just Brazil. About sort of four or five years ago. We actually a bit longer, we saw something similar in the UK when

tax raises on fuel. Truckers are the people in the modern world with a lot of power, and the government has to respond to that. Okay, So, Paul, thank you so much for being with us. I'm struck by the idea that we've had so off in emerging markets. More broadly, people were talking about Turkey and Argentina's idiosyncratic issues. Brazil was supposed to be a recovery story after just emerging

from the worst financial crisis on record. Uh and here we are seeing something that will crimp growth, potentially eliminating two point six billion dollars from their economy this year. So as an investor, how does this change your perspective

on Brazil? I mean, I think it's a demonstration of something that we already knew that Brazil was vulnerable on because I mean, the government has has effectively surrendered to the to the truckers by agreeing to absorb any further rises in the price of oil, that they'll they'll create

subsidies as the price of oil goes up. Now, of all the emerging markets, Brazil is in one of the weakest positions to do so, although they've had some success in tightening fiscal policy because they pay much higher interest rates than anyone else. It's the one country where where the fiscal rather than the private sector is a bit of a problem. And I think, you know, that's why

Brazil has been particularly badly hit. And also I think if you if you look at Petrobras, which is the company which is going to be bearing the brunt of this. I mean, their their share I mean I'm not an equity investor, but their share are off about fifteen percent or so in a week now. Michelle Tamara the president of Brazil. He's got a lame duck government and there's a presidential election in October. Does this mean that you wait until the results of the election before making an

investment decision. I think it's you know, it increases the risk. I mean, what's different about Brazil this time around is that historically it's been the highest yielding emerging market. If you kind of go back to two thousand and thirteen, they were in the middle of a hiking cycle kind

of rates peaked in low double digits. Now we've got a headline celebrate around below seven percent, which is, you know, which is historically very low by Brazilian standards, and it does mean that the price of waiting has never been lower. So I think you know that the you know that, whereas historically, you know, if you do, if you just sat still in Brazil marked time, you made a decent profits.

I think the calculus is against Brazil and people are going to be less willing to hold low yielding Brazilian assets than they were high yielding assets in the past. So, Paul, how are you currently thinking about Brazil? Are you buying more? We're holding onto what's a what's a pretty substantial and to be honest, slightly expensive overweight we've held for some time. I mean, two things stand out for us in Brazil

at the moment. One is that this government has actually may you know, combined with an economic recovery, has made a dent in their fiscal problems. They have about half the primary deficit from three percent of GDP to just over one and a half percent. And at the same time they're running trade surplus is bigger than they did in the peak of the commodity bubble, of around five and a half billion dollars a month. So that combination of decent activity numbers and a very strong external balance

is something that we think should be supportive. The trouble is that when the U. S. Dollar is strong against the developed markets, it tends to be very strong against em and that's when we're caught. At the moment, Brazil is no place to try and fight a stronger dollar story. So, putting aside the currency issue, which nobody can seem to have much confidence in right now, if you talk to people that have a view on the dollar, and then

quietly they'll say, but I have no idea. Um, I'm wondering, though. You talked about the export balance and how Brazil is such a big commodity exporter, and I'm wondering, given the fact that this trucker strikes so directly affects that industry, specifically with the soybean exports, how does that change or alter your view on your positive outlook on Brazil. I mean, I think you know this is this is that long

standing an issue you know. I mean e M isn't that different different from d M in that investors can bear in mind one or factors bit national disasters or strikes. So you know, if we see slightly wobbly activity data, if we see slightly if he trade data for a month or two, I think I don't think that's going to be that that's going to be a problem. You know, it's the structural situation that investors are looking at. Yeah, I mean, I think we're probably going to get some

ropey numbers, but that's not our our biggest concern. What about the reform of the pension system in in Brazil? Isn't that the sort of the key issue? It is absolutely a key issue, and you know it's one that investors remain generally quite bullishly biased on that. You know, although President Temor himself isn't particularly popular, the balance in Congress is broadly space broadly speaking centrist. And you know, if we get a pension reform that's that's correctly put

together or you know, in some way politically palapable. I think the consensus is still that that should pass. Um if we get closer to actually getting that through, that's that's clearly going to be a positive because Brazil stands out, as I said, as the one emerging market where the government balance sheet, you know, rather than in Turkey where it's the banks which are the problem. But they absolutely You're absolutely right, they do need to fix that, that

pension reform. Paul McNamara, thank you so much for joining us. So wonderful to have you. As always. Paul McNamara is investment or actor for emerging markets at GAM UK Limited with about eleven billion dollars in developing world assets. Joining us from London. We've been talking a lot about Italy today, in particular how markets are in turmoil in Italy as a result of the populist movement and increasing euroskeptic sentiment

that is sweeping the government. But how is this affecting businesses. Let's bring in it Fernando napolitan No. He's President and chief executive officer of the Italian Business and Investment Initiative based in New York, although he is in Rome right now. Fernando, thank you so much for being with us. So what is the word from chief executives who you speak with in Italy about what's going on with the political sphere

right now. Well, as you know, it's been quite a particularly new situation even for Italy that is used to along negotiations, So there is uh, let's say that there

are two views. The first is that the President of Republic acted in the supreme interest making sure that there is order at least in the processes of forming a government, and I think it's given a very clear message that Italy is strong and solid within the Euro and will be respecting the European agreements starting from serving to that and of course the member of the euro currency. The second is, of course there is a general moral azarre by the population in Italy, and I think this is

also the result of the quantity vision. There is this general unfunded perception that there's there's gonna be somebody who's going to footing the bill ultimately, and it's going to be the central Bank, and I think this is what has been fueling the discussions, especially over the last three weeks, that have created anxiety in the market, and also the difference between the Italian bonds and the German bonds that

have skyrocket as we're speaking. And so this is something that I am expecting CEOs to take the lead and in addressing UH these issues more broadly, especially visa v the investors and the dead holders that as you know about of the Italian dad or two point seven trillion euros,

it's owned by foreigners. Fernando Napolitano, do you believe that whoever becomes the prime minister or indeed populates the Italian government or to brush up on their German language skills, you know, And there's always been UH, you know, hateen lo of in UH, in the relationship with with the Germany, and of course on the emotion that have been comments that I would not subscribe. But angel A Miracle, I think I made a very clear statement visit the Italy

and the respect that Italy Italy deserves. The new prime minister or appointed prime Minister A Carlo Corelli, I think is a huge job again, you know, in the next couple of weeks, making sure that he explains and communicates well to the Italian people. What is the status so that UH September's election. This is pretty much the Framewords

agrees upon. We will have a cognizing electorate that will go to the ballots, understanding that it is not a lot of a leeway considering the fact again that we have a hundred percent of the GDP in terms of depth and and and any comparison with Japan is not founded because Japan it's all internally owned, so that there is uh, there is a bit of relationship going going

with Germany. But we are confident and we're sure, especially the business imunity, that the number one partner of Germany in Europe cannot be a defaulting and we're expecting a lot of help coming from Germany. So Fernando, let's just take a step back here, because at the heart of a lot of the turmoil that we're seeing in Italian markets right now is this fear that the movement to break away from the shared currency is going to is

going to gain steam. I'm wondering, from a business community standpoint, do you hear companies executives saying, you know what, if we had the lira back, if we could not have to be part of the shared currency, our businesses would be much stronger, our currency would be weaker, we would have better export power. Do you hear that? No? I don't I think that any business leader initialy, especially those that are that are fuelling the Italian export are really

into the Euro and they are appreciating having a stable currency. Yes, there are the fluctuation is a bit of dollars that at times may hamper our export, but as you know, every year we are increasing our export, which is now about five hundred billion a year, and so everybody, especially in the medium sector, is not regretting a delta UH. As you want to do a step back, let's really understand that if we were not joining the the first year of the Group of the Euro currency UH, but

seventeen years ago Italy would that most likely defaulted. If that it would have you know, a serious like what happened in Argentina at the time. So the business community

is solidate in the back. And by the way, it's the same business community that largely has supported the one of the two political parties, the North League, because as you know, the the electoral split is that the Five Star Movement UH, the new UH political parties primarily um from the south the voters, while the North League is primarily from the north, where you know, the strong economic

engines of Italy are. So I am not convinced that the business community would support any movement outside the Euro whose cost would be enormous. But most importantly, there is no process for quitting the euro Is this availed confrontation between the private sector and the public sector in Italy? No, I think that the the there there are. There are a number of things, of course which are not working uh.

And number one is the unemployment rate. Number two, we have had a huge flood of immigrants with whose process has not been managing, manage been vented carefully. So there is a lot of anxiety, especially in the young people. UH, and the and the and the business community of course is concerned. But in a way we are going through a kind of recall, very not as healthy as we would that like. But I think the the the the future government and the future election unfortunately will be uh.

Are we in Europe or out of the Europe? And so this is I think it's going to be the major team where the business community needs really to step up in a way that has never done in the history of Italy. So they need to speak up and h I think that's what's going to happen in the next sixth late weeks. Thank you very much for Noto Napolitano as the president and the chief executive of the Italian Business and Investment Initiative speaking about current events in

Italy him. There is a story in Bloomberg Business Week this week by Peter Coy talking about how how there seems to be a much lower birth rate among US millennials and the question is why. And my question was how much does this have to do with the availability of childcare and how how cheaper expensive it is. And to weigh in on that is Betsy Stevenson who joins us now. She's Associate Professor of Public Policy at the Ford School of the University of Michigan, joining us from

an Arbor, Michigan. She's also the former chief economist at the U S Department of Labor UH from and eleven. Thank you so much for joining us. Betsy, my pleasure. It's great to speak with you. So I wanted just to start with this idea that the birth rate has been falling among younger people, and I'm wondering, do you

think that childcare has anything to do with that? So I do think that childcare has something to do with it, but I think it's actually um kind of a trifecta of not just the high cost of childcare but a lack of paid leave, paid family leave to you, you know, thinking about it. You go to have a child, you don't know that you're gonna be able to take any

time off of work. If you do take time off, you may have to take it unpaid, and then you face enormous costs putting those children into childcare if you're going to go back to work, and then you often face discrimination in the workplace. And research shows that women can face a really steep wage penalty when they have children.

So you put those three things together and you see a lot of young women who are saying, wait, this is really really expensive, um, and I'm just not sure I can do it, or I need to wait longer to do it. So we are seeing the age of first birth really getting pushed up quite rapidly. And I think part of what women are doing is delaying, and they're delaying so that they can save up for to pay that, you know, these these high costs of child care.

And because research shows that every year you delay having a child, the motherhood wage penalty that you face is lower. So they know that if they can just you know, wait, their careers will turn out better and they'll be able to save up for childcare unfortunately for a lot of women. Though, Now wouldn't you wait and wait and wait to have

a kid, You can often run out of time. So, Betsy, I'm just wondering, compared to other nations, where does the United States rank in terms of things such as paid maternity leave or indeed even paid childcare. So, uh, in terms of paid maternity leave, this one's easy because the United States is alone. UM. I think Papua New Guinea also uh no longer it doesn't have paid maternity leave.

But aside from those two countries, the United States and Papua New Guinea, everybody else has paid maternity leave UM. And the research shows that that does increase fertility. So Australia has one of the more recent paid maternity leave policies. In two thousand eleven they introduced eighteen weeks of paid leave and then some additional unpaid leaves and there's some new research coming out that shows that women have more

children as a result, so it did boost fertility rates. UM. In terms of childcare, you know, other countries do support childcare more. You know, the United States UM is mostly a system of private childcare, was very little government funding. So that's you know. One thing that I'm struck by is what would you say to people who said, look, you know, if people don't want to have have babies, and fine, don't have babies if they can't afford them, that's their issue.

It's a lifestyle choice. If they want to make it work, they make it work. If they don't, they don't. Um, it's their choice. If they're not doing it, fine, What do you say to people who say that, I mean, why do why should we care? From a public policy perspective, Well, I think from a public policy perspective, as a nation, we're supposed to be forward looking um and not just

you know, partying like there's no tomorrow. So that means that we need to be thinking about the next generation as well as thinking about what you know, the current generation would like. And the issue with early childhood education and child care is if you make those investments, they can pay huge dividends in the future. So UM research shows that children who've got uh good early childhood education go on to earn higher wages as adults and to

pay more in taxes. So if we want to continue to have you know, uh, you know, a strong society with people who are productive and a lot of economic growth. But we need to support the next generation who's going to go on to be those workers that are productive and uh contributing to economic growth and paying taxes. Uh so. And the thing that makes it so difficult for parents

is you have your kids early in life. It's you know, we spend a lot of time worrying about how parents are going to pay for college, but parents have eighteen years to save for their kids college. When your child is born, you face college tuition in that first year. In twenty eight states, the cost of center based care for a child in the first year of life is more than in state public tuition in those states. So you could have sent your kid to college for less

than putting them in child care. And yet people can have their children when they're just getting their start in life. They haven't saved up to pay college tuition. In fact, some of them are still paying their own student loans. They're paying for their own college tuition. So if we want to invest in children that were investing in the next generation, we need to help parents out with these expenses because parents often can't do it, and certainly the

kids can't do it. You know, a six month old can't go to a bank and say, can I have a loan? This is going to make me a more productive citizen and I'm going to be, you know, a better member of this it in twenty five years if you just pay for my early childhood education. Now, we that that's not the way the system works, and so it's one of the reasons why we really need the government to step in and support investments in early childhood education.

By some estimates, the in the United States, couples spend more than more than a quarter of their income on childcare costs, and that if you happen to be a single parent, that number is about fifty of your income for childcare costs. Is that out of line when compared to other countries? That is out of line with compared to other countries. And you know, the the the United States spends less on UM safety net programs and other

countries by a lot. We spend a much smaller share of gdp UM on social programs than other countries do. But and the money we do spend in the United States is way more tilted towards the elderly than in other countries. UM. So it's you know, in UH UM in the United States spent five the federal government spent five thousand dollars per child um. In comparison, the federal government spent thirty five thousand dollars per person over the age of sixty. So we have a system that's really

tilted towards the elderly. And that's because we've passed a bunch of policies that are really beneficial to the elderly, like Social Security and Medicare. I haven't passed policies that support kids. We gotta leave, gotta run, Thank you very much, Betsy Stevenson, Associate Professor Public Policy, the Ford School, University of Michigan. Pam Me raised a good point earlier when you said you would think that banks would have learned after paying ten billion dollars and penalties and after a

trader was sent to prison. Evidently not. And joining us to detail what is going on currently in the foreign exchange market is Lennon Nuian. She has FX reporter for Blue Broke News, and she wrote a story today detailing ongoing abuses frankly in the five point one trillion dollar a day f X market. Can you explain, Lenan, well, Lisa, what participants are worried about in this market is that there are a few lingering practices that are still you know,

as far as regulators are concerned, kind of okay. And sou Anie Mack from Vanguard who's the head currency trader, they're warned of some abuses that potentially could happen as a result of these practices, like last look, where dealers can kind of reneg on a price and front running g front running. Um, that doesn't sound uh really good, does it? I mean that that that's getting in front

of your own to in order to profit. Yes, So if you have knowledge in for an exchange of a customer trade in advance, you can kind of get ahead of it, which is not okay in other markets like equities. Um. Andy mac from Vanguard comes from the equities markets. So for a lot of people in other markets, this sounds very bizarre, But in foreign exchanges is actually okay. It's still under the FX Code of Conduct and the guidelines,

it's still okay under certain circumstances. Let's take a step back, because from my understanding, a majority of the five point one trillion dollar a day of FX trading happens now over electronic systems. And there is a much more sort of algorithmic presence. What's the human component here? And you know, just can you give us a sense of why some traders still have so much power in setting prices? Well, first of all, the human component and the electronic components

still uh, you know, the difference of speed. But the practices are still okay whether you're talking about a human being or computer or an electronic trade. So everything just happens quicker in these computerized markets. Um. But in terms of the power that you talk about, Lisa, it's more of the fact that this market still condones these practices

as being legitimate and okay. Under the guidelines that regulators and industry participants have set, it's still all right to pre hedge an order, so they call it, which many people, including Van Guards say is purely front running. What is that pre hedge? Can you just describe it? It basically means that if you have advanced knowledge of a client order, you can kind of get ahead of it, so either

buy or sell. But the tricky thing there is that if you buy or sell and you tell them you're going to do it, you can potentially move the market against your clients. So that's pre hedging, and in some circumstances it's fine in foreign exchange. Okay, I just want to understand here, because there's one thing that that volume can help determine price, right. In other words, if you have a lot of buyers or a lot of sellers, that can help move the price of a particular currency

versus another currency. Um. But this is just an exchange, right, I mean it's not as if anybody in between is actually committing their own capital to invest, right. I mean, this is about an exchange of money, not an investment of money. It's not an investment of money. It is an exchange of money. So that's one reason why this is so Thorny's because you're basically, as a by side customer exchanging money with a bank or another participant in

the market. And so that that's kind of the crux of why this market isn't regulated to want to just go to a feast a fee base structure. I mean, you know whether I mean, that's certainly what a lot of the equity world has moved towards. That's true, and that potentially is happening in foreign exchange, But the market has been so used to not having the fee structure for a long time that people just trade on the spread.

They just look at a very narrow spread. So well, let's get a sense though, just also taking a step back when you were talking about first look, I just want to get a sense how frequently is the exchange rate set? Who sets it? You know, I mean, is there is just to sort of talk about, you know,

how that whole dynamic plays out? Well, that dynamic again, because this market is so large, because it's over the counter, it's basically just a direct exchange between say him and I, We just we can decide what we want to exchange euros for dollars for exactly, and so that happens across this huge financial mark. This is the biggest world's biggest financial market, and that happens all the time, and there's no oversight over it because it's just you and I

exchange money. So, um, that's why it's so tricky, Lisa, because there isn't this kind of overarching regulator in one region managing what the exchange rate is. It's happening, you know, bilaterally all the time. What's it going to take more lawsuits and more people going to jail? If they want to reform themselves before something bad happens. I think one person going to prison has already had an impact. This is the story. Is not to say that there hasn't

been a change across the industry. People are super careful about what they say. They're very very cautious about conflicts of interests, and they really watch their backs. Um, there's a lot of surveillance now as well in the foreign exchange market. So it's not to say that nothing has changed, but there are a few red flag areas that some investors are very worried about. Which is last look in

front running. Right, So that that admonition that you hear on a lot of recorded lines, you know this is being recorded for customer service purposes is something that may be heard more and more on the world of the telephones or on the systems of for X traders. Yeah, for X traders know their phones are being recorded, and they're much more careful with what they say. All right, Thanks very much for the story and for enlightening us much appreciated Land and new in our FX reporter for

Bloomberg News. I encourage you to read the story at Bloomberg dot com. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio