Emerging Markets Selloff Presents Buying Opportunities: Dennis

decline for a fifth day. Here to talk about this, this rapid fall of one of the darlings of this year is Jeffrey Dennis. He has head of Global Emerging Market Strategy for UBS Securities. So Jeff just weigh in here. I mean, why are we seeing such severe declines kind of escalate in the way that they are right now?

First of all, I think we have to keep all this in perspective because actually some of the weaker brethren, if you like, within the emerging markets that have that are under pressure Brazil, Turkey, UM, India, UM, Indonesia to a settings in Mexico. UM. They're coming off for sure, but some of the better quality emerging markets, by you know, in terms of fundamentals, like China and career in Taiwan are hardly see any I have not seen any currency decline at all, to speak out. So this is somewhat

isolated or somewhat localized. But it's happening because the dollar itself is rising and that intern has got quite a lot to do with the anticipation of more FED hikes and also the rise of course in tenure bond yields above three percent. But our view is this is all happening because the global financial markets, in other words, not because of anything going wrong within the emerging markets themselves.

All right. So Jeffrey Dennis having said that, and maybe it is uh, maybe a time warned but but really inaccurate way to look at investments by saying, all right, we're going to look at this geographically, and we're looking

at emerging markets, so we look country by country. When you've got companies that are doing business probably not only in their home country but in other emerging markets, are there specific companies that you would point investors to and say, look, this is a great company that you want to own for a long period of time, and here's an opportunity

to buy in when other people are too afraid. Well, I'm not going to talk about specific companies, but the way I would try to answer that is the following, and that is the the danger sign will be to what extent these currency declines in certain markets, as I say, and the rise in inflation, which is partly coming through because of higher all prices, does that at some point cause the fundamental story within the emerging marks to deteriorate?

Does it lead to countries having to raise interest rates aggressively? Doesn't mean the growth will slow down in some of these countries because they have to react to a weaker currency in higher inflation. That is when you would see more of a risk coming through to the asset class. If you've got, in other words, the this contained in my view, currency weakness. Some does it start to contaminate the fundamentals And we're and we're not frankly really seeing

that at this point. We've had a rate rise in Indonesia, to be fair, but at this stage we think that the basically the growth story in the global economy and the growth story and the emerging marks is therefore intact and so one a lot of your way to answer your question would be would be to look at export stocks that are that are coming out of these countries with much weaker currencies because they will get some benefit

because the currencies are cheaper. And elsewhere in parts of the world where things look more stable, we are not seeing much declining currencies whatsoever. You got what you're gonna find then, as some of the domestic stocks will do well. Um, and in particular, we have a biggeravaging financials and emerging markets, and that's an area we would be looking at. So have you gotten a lot of calls from nervous clients recently?

We've had a lot of inquiries from nervous clients for sure, and I think, um, it's inevitable when you get this this amount of selling of certain currencies, including as you said in your intro, some of the darlings of I think last year rather than this year, such as Brazil. There is there is a great concern about this. But at the end of the day, um, you know, the funds flow story is still pretty strong into the emerging markets. We haven't seen much of the way of outflows now.

Of course that could happen, you know, on the back of all of this, but we we think generally investors are going to stay relatively calm and on our view of a weaker dollar and lower bondial second half of the year, I think this will prove to be a very nice buying opportunity on a sort of six to nine month view. So that's where I was going to go with this, because you said, you know, this isn't some something fundamental and emerging markets, it's something more of

a market driven kind of issue. But you could argue that it was sort of a market driven issue that there was such a flood of cash going into emerging markets earlier through index funds UM so you know, what's to say that it won't accelerate. To your point, you're not seeing that yet, But how closely are you watching those sort of passive passive funny fun We are certainly

watching watching that with any question. And one and one argument people could make for being having a more negative view going forward is the fact that a e M equity funds about fifty three billion dollars of money coming in so far this year, which is essentially a record for this time of the year. We haven't seen any significant We seen a slowdown those flows, but no real outflows. Were that to happen, obviously that would um you know

that that would be a concern. And but from a from a fundamental point of view, if we're alsto alive by the time we get there, you know, our highest view here is that the pressure on bond yells and the pressure on the upward pressure on the dollar will fade in the second half of the year, as as inflation in the US kind of rolls over and is not seen to be the threat props it is at the moment, and if the dollar were to go shall be lower second half of the year, which is our view,

and bonnos come back a bit. I think that money money is going to come back, and therefore we are in the middle of a bit of a nasty storm here and it may well go on for a few more weeks, but I don't think it's going to lead to a major bear market in emerging market equities at this stage, Thank you very much. Jeffrey Dennis is head

of Global Emerging Market Strategy for UBS Securities. He's based in Boston, of course, home the Bloomberg one or six one Boston, Newburyport, in thirty in Metro West and the South Shore, and he was talking about the dollar. Italy could soon have a radical coal Asian government led by the anti establishment Five Star Movement and the far right

League here to tell us more about Italy and it's uh. Well, the economy and the reaction to financial markets to the perhaps forming of a new government is uh for Aernando Giuliano. He is a columns for Bloomberg Opinion based in Rome. Fernando, thank you very much for being with us. Bring us up to date on who are the various parties that may come together to form a real government and what is their platform or at least what's their platform today.

So we have two governments, two parties which did not run together in the election, let's recall that. So that's why they had to sit down and negotiate a new program. On the one hand, we have the Five Star Movements, which is a anti establishment party which rose to power very quickly over the last few years, which was set up initially by the comedian bet Pegrillo and has been a little bit of a catch hole party, really grubbing

votes from less and right. And on the other hand, we have the League, which is a hard right party which in the past was taking positions to have the North basically, you know, to separate the Italy into North and South, but now it's taken more eurosceptic views. The two of them are now combined to this turbocharged populist

government which has just produced its coalition agreement. It's a list of spending commitments which total more than a hundred billion euros and include some radical ideas, for example, a speed cutting income taxes, uh an income support scheme, very generous but which most importantly would set Italy on a collision course with the rest of the Eurozone and the

European Union if they were to be enacted. You know, the response has been notable in some of the Italian markets, but in some ways it's sort of surprising that you haven't seen a greater sell off. For example, Italian bonds. I mean, yes, yields are at the highest level since July of last year, but still I mean, basically, they're they're calling for a blow out of their deficit and they're hoping that the Eurozone is going to help fund

their lavish promises, which they're not going to do. Well, absolutely, I think the reaction has been there. I mean we've seen it accelerating over the last couple of days. I've since you know, it became clear that these two parties were serious. But it's not been as uh, you know,

there could be more to come. I mean, I think that the mitigating factors here are, first of all, the European Central Bank scheme of quantitative easing, which is still running and we'll run until the autumn, so there is still a buyer of Italian debt and investors know that in the form of a central bank. And on top of that, we also have the idea that somehow these

proposals are non starters. I mean, they will need to meet the President on Monday to discuss the program, and the President has said he will want to play an active role. And on top of that, you know, many of these ideas will actually need to be implemented, and you know, there will be some discussions with Euros and partners who are going to be you know, quite unsupportive to say the list. So I think there is you know,

there is more to come, for sure. But on the other hand, I think the investors are looking at this, you know, mitigating factors, which may explain why the reaction

is still relatively muted for the NANDO. I mean, just to sort of put this in a perspective, I was speaking to an analyst who said, basically, the market is betting, for all intents and purposes, that the current government will be completely ineffective and the tectocrats will continue to sort of chart a more logical path forward for the nation. Um is that a bank of the assumption? Well, I think there are you know, several issues. First of all, this is a coalition which has been you know, is

completely new. So one possibility is that they will start squabbling once you know, reality kicks ince. So you know, what do we prioritize between say the flat you know, this kind of steep income tax reduction which the League is very keen on, and the income supports scheme, which the Five Star is keen on. So they may start squabbling and so do very little. And then on top of that, you know, there are a number of constraints.

For example, the Italian constitution has a close which says that Italy has to balance the budget over the economic cycle. So there is a possibility that the president may veto some of the you know, craziest spending bills because they simply clash with the constitution. So I think there are a number of, you know, reasons to be relatively sanguine

about the prospect, the spending prospect of this government. But for sure, the document we have in front of us is explosive from you know, a point of view of the public finances. This is one of the biggest gambles you've seen in a Eurozone country, be since the formation of the currency Union. Frdando, thank you so much for being with us, really interesting insights. I recommend everyone read

his columns. Ferdando Giuliano is columnist for Bloomberg Opinion, coming to us from Rome, and you can find his columns on Bloomberg dot com. You can just get a sense of what they are about. One of the latest Italy gets a taste of Boris Johnson's cake, talking about how the league and five Stars dreamers want the years to help fund their lavish promises, even though that will break the rules that have already been established. A really interesting

issue in PAM. Frankly, I am surprised that we're not seeing a bigger sell off. Is there some kind of two hundred billion dollar trade deficit deal with China. Is they're not different people saying different things. Here to clear it all up for US is and Mask. He's economics editor and columnist for Bloomberg Opinion, joining us here in our eleven three our studios. So, Dana, what's going on

here and who's right? You know? The key is the final clause in the Chinese Foreign Ministry spokesman's answer to this question. When asked if a two hundred billion dollar deal has been hatched, he said not to blah blah blah blah comma to my knowledge. Now, that is absolutely key. It was taken as a denial, but really it's a non denial. This is important just to make sure that

people understand the context here. Uh. Some people were cited anonymously as saying that the US was close to getting China to reduce its trade deficit with the US by

two hundred billion dollars. Is that per year? That's unclear, But if we assume that it is, and that was the total the administration was looking for, that basedly takes care of the bulk of it, so you'd essentially be writing off the trade gap in one stroke of the pen, which is why it seems like a big number and on the face of it unlikely, but we'll even unlikely times. You know, did I thought you were going to talk

about sorghum? Well that was going to be this. By the way, it doesn't contain any gluten if you just just see, you know, that was really the main question. That was exactly my wife has Celia was important, so they were really okay. So after this story was published, including by Bloomberg last night New York Time, the focus shifted to Chinese officials in Beijing. Was there a deal for two billion? Was there not a deal? The Foreign

Ministry spokesman statement was taken as a denial. It wasn't really. It was way more nuanced from a to my ledge, and by the way, the Foreign Ministry does not have responsibility for trade policy in China, so it's really a non denial denial. The point that Pim makes is equally critical when taken with the knot. To my knowledge, China's suspension of an anti dumping investigation into US sorghum is a way of saying, yeah, we're playing ball here. We're

playing ball here. This doesn't have to be a confrontational thing. So while no one from China came out in Beijing overnight and said, yeah, two hundred billion done, there were signals that were headed toward some kind of something. What is that? Some kind of something? That is the technical term for it? Dan, Can you just put into perspective zooming out the significance of reducing the tree deficit by two hundred billion dollars? Is that feasible? I mean, just explain.

This is sort of the number that people put out there for how much basically we give to China. It's not that simple explain here, Okay? Is it feasible? Sure, it's feasible. Is it plausible as a sustainable thing? Yeah, well that's a whole separate question. Look, how could you want two hundred billion off? And let's say, for argument's sake, the US trade deficit with China is about three d meaning that we pay for we import three hundred and

fifty billion dollars more from China than they import from US. Correct, that's a ballpark figure. Okay. So look, if Chinese airlines, most of which are controlled by the state, stopped buying air Bus and started using that cash to buy Boeing, they imported a whole lot more US agriculture you could get within Cooeye, within shouting distance of two hundred billion.

But does it really realistic to assume they're not going to buy any more air buses, for example, and that the US is the only source for agricultural and oil now that the US is an oil exporter, there's that as well. The important thing to remember, which it's lost in a lot of this, is a large chunk of what the US quote unquote bias from China is stuff that's assembled in China by subsidiaries of US multinationals and

shipped back here for consumption in the domestic market. Look, the global supply chains are really important here, and the vast majority of those global supply chains are anchored by US headquartered companies. Look, iPhones are assembled by a subsidiary in China of a Taiwanese company and sent back here. That this phone Lisa in front of you right now, Where was it? Where was it? Okay, Korean company? This

iPhone is now holding? Seriously, this thing has wound its way around the globe half a dozen times before it appeared at the A T and T store in Montague Street in Brooklyn. So when we talk about things that America buys from China and how it's so much more than China buys from America, you know we need to

be careful. Uh, Dan, can I just ask you in maybe twenty seconds, isn't it interesting that we are now even talking about bilateral trade negotiations when maybe two years ago we were talking about multilateral trade negotiations and this is turning out to be normal. Part of the doctrine, if you can even call it that, of Team Trump is that it's a big conspiracy and everyone everywhere is

out to get the US because we're so noble. Okay, if the US negotiates with a wide variety of parties simultaneously, the US doesn't have the same leverage as if it engages in one on one negotiations. That's part of the foundational idea. Again, I don't want to glorify it with you sort of intellectual scaffolding, but you get the picture. Thank you very much. Dan Moss, economics editor, columnist for Bloomberg Opinion, talking about the US China trade conversations, confrontations

and denials, but not really denials. Right now, I want to shift gears a bid and go to Aaron Brown. He's former managing director and head of financial market Research at a q R Capital Management, also a Bloomberg opinion columnist. Aaron, thank you so much for being with us. You wrote a column that really caught my attention this month where you were talking about buying and holding the market through

index funds and the pitfalls that can ensue. Can you just give us a sense of what you were talking about, what the general thesis is it is for this column. Um, sure, buying and holding the market is clearly the dominant strategy for most UH retail investors. It's a solid, low cost, tax efficient, well diversified way to get your stock exposure. But it's not so obvious how to do it. UH. The usual way people do it is by an SMP five indext fun which is a perfectly good idea. It's

low cost, it's the traditional way. It's worked well for many decades. But there's no particular reason to do it, and and it kind of looked at in a number of ways. You're overweighting UH the tech companies, financial companies, healthcare companies. You're really missing out on a lot of sectors. You've got one of your investment in just ten companies UM, and there's a lot of reason to think about moving

to more diversified versions of it. For example, and equally waited, a kind of fund that puts the same amount of dollars in each five SMP funds. There are other other schemes people use as well. Before we before you go onto the other schemes, I just want to drill into some of the points that you made because they're really interesting to me. In part. For example, when people get back their dividends or other kinds of payments, UM, it just gets funneled into stocks that are by nature the

most expensive. Yes, and and the most expensive which can mean the best in some cases, but also can mean the most overvalued. Uh. There are a lot of neglected stocks that are very good. Uh. You know, near the bottom of the SMP, the last two stocks and the sp F hundred. There are some bad stocks in there as well. I mean, when you do an index fund, agree to take the good with the bad because you're

going for average. But do you want the average of the best, you know, the highest price ten companies, or do you want the average of the five biggest companies? Uh? Aaron wondering if you could just give people an example so that we understand that there is a difference between indexes. Because when you say buying the market, that makes sense. But then you drill down one step and you go,

all right, so what really is the market? And I think your point about when you own the SMP five in an index fund, the top whatever it is ten holdings of fifteen holdings, and that that's like of the entire fund. So you're not really invested in the sm P five hundred companies in an equal way. You are really lopsided, as you just described, by buying companies like Apple, Microsoft, Berkshire, Hathaway, Johnson, Johnson, uh, Intel, Chevron, and so on exactly. And and and those are very

good companies. And and you know, I'm not telling anyone that's a bad investment to do it. Um it's not as diversified as it could be. And and those companies have similarities. They they they're obviously they're all big companies. For one thing, Uh, they tend to have high valuation ratios. So you're not getting a lot of assets, you're not

getting a lot of earnings for your dollar. You go lower down in the SMP five hundred, and you can find a lot more value stocks UM, which which you know many people like, in which have historically have performed. But I want to be very careful here. Some people go for a waiting scheme because it's giving them some particular investment thesis, and you go too far in that direction. You're back to asset management to get active management, and

you're paying forty fifty sixty basis points. I'm only talking about waiting schemes that can be done for twenty basis points are so very inexpensive. SMP five hundred you get for four or five basis points if you do it with market weights, But you can get very similar and you get the same stocks waited differently. You pay a little bit more, you pay ten to twenty basis points UM, but you do get more diversification, you do get more

of the broad economy. Can you visit a saron of just how much better some of these funds that you prefer have performed? Well, Okay, I don't like to use that as a reason. UM, it is true that equal weight SMP five hundred has outperformed the market cap weight by about two point two over the last twenty years. It's one thirteen of the last twenty one years. But I don't think you should buy it on that basis. I think you should say, Look, there's no strong reasonably

that it's going to outperform or underperform. In the long run. We'll probably going to be about the same. I'm just getting more diversification. I'm getting the average return, but I'm getting the average return on a much broader base of companies. And therefore, uh, in some sense, I think you're reducing your risk. I think it could easily be true that it underperforms over the next ten years. We don't really know, uh, but it is. It strikes me as a more solid investment.

And you could also just go out and buy an equal dollar amount of all the stocks in the sp if you have an awful lot of money. Yes, right, Uh here, Aaron Brown, thank you so much for being with us. We'll have to have you back. You have a really broad range from uh, some of these interesting strategies to also cryptocurrencies. So Aaron Brown, thank you so much for being with us. A fascinating column. The title

is buying and holding. The market has many pitfalls here I just mentioned he's also the author of a great book called The Poker Face of Wall Street. 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 abramowits one before the podcast. You can always catch us worldwide on Bloomberg Radio.