Argentina Bonds Become Attractive At 40 Cents: Greer

certainly China and the US. The other big news is Argentina at the pace so continuing to sell off versus the dollar currently at its lowest weakest level on record, after the surprise defeat of Mauricio mccli the current president, yesterday, and questions about who will take his place, the fact that Christina Kirshner could be coming back to power. Joining us how to talk about how investors have to view all this is Paul Greer. He's a portfolio manager focusing

on emerging markets, debt and fax at Fidelity International. He's joining us from our London studios. Paul, thank you so much for being with me today. The main question is how much is Argentina a specific story about a country that has defaulted many times on its debt and how much does this reflect true risk and emerging markets that is currently mispriced by debt investors A Lisa and yeah, I guess with Argentina, you know, clearly it's been that the story of the week. I think the nature of

the story is quite idiosyncratic in many ways. We had a very specific primary vote over the weekend, which you know clearly had an adverse result for investors in Argentinean debt and currency, and investors have have voted with their feet. You know, we've seen a pretty sharp sell off in bonds and in currency markets. I think there's been a little bit of contusion, certainly yesterday, a little bit today

into the rest of emerging markets. I think it's you know, maybe quite difficult for investors to exit the Argentinian market at the moment. It's it's quite a liquid, it's under a lot of pressure. But I think from here on, with every passing day, I think for the rest of emerging markets, in terms of contagion, we'll probably see a reduced impact in terms of the spill over into the

rest of the market. Clearly, it's going to remain topical and thematic for Argentina is specifically, but I think we've probably seen the peak for the rest of EM in terms of contagion. Well, what is the node of contagion that we should be looking at? I'm sorry I didn't In other words, what how how is the contagion expressing itself. Is it just that investors, if they can't get rid of Argentinean assets, they're simply selling other high beta emerging

markets securities. Is that sort of the way it's expressed. Or is it just that you have negative news and in a big emerging market or one that a lot of people own, and then certain retail investors say, you know what, I'm not going to go any into EM or I'm going to yank some funds from my E M E TF. I think it's exactly that, I mean, I mean, the two biggest risks with Argentina right throughout this year have always been politics and positioning, and on

the latter issue, you know, Argentinean dead and currency. You know, it has been a popular, crowded market in many ways with investors. Clearly there's been a big draw down in terms of the performance that's hit you know, investors, funds, and we've seen a little bit of de risking in other markets. It's been most acute in Latin America, particularly on the f X side. I would say, you know, it's very difficult to sell the Argentinian pesto at the minute.

Liquidity is quite poor. So you know, certainly yesterday we saw currencies like the Mexican pesso, Brazilian royale, Chile, Columbia, et cetera come under pressure as investors really look for an option somehow to hedge the risk in Argentina. I think it worked yesterday, you know, maybe a little bit today. But with each passing day, I think the Argentinian story will become increasingly idiosyncratic and it will be harder to hedge it using, you know, other countries and other markets.

Earlier this year, you wrote a column for the Financial Times where you said that emerging markets are in a sweet spot, and certainly that came to fruition and returns with emerging markets debt outperforming us risk of your securities. I'm wondering, from your perspective, is that sweet spot over? Have we sort of closed that out? Yeah? I don't think it's quite over. I mean, if you look at the returns year to did you know sovereign external debt,

you know, we're up twelve and a half percent. Local currency markets were up percent. I think probably the lion's share of the returns have already come and gone so far in emerging markets this year, but between nine year end, we still think there'll be incremental positive returns for for e M debt investors. I mean, it's it's not a perfect asset class. We've seen this horrible story in Argentina over the weekend. You know, em is still suffering from

softening global growth. We've still got the threat of you know, US trying to cheer trade tarts, etcetera. But you know, there's there's in lots of parallels with with last year, you know, the big sell off and e M in summer eighteen, but there are also some notable differences. You know, the industrate environment globally is a lot more favorable this year, and we'll be seeing that the Fed and other central banks cut interest rates. So you know, yields have been

falling generally in the G ten world. Investors have been looking towards emerging markets as summer that has an attractive yield and a spread that that will offer them them some returns. So I don't think the sweet story is that the sweet spot is is quite over. You know, we're also seeing stimulus from the Chinese authorities as well, but I think probably most of the returns for nineteen have already been witnessed. Yeah, talking about picking up some

yield and emerging markets. Argentinian A hundred year bonds currently almost yield fourteen percent. Are you buying? We're not buying now. We think it pays to be cautious and in the ear term. As I mentioned earlier, the two biggest risks this year in argent You for us, we're really politics and positioning. And politics has clearly played out with the primary result in Sunday. But the positioning overhang that technical is it's still quite awkward for investors. It's been crowded,

it's been a popular trade. I think the market still needs to find a balancing clearing level for for both bonds and for currencies. So we think that positioning and technical angle will continue to to weigh in Argentina in the short term and more medium term. It does offer,

you know, an interesting opportunity. The bonds, I guess are done, you know, points in the last kind of one and a half days were very quickly moving towards the scenario where default is you know, getting towards priced in by the market, with you know, bonds trading below fifty cents in the dollar today, so you know, a lot of

bad news has been priced in. We think in the near term bonds are probably at risk of drifting further lower and by you know, as we get down to the forties and some of these Argentinean dollar bonds, and you start to think about recovery values and kind of the assets that the country has, I think, you know, over the media in term it could be an interesting opportunity, but but certainly not in the short term. Where else

are you buying just quickly thirty seconds? Yeah, I mean our highest conviction and e m that at the minute is on the local currency side. You know, inflation and growth has been falling in a number of countries and many markets have got you know, steep yield curves and pretty attractive real yields. So we really like local currency bonds, and you know, countries like China, Russia, Indonesia, Serbia, Peru, etcetera.

Love these countries were expecting to see more interest rate cuts from central banks, and we think the risk premium is is pretty attractive even at these levels. Paul Greer, thank you so much for spending the time, wonderful speaking with you. Paul Greers, portfolio manager focusing on emerging markets, debt and f X for Fidelity International, joining us from our London studios. How do you trade this market? The key question facing so many portfolio managers today. We're going

to post that question to Grady Briquette. He's a portfolio manager at diamond Hill Capital Management, joining us here in our interactive broker studio. So, Grady, one key question here as markets get whipside, who's trading? Are you out there actively trading these headlines? Thanks for having me. We're not. So we take a strategic approach to the portfolio construction.

We my team and I meet on a on a scheduled basis to decide what we want to buy and what we want to sell, and it's really based on valuation and our expectations for future fundamental fundamentals of each business. So a day like today, you it's unlikely that you'd see us make any any big changes, if if any changes at all. So Diamond Hill Capital Management, overseeing twenty

three billion dollars normally in Columbus, Ohio. Grady, I'm wondering if you're saying, and so many people are saying, we're not trading this, In fact, we're trading less. Are you trading less due to some of the geopolitical uncertainty and the backdrop of the trade tensions. Well, if we we would trade less if we don't see relative valuation opportunities. If we saw relative evaluation opportunities emerge as a result

of these issues, then we might allocate more. So, for instance, if we saw China become relatively attractive compared to Europe or some of the other markets, we might start to allocate more to China. Right now, we have a larger allocation to the UK because first a couple of years now, we've we've felt that the valuations in the UK attractive. But on a day to day basis, we're gonna we're gonna step back and breathe and uh and look and make sure that we're comfortable buying more of the businesses

that we own as they get cheaper. So when did you start buying UK? Oh? We started? We we we've We've always allocated the UK since the funds inception. Um, but we we we I'd say we increase the weight over time right after the initial vote to to leave the European Union, and how how are you accessing it with bonds? Stocks? So we're so in the international fund,

we're all equity, all equity. And one thing that you mentioned in a note recently was it's reasonable to expect seven to nine percent annualized returns for global equities over the next ten years. I'm wondering how that can be given the fact that so much of the growth has already been front loaded, priced in, and sort of juiced by the central banks. Do you ever get pushed back on that that that yield target? I just did from one of my colleagues when I presented it to you.

All right, so what did you say? Well, so my answer is, right now, when I look at our portfolio, and I'm using our portfolio as a proxy for for global equities because we are global portfolio, the dividend yield right now is about two point six percent. I think the valuations are reasonable now, some some markets are more valuations are more stretched than others. I would argue the US is one of the more stretched markets in terms

of just statistical valuation. UM. But I think that you get three percent uh real GDP growth, and you get a couple of percentage points of earnings growth on top of that through share by backs, that operating efficiencies. So you've got five percent on the on the earnings growth potential, and then you've got another two at two point six

percent DIVEN yields. That's that's right at eight percent. The idea of predicting out ten years at a time of you know, tweets and things moving uh really quickly depending on the headline of the day is mind boggling. And I wonder how sensitive your returns prediction is to a trade deal or some sort of kind of global order

staying the same way that it is right now. So again this is this is my base case, and so there's certain enter tails around that and you can see return and we have seen historical returns be much higher and much lower. UM. I think that if you get a negative sentiment in the market that compresses valuations, than

our forward tenure return would be higher. And if you get positive sentiment that causes valuations to stretch further than there are today that I would expect my return expectations to go down, but on a tenure basis, it's more about the current dividend yield and earnings growth expectations. Do

you expect a recession anytime soon? I think within the tenure time frame that I mentioned, But in the next and the next day, in the next year, uh, potentially earnings some earnings pressure, but but a true recession, global recession, I don't personally see it. What about emerging markets? I think emerging markets can be attractive. The way that we typically access that is through developed market companies that have

strong exposure to emerging markets. So like a b NBEV Ashmore, which is a UK asset manager that's emerging market debt manager UM Diagio and so we understand that we're out on the ground and emerging markets as a team, so we want to access companies with good management teams who have people on the ground to understand those markets well. Any areas you're absolutely avoiding well UM. Fortunately we haven't been allocated to Argentina on a direct basis, although we

do have exposure through COPA Airlines. They have seven percent of the revenue from Argentina. UM any market where we see very high inflation and unstable political environments, we tend to tend to avoid. Great cat Thank you so much for being here. Grady brick Hats, portfolio manager at Diamond Hil Capital Management, overseeing twenty three billion dollars, joining us here in New York. Try to check in with Bloomberg Opinion.

We're joined by the Bloomberg Opinion Commnst. Max Neeson. Uh. There have been recent proposals out of the Trump administration's headquarters that perhaps the way to lower prices on prescription drugs in the United States is simply to import drugs from Canada. Can you just give us a little bit

more about the proposal. Yeah, absolutely so. It's basically a two part proposal, One that that states and wholesalers and pharmacies can apply to HHS to basically give them a proposal for importing certain subsets of drugs from Canada, which has lower prices than we do, if they can prove that it's going to be safe for consumers for them to do so. The other one, which is a little bit more puzzling, is that drug makers would be able

to import their own medicines from another country. That part I basically ignore because it doesn't make any sense to me. But um, the issue, as always with drug pricing is that although this sounds good, you know you have lower price in an other country. If you bring those drugs in, it's good for consumers, it brings in competition, it brings

the price down. But it's it's more complicated because in order to actually do this, you need Canadian wholesalers and the government of Canada to cooperate, and they have no incentive whatsoever to do So why not more business, more profits because they depend on on drug makers to actually provide those medicines, and the price differential in the US is basically the most valuable thing in the world for the pharmaceutical industry, the fact that they can charge higher

prices here. They will do whatever they can to preserve it. And if that means basically cutting off drug supply for Canadian wholesalers that that start importing drugs in the United States, they may very well do so. Um. So you know, they really relies on drug makers to cooperate in a scheme that would cost them money in the long run, and I don't I don't expect them to do that. Yeah, Max,

here's what I'm struggling with. We have been talking about prescription drug prices for decades, right, I mean, this has been an issue for a really long time. Why has there been no material progress and coming up with some way to lower drug prices while continuing to encourage uh

innovation within the pharmaceutical industry. I think it's because there's such a lobby on the second part of that thing where or it's become sort of this perceived wisdom for for a lot of politicians that anything you do to to bring down drug prices is going to irrevocably and harmfully impact innovation. The reality is is probably something a little bit different, and and the problem is, in order to actually bring prices down, you really do have to

make big structural change. You need to do what every other developed country in the world does, which is make drug approval conditional on and pricing conditional on the value it brings to patients, as opposed to the system we have right now where negotiating power is so fragmented that that that sort of fundamental market action that the real competition only happens in limited ways and is specifically prohibited

from happening in certain government programs. So it's just a mess, and there has to be a kind of a fundamental shift in in mindset and ambition that's just not happening right now. Max. When I talked to a lot of investment managers right now, they say that because of the trade wars, because of what's going on with geopolitical uncertainty, they are piling into healthcare shares in the United States because they see that as immune to some of these

tensions and immune to a potential downturn. People still have to spend on their healthcare. Do you think that the outlook for healthcare companies right now it's pretty positive or do you think that perhaps people are overlooking other issues

that are facing some of these companies. I think in the near to midterm, and and kind of in a general macro sense, they're They're probably right in the sense that we're not going to see a significant health reform, which is kind of the health or drug press reform, which is the real only real threat to that sort of thesis, at least until you know, the after the next election, and who knows that how that's going to

go in the first place. Um, you know, the things that we're seeing out of the sentence out of Congress right now, would definitely have an impact on on drugmakers and potentially on providers as well. Speaking about UM, basically an effort to reform how Medicare pays for drugs and to crimp surprise bills from from hospitals. But those are all sort of incremental changes, especially when compared to the more ambitious reform efforts you're you're just seeing proposed by

by Democrats that are running for president UM. In order to kind of pass those those larger efforts at reform, they basically have to throw put aside any other political priority and also have a very specific outcome in Congress as well in the next year's elections. So they may not be too far off. It's cynical, but but they may be right. And just real quick here in general, is the idea that healthcare companies are somewhat recession immune.

Is that accurate? It historically has been the case. You know, as you said, you know, people are going to get sick no matter what. People are going to have to pay for healthcare no matter what. And at the end of the day, there are there are these sort of safety net programs that even if people do lose their jobs or lose some part of discretionary income, they're they're going to fall back on those There there is at the margin an impact. You know, there's more uncompensated care.

People choose to you know, not fill prescriptions that they might otherwise feel if they they were seeing you know, they had jobs that they were seeing wage growth. But you know, relative to other parts of the economy, when when things go badly, healthcare does does generally turn out to be a lot safer. Max Neeson, thank you so much for being with us today. Max Neeson is biotech, pharma, and healthcare columnist for Bloomberg Opinion. Read all his columns,

They're fantastic. You can read them at O. P I N Go on the Bloomberg or you can read them at Bloomberg dot com Slash Opinion. Right now, we are talking so much about the shift from active fund management to passive fund management at a time of index outperformance, but there really is a more important question, which is what's behind this shift? And joining us now Michelle Sites She's chairman and chief executive officer of Russell Investments, which

oversees two hundred and ninety billion dollars of assets. Michelle joins us here in our eleven three oh studios or interactive broker studios. Michelle, I want to pull this to you because I think it's more important to view this shift in light of the drivers than it is the shift itself. So what do you think is behind the move?

Right well throughout my career, but also at Russell Investments, you know, the touchstone always is the clients and whatever the client's problems are or where the industry is going to go. And so at the moment, the problem is more people are concerned about going broke than they are dying. We're living longer, and we have a massive underfunding of

pension plans. dB plans are being frozen or shut down going to d C. So you have this massive shift from institutions providing for retirements to individuals having to provide for their own retirements. That is driving down in a low return environment, driving down the costs of what we've all we all used to do. And so that is a byproduct passive to active. Active from passive, etcetera. Is a byproduct of really trying to solve a root problem,

which is the retirement crisis. So some people would turn that on its head and say, as people get more aware of the income that they get, they become more aware of the fees they're paying out, and because they're not able to necessarily prove outperformance, some of these active funds investors are fleeing. Do you think that that narrative

is accurate? That simply put, Yes, as people get more focused on the fact that they've got to make money on their money, they realize that the human managers aren't aren't doing the job. Yeah, no, that's that's a very accurate depiction as well. Uh, the focus is increasingly on the returns that are needed in order for people to be able to retire well. And so as the focus goes on that, as returns are lower, and the percent of the return that we're taking and fees collectively as

an as an industry needs to go down. Right, When you have double digit returns and the average fee is one percent or whatever it might be, that's one thing. When you have a goal digit returns and it's still one percent, that's a very different thing. So what do you advise clients as the sort of risk reward factor becomes so tenuous where people are less worried about dying than they are about just making enough money to survive

for the thirty years after the retirement. How do you advise clients this late in the credit cycle, right, Well, well, there's a structural change going on in the industry, which is this gap uh and the need to be focused

on outcomes and solutions that are tailored to individuals. And then there's the amplification of the cyclical, which is what you're talking about, which which is the this long in the cycle, there's going to be risk two returns as well, So that's an amplification, but the structural problem will still be here, and so focus is first and foremost on the liability that you're trying to cover, and so our work with our clients, through intermediaries and through advisors is

to make sure that people understand the liability, how to get their cost effectively, and how to make sure that they measure not a benchmark relative performance. You can't retire on a benchmark. You have to retire on absolute returns. That's the key focus. We're speaking with Michelle Sites, chairman and CEO of Russell Investments over seeing two billion dollars in assets. We were talking about the expected return rate

that individual investors should target. And I think it's important when you talk about the mix between stocks and bonds and how much risk to take on, what is appropriate for individuals to expect over the next ten years? Right, Well, I love this question because we're all different. And target date funds, which were a great invention and have been a great default option, assumed that everyone at the same age as exactly the same and should have the same

target return. We believe that that's not not effective, not enough.

It's effective, but not enough. And so what we're espousing and really put in and implementation mode is personalized retirement accounts where we take every data point that we can for you and virtually create many define benefit plans for each individual, how how old you are, how long you're going to work, what your gender is, what your salary is, what your income needs are, and so that it's less about a target return, it's more about customizing around your

unique your unique attributes and what the outcome is that you need. How far are we in this shift from active to passive? I mean, how far in the transformation? Um? Well, first of all, we we do believe that active is a critical part of the ecosystem of capital markets. So we believe in active, UM, we do need to deliver active more consistent for a value price point that's uh in line with the value derived for the clients. So agreed on all of that. But but I would say

there have been a lot of studies. I don't know that fifty fifty is uh the exact right talents. It could be uh that the majority of investing is done through index and systematic and factor investing UM, but it's not. It's not ever going to stamp out the value that active brings to the equation. Just real quick here, I'm just trying to understand going forward with the next step is in terms of the evolution of the asset management industry. I mean, what's sort of the next thing we should

be talking about. Yeah, so I think absolutely the next shift. It's a major pivot. The pivot is from managing money primarily for institutions to making sure that we're managing money for the end individual so that we can do mass customization at scale and it's much more tailored. The second major pivot is to alternative asset classes. Michelle Sides, Chairman and CEO of Russell Investments, Thank you so much for being with us. Thanks for listening to the Bloomberg P

and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paulse Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Wohits. I'm on Twitter at Lisa Abram Wohits. One before the podcast, you can always catch us worldwide on Bloomberg Radio