Local Currency EM Debt Is A Good Play On Weaker Dollar: Stein

Bramowitz on Bloomberg Radio. If you're looking for international exposure when it comes to your bond portfolio, you want to ask Eric Stein. He is portfolio manager and co director of Global Fixed Income for eating Vance, the whole company helping to manage more than four hundred and thirty billion dollars of company of of customer assets, and they're of course based in Boston, home to Bloomberg one O six one Boston, Newburyport and thirty in Metro West and the

South Shore. We welcome all of our listeners in Boston and around the world. And Uh, Eric, well, maybe just talk a little bit about this new fund. This is the Eaton Vance International Emerging Markets Local Income Fund and it is UH focused not only on on a quorum bonds that are outside the United States. What I'm getting

at is it's in local currency, correct, correct. So you know, we've been running a local currency strategy for for US investors dating back actually the June of two thousand seven. We just launched a version of that for overseas investors, but it's dominated um it's denominated, i should say, in local currency. So there's two different types of emerging market debt. There's dollar debt, which trades that has spread to treasuries like US HIEL bonds or US corporates, and then there's

locally denominated emerging market debt. And so that's debt issued let's say, by the government of Brazil, but not issued in US dollars, issued in Brazilian ray ice. And it's certainly a more volatile part of the emerging market debtast class, but I also think it's one where return potentials also greater. It's also one that relies heavily on emerging market currency performance against the dollar. And I'm wondering, you know this, this implies to me that you see a weaker dollar

going forward against these emerging markets currencies. What's giving you that confidence so you're exactly right. It's certainly based on emerging market currency strength or emerging market currencies just being flat and you're earning a higher rate of interest. And if you go back to two thousand, thirteen, fourteen or fifteen, when emerging market currencies were weak and the dollar was strong, that would be a headwind for a strategy like this.

So I always tell people, you know, it's it's certainly one of my favorite parts of the fixed income markets, but I caution people that if you can't have a draw down in your fixed income, this probably isn't the right sector for you. I always caution you because of

the currency component. As you mentioned. The other thing we had Bloomberg Intelligence is Damien Sassauer on yesterday and he was talking about liquidity and emerging markets credit and he was saying he's watching the bid asks spreads widen out. This is sort of a measure of the difference between what the prices that people are asking for on bonds and what they're actually able to get. Um are you concerned about that? And how do you sort of plan

around that in a fun like this? So I think when you know, when you talk about a bit offer spreads. I think in em credit, I think of that more a sovereign credit. You know, certainly all fixed income markets have their liquidity challenges. I think you know, on our Advanced Global Income team, we put a big focus on trading. We have a twenty four hour trading desk based not only out of Boston, but London and Singapore, and we're

always looking for different liquidity sources. So the interesting thing about local markets is it's not only trading with large banks. There's also local players on shore UH and some of these countries that we invest in, So liquidity is just different than I'd say it would be in US high yel bonds or even emerging market dollar bonds. What are some of the characteristics of the bonds that would go

into this portfolio. So they would be issued by governments of emerging market countries, so you know countries and let's say Latin America, Eastern Europe, Africa, Asia, UH, and they'd be issued in local currency, so Brazilian RAI ICE, Turkish lyra, Indonesian RUPEA, And we think of them as having two main risks. You have local interest rate or local duration risk, and you also have currency risk as well. Okay, But in that in that context of risk, what do you

susset as parameters? Are you looking at shorter duration longer duration? I mean in debt can be funded in a variety of different ways and secured in different ways. Yes, so certainly there is duration. There's local duration to these assets. So it's okay, how do Brazilian interest rates move or Indonesian interest rates move? And sometimes there can be correlations with US interest rates. We have seen that in the past.

We saw that in two thousand thirteen. I actually think what's interesting is this year here, in two thousand eighteen, despite all the volatility we've seen in US treasuries, higher US yields, negative return, let's say on the Barkley's agg you know, yield in some of these emerging market countries continue to come down. They sold off a bunch and thirteen. Their central banks have the high rates of defend currencies and now they've been able to cut rates for the

past couple of years. What's your most recent high conviction bet so, So maybe one I can talk about is India. So India as a country, you know, not without risk. There's always things that that that go on sometimes that are frustrating to those of us that that's send a lot of time following India. But you know, you get seven and a half or seven points six percent on

government bond yield, it's not in the index. So I think that's kind of a specialty of our whole team is looking for bonds that are not necessarily in the index. In India, despite being a really large country, isn't in the index. And real quick, what's your biggest contrarian bet biggest contrarian bet? Um? You know, we're starting to like the Philippines paso. It's actually one of the currencies in Asia that people like to short a lot, and there

are certainly issues. They used to have a current account surplus and then it went to deficit. We think their important number is actually gonna be very high in the fourth quarter because of a new tax regime and people are gonna get all flustered about that and the currency is selling off, but ultimately there's some inflation there. We think the central bank, the BSP is what they call the central bank in Philippines, they'll have to raise rates

that should lead the currency strength. Thank you so much for being with us. Truly a pleasure speaking with you. Eric Stein, portfolio manager and codirector of Global fixed Income at Eaton a Vance, which manages about four hundred and thirty billion dollars and is based in Boston, but he joins us here in our Bloomberg eleven three oh studios. This is Bloomberg Markets with Pim Fox and Lisa Abramowitz on Bloomberg Radio. Obamacare is getting a pretty profound test

with a move by an Idaho based ensure. Here to talk about that is Max Neeson, who covers the pharmaceutical industry and all things healthcare for Bloomberg gad Fly, and

he joins us here in our Bloomberg eleven three oh studios. Max, this is a fascinating story because it really goes to the heart of the issue that UH insurers are looking at whether they will be able to offer people lower cost UH insurance plans if they're healthier and they'll get less coverage, but that means higher premiums for sicker people.

Tell us about this place. Yeah, absolutely so. Um, what what Blue Cross in Idaho is doing is is pretty clearly in blatantly in violation of a number of of statutes in the Affordable Care Act, namely UH no, no limits on spending UM having to provide the same variety of coverage people not denying coverage for sick people for

plans UM. And the issue is that if you offer that kind of insurance and a c A compliant insurance at the same time, inevitably healthy people are gonna flock to those cheaper plans, leaving sicker people in the a c A compliant plans skyrocketing premiums. So you can't really have it both ways, and and that seems to be what they're trying to do an Idaho. The question is whether it will actually happen UM, you know, due to

legal threat or or action by the government. Max, could you outline what this plan would look like for someone that is shopping for health insurance. Yeah, so I think they're gonna offer UM a bunch of different plans, But the general idea basically is that you know, if you're someone who's young and healthy, you might pick a plan UM that, for example, doesn't cover certain types of drug,

doesn't cover certain types of care. UM offers more kind of limited in basic skeletal care as opposed to the sort of comprehensive benefits the under the C A Okay, but but what I mean I'm looking here. For example, it says the proposed plans have a one million dollar annual per person limit to how much care the ensurer

will pay for. So if you're not gonna get any, if you're not going to be ill, or you think you're not going to be ill or need more than a million dollars, what do we know what the premium is, for example, on a monthly basis um. I don't know yet, but I imagine that it would be substantially lower than something on the c A because those plans literally, you know, they have a set of ten essential health benefits that they're required to cover um things like you know, for example,

maternity care. Um. Someone who doesn't want that, doesn't plan on having a kid, um, they won't be paying for that. So that's the appeal theoretically. But the problem is, you know, the idea upon a C is that you make everyone pay for that. I understand that. I mean, that's the that's the whole idea of insurance, right, I mean, you've

got this bigger pool. But I'm just trying to look at it from the consumer's point of view that someone is currently faced let's say with you know, paying six or seven a month for a plan when they have a high deductible, they kind of look at it and a, g Why am I paying six seven hundred bucks a month when I've got this really high deductible. So I'll never really end up using the unless unless something well.

But but of course you don't know that in the future, right, you don't know whether you're going to be ill or not well. I think that there's a big question, Max. You're talking about the legal challenge to this, and to me, that's the most interesting part because, as you said, this is im blatant violation of the Obamacare plan. Who which legal agency would be the one to go after them? And since President Trump has voiced support for this type of structure of a plan, will they go after them?

So that that's really the question. Um. So, alexas are the new Secretary of Health and Human Services had said that, you know, you have to enforce the rule of law. The question is what exactly that means from him whether they'll do it because HHS, you know, is the regulatory agency that oversees this. It's their job to enforce the law of the land. Um. But you know, as we've seen in other areas, they have a certain amount of latitude, but the amount of legal risk he is really acute.

You know, the insurer is likely to get suited if they offer plans that UM sick people are inteligible before they impose this lifetime limit. Idaho is likely to get sued for allowing them to do it. And then if HHS isn't informing in enforcing the law, there's legal risk of the Trump administration as well. Okay, well, let's say they don't enforce it. Do you expect other health insurance

companies to follow suit? UM at a minimum? You know, just about every insurer on the exchanges in Idaho is likely to to jump in as well, because if they don't and they only offer a c A compliant insurance UM, basically everyone's gonna get siphoned off into this third party UM, into the blue Cross plane at this point that's offering this type of insurance. So that's just a losing situation

for them. They'll have to balance basically the legal risk of offering those plans against the possibility that they'll only have UM, you know, a very sick and expensive to cover population left for them. UM and be forced to jack up premiums, but maybe not be able to keep up anyway because they have no idea how to price this market because you've never seen anything like it before. Thanks very much for bringing this to our attention and

giving us this detail very interesting. Max Neeson is our biotechnology, pharmaceutical and healthcare columnist for Bloomberg Gadfly, and you can follow Max on Twitter at Max Neeson and I S E and much appreciative. Coming up on a Bloomberg Markets, we're gonna be speaking with Oxo Murky as the president and the chief investment officer of Murk Investments, talk about the volatility in the value of the US dollar and whether gold would be something to buy for your portfolio.

You're listening to Bloomberg Markets with Pim Fox and Lisa Abramowitz on Bloomberg Radio. Bloomberg Markets is brought to by Commonwealth Financial Network, the broker dealer r i A who has been putting relationships first since nineteen seventy nine. Find out why the industry's most satisfied advisors are head over heels about them. Visit Commonwealth dot com. We'll just taking a look at the value of gold since the beginning

of the year, it has increased about four percent. Is that really a way to diversify your portfolio away from the risk of stocks and bonds. Here to help us answer this and many other questions is Axill Murky as the president and the chief investment Officer of MRK Investments, and he can be followed on Twitter at axel Mark based in San Francisco. Oxell, thanks very much for being with us. Talk a little bit about diversification and when people diversify, but really they're not doing a good job

at it. Yeah, great to be with you. Well, let's answer the second part of your question. First, the markets have moved relentlessly higher, and obviously if you've done anything other than by buying the SMP, you underperformed. And so some people say they diversified to bonds, but in truth, many of them have been grabbing yield and when you when you buy junk bonds as a more extreme example of that, they tend to be highly correlated with risk assets.

So it's been very, very difficult to get proper diversification. And of course why should you diversified? And volatility is low? The problem with that of causes at some point and we saw it in recent weeks. Volatility edges higher, and as that happens, people realize their misallocated and that sets in motion this grinding process that they're struggling to find diversification. And as people are realizing in recent weeks that's not so easy. Um, And you mentioned gold in the beginning.

Gold has historically had a correlation of zero to the SMP in the long run. Um. And in the context of volatility, if I can continue here, um, gold doesn't have cash flow, and that's a good thing because when volatility rises, cash flows get discounted. More so all risk assets tend to get banged on the head. Everything else equal anyway, whereas gold in comparison does well because it doesn't have the cash flow. So when risk premier rise,

gold does well. And that is the reason why every baire market since the early seventies gold has done well, with the big exception, of course, of the early eighties where real interest rates when they very high. Okay axel

uh full disclosure. Gold I find incredibly confusing and I always thought of it as an inflation hedge, and exactly as you're saying, you know it should do well in times of inflation and growth, possibly even better than say a fixed income instrument, especially tied to risk your credit. And yet you really haven't seen that substantial of a rally in gold on the heels of the sell off. And yesterday we had a guest on who is saying this is because interest rates are rising in the u US,

people are able to actually get more income. Uh so because it's not interest producing security. Uh, it's sort of being punished. Make make this make sense for me, please? Well, is that incredible? This this this brick, this piece shiny piece of metal that doesn't do anything, doesn't ever change. Is so confusing because it's the one thing that's constant.

It's the world around it that's so confusing. And and so um and and obviously the price of gold is determined just like everything else by supply and demand, and so the question is is there reason to to have more of gold than this or that? And and clearly the other things that are also quote unquote inflation hedges, but neither of those perfect heades. People have historically said, right, buying um real estate, buying equities might be inflation hedges.

And so um I tried to put it into this is volatility framework, because that one I think makes perfect sense. It doesn't have cash flow, and therefore the discounting works differently now um in the context of higher inflation. First of all, inflation is still very low and and so there's fear of it ticking up um And we're not talking about hyper inflation here, we're talking about the Federal

reserve potentially being attacked more assertive. And if there's one big competition to gold, it is higher real interest rates. And so if you get compensated for holding cash while you don't need to hold something that doesn't throw off cash.

And the reason why gold has held up very well anyway, in my view any way, is because people think that there's a limit to how much tightening the Federal Reserve can do, and so and when it was also seen the dollar has been weakening despite higher rates, and of course a lot of that has to do with how

much has been priced in. But just for the kind of in the context of the reason about a volatility and tandem we had in the market, I take something that's kind of boring any time over something that moves a thousand points in in in a few minutes, and so it does play its role as a diversifier. But but this is an environment I think where everybody, no

matter what your hold you're going to be tested. Um. Correlations are breaking down, have been breaking down, and so you're going to be tested with whatever view you have on whatever I as said. You've got to have a long term framework to think about what you want to do, how much allocate the stocks, bonds, gold, or whatever it might be. Because if you just look at any one data point, any one day, UM, I think people will

be rightfully confused. Oxville. If you go back about five years and you look at the value of gold, it was trading it around sixteen hundred and five dollars four an ounce. Right now we're hundred and fifty two. What do you say to people that maybe bought gold then and now look at their holdings and say, gee, I can't buy the same amount in dollar terms that I bought back then, And the value of the US dollar may have even declined since then, so as a result,

I even have less money. Is gold a means to an end or is it an end in itself? Actually just got a message from somebody who said, oh, I loaded up on too much gold and got burned during those days that you're just a reference. And so even when the price of gold goes higher, they might have to sell some of it, and uh and and you you get that from time to time. It comes down

to investment process. Right. If you take take if you bought stocks in two thousand seven and two thousand eight and and and and had were fully loaded in the stocks, well you lose a lot of money, and then people tell you to double down at the bottom. That is completely irresponsible because you lost half of your net worth and you lost more than you could afford to lease do.

So you've got to pay down your risk profile. So similarly, if you loaded up on too much of anything, including gold on the top and haven't diversified as as prices were moving, well, odds are that you lost more than you could afford to lose. But that doesn't make the investment in bad investment. It means that you don't have a discipline to rebalance your portfolio and and to to understand the risks and and what happened in gold at the time, volatility was too low and people weren't the

way of the risk. While anybody who buys anything, including gold, should be aware these things can be very volatile and people only realize that on the way down when volatility spikes and doesn't make the investment worth But it does remind people that the human and I'm not following the process. And notably they didn't take chips off the table now either um during the the bull market and hopefully they got the wake up call of Laton in the market.

Shield axell Mark, thank you so much for joining us. A pleasure having you on. Axel Mark is President, chief investment officer of Mark Investments in San Francisco, California. It's not gold that's confusing, it's the world around it. Let's turn to farming equipment Deer and Company, which focuses on supplying farmers and their infrastructure. Their shares are up nearly

four percent after beating estimates with their earnings. Karen yubile Heart joins us now our industrials analysts for Bloomberg Intelligence. Always full of insight. Karen, We're so happy to have you here. So what's going on here? I just sort of set the stage for why why the outlook in general for farming is turning up? Uh, you know, it's it's largely replacement demand. Um. They are in both construction and agg and medals are surging um so and the

construction business is surging. But you know, grain commodity prices have not really done anything. But the farmers have not bought, particularly the large farmers for about three years, and they there's the technology has changed a lot. Um. You know, their equipment is getting a little old, and I think they've just and they have enough confidence to get out there and start buying. Well, the company already said, what sales are up like the quarter? Yeah, yeah, um, And

well there's two things happening there. The end markets are not up that much, but deer underproduced for three years, so they get a kick, uh, an extra kick from ramping back up to uh, you know, retail demand. So internally they're going to do a lot better than the end market this year. So what's the breakdown for deer as far as where they get their rev new if you look at construction versus farming, and which is the

brighter spot heading into the rest of the year. Uh, you know, from a margin perspective, you want dear, you want add to grow and because that's eight percent of deer um right now on a sales basis. Well, it's actually seventy after Vertican and it's still um, you know,

about sixty of earnings. And the one thing they did say is large equipment is doing much better than they expected, and that's margin they don't they you know, they'll make a ten percent margin this year and at in um construction and they'll do you know of fourteen percent margin in agg so you know, because of the big stuff. Well,

they talked about agriculture and turf equipment sales. I think they were up something like eighteen to but then even more so construction and forestry equipment posting increase of nearly sixty that's the that's the merger um. But it's still up. If you take out Vertican, it's still about twenty percent.

But if you look at CATS numbers, which come out monthly, they're up thirty percent in in overall in every region is up at least um and both construction of mining construction matters more to deer is up, are both surging so um. You could see it in CATS numbers a couple of weeks ago, and it's flowing through deer seeing in construction as well, so expert and it's still up a lot so with construction. I mean, we just got housing starts that were the strongest in several years. Um.

What's driving the sort of optimism on that side? You know, housing has been pretty good for a while. Um, and I do you know jobs, um, a little bit more money, um, you know, and just an overall more optimistic outlook about the US economic growth I think is helping. And Deer is very sensitive to housing, um, even more so than Cat so and I just want to mention you keep

talking about the Verton acquisition. This was the German company, right, and about a four point six billion dollar yes, and they and they have very high margins and the road machinery and Deer wasn't really in that business and they have like a fourteen fifteen percent operating margin. Deer doesn't break ten in their construction, So good from an end market perspective, a regional perspective, as well as margins for

that business. What's the for for dear, what's the breakdown with international sales versus domestic sales and how much of a boost are they getting from sort of the I hate saying this because it's such cliche synchronized global growth, but that's what everybody says, well, it's true, So what's

going on? Um, they get about two thirds UM of their sales in North America now pro forma with Vertkin, that's gonna that's gonna go down, you know some because you know, Verkan has much larger exposure outside, so we'll probably be more like fifty five UM north America. So they actually have a pretty high North American exposure, which is good tax rate wise, right, so they'll get a benefit.

Do we hear it? A thing about dividend changes? Well, that came up because they're relative to their sixty cents to share right now. It's it's about um, it's under their payout goal based on consensus, and the CFO basically said, oh, we're talking about it, we're reviewing it because it's one, I mean one one point four percent. That's not going to get anybody interested. And with the cash flow, they raised their cash flow expectations because things are doing, you know,

doing better than they expected. So I would expect they'll do something with the dividend this year. All right, we'll have to look for that because they haven't raised it in a while. I think it was like fifty one cents to share for quite a long period and sixty cents to share, so right now, as I said, one point four, and then they went into the downturn and they were conserving cash. Right now, they can let it fly.

Let it fly. There you go. I like that all right, thanks very much, Like Karen, let him fly along with the synchronized global growth that's g G and let it fly. Karen Jubile heard are industrials analysts for Bloomberg Intelligence. Shares of Deer and Company. They are higher right now by more than four percent. 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.