Signs of Credit Stress Pose A Big Challenge to Emerging Markets

And PIM we've been talking about the dollar revival. The flip story to that is the significant decline in emerging market currencies, and to talk about that, let's bring in Damian sass Our, chief Emerging market credit tragist for Bloomberg Intelligence. Damien, I'm looking right now at the biggest one day drop in the M S c I E M Currency Index since early October and more than a month. Is this all just the dollar or is there something else going

on with a rethink of investing in the developing world? Yeah, at least you no, I think there is a little bit of something else going on here. I mean, if you just look back at was a test of what's called the external durability of global economies. And I think the way things are shaping up here, you know, heading into yourn for is you know, with with a lot

of shorts and liquidity metrics kind of rolling over. And by that I'm talking about US liquidity metrics, you know, um, you know, oh I s t to libor and and TED spreads and all of this. I think we were maybe setting up to see a test of sort of the structural fiber of financial markets, and I see the credit markets as we get into the new year may very well be tested for the first time in a post TFC more tightly regularly. Hold on a second. So

great financial uh, great financial crisis. H Hold on a second. This is what you're saying is really important, and I want you to sort of articulate this. You're concerned about the sustainability of current credit markets given some of the stress metrics that you're seeing build right now. Is that correct? That's art I think the said unwind is crowding out

competing asset classes. Damian Sassaur what is going on in Mexico and we see a stock market that is lower by about two right now and the new president on low this is not reassuring at least two investors. What's happening. Yeah, you know, I mean we're gonna see a lot of credit differentiation here, I think as we as we get into the end of the year. I mean, you know, look, Trump has gone some way toward unifying forces against the dollar and against the US, from China to Russia, to

France and Germany, you name it. But I think we're going to see foreign governments pay a lot more attention to currency denomination and the PACEO is then you know, it's the most liquid emerging market currency out there, and I think people are going to use that either as a head vehicle or a way of speculating against the dollar. So I mean, you know, there's a little bit of

that going on. And I think, you know, Mexican equities and a lot of other Mexican assets are just really kind of um, you know, a byproduct of that, but you know, just kind of taking that that that fall it a little bit, you know, I think I think the real themes as we get into the new year and emerging markets PIM you know, China struggling to find a way to fix its slow growth problem, and they're going to be hard pressed to find one that doesn't

involve taking on additional leverage. Um. You know, if you just look to Russia, now that the midterms of behind US, we have new sanctions that are expected soon and then this could be registered regulated US funds are not able to participate in new Russian sovereign auctions that could be a major hit to them. And then the other big theme I think that we're looking at is Brazil, right,

I mean Brazil. You know, everything is all rosy in Brazil, but now the country needs to deliver and both in our as an uphill battle if they if they plan

on passing hugely unpopular pensruon reform and other structural agenda. Well, Damien, I want to go back to something that you were talking about with respect to the stress that seems to be emerging in credit markets that basically the FED is withdrawing liquidity from markets and you're starting to see investors go back to treasuries and withdraw money from emerging markets.

I'm just wondering how much further you think this could go, because I'm looking right now at the biggest dollar denominated emerging markets debt et F and it's down six and a half percent year to date. I mean, this hasn't

been a good year for it at all. Are we looking at much deeper losses than that even potentially next well, I mean if you just look back at the modern era of emerging market debt and I'm talking post global financial crisis, you know, this is the first environment we've ever seen where you know, we're duration and I'm talking losses that are due to rising US yields are really dominating.

You know, uh, you know, any other factor that might generate you know, that might that might impact the end returns. And the other big factor, as we know, is spread. We'd have we've come come to some the taper tangum a number of episodes, November elections, you name it, where spreads have blown out quite considerably in the e M debt and we've not seen that this time around, and

that is a real risk. And I think the reason that spreads has kind of held their own here has a lot to do with the fact that other spread asset classes here in the U S, specifically high yield, have not really witnessed the same sort of you know, um hit that emerging market, you know, so, so I

think I think you make a very good point. I think there's a real risk here that not so much that the set isn't doing its job, but it's going to be very very difficult for it to navigate an environment where you know, dollars are being squeezed out of the system. Damien. Are there many professionals who are betting on a recovery in e M debt and equity and have not seen that recovery and now are faced with

issues about redemptions or just past performances not prologue. Well, I mean yes, and and there's there's certainly gonna be pockets of that. But you make a really you're hitting on a very very important nerve here, Pim. As we get into the new year, you know, everything resets, right, And I mean I've been crunching the numbers here and I don't see how you can have exposure to some of these very high BIDA, high risk UM you know

e M themes like Turkey and Argentina. You know, because if we go into a risk on environment, you know, at some point next year, those credits are going you know, they're going to outperform significantly, just given the embedded data that are in them, so you know, you just can't

afford not to own them, you know. And I despite the weaker fundamentals, the higher idiosyncratic risk, I really can see buyers emerging over the next few weeks into year end, you know, before conditions turn a liquid into the holidays. So just to follow on that theme right now, at least looking at retail funds, we really haven't seen outflows. Are we seeing outflows from other areas or not yet? We have We've definitely seen active funds take their share

of out flows. A lot of that's already kind of transpired. I think it's safe to say that you're going to see some rebalancing, as you do most years, you know, as you kind of you get through the thirty feet into the into January. I mean what happens is is usually a bit of a lag because the redemptions start to come through, at least the redemption orders come through. Now you know, they usually have a month or two before they have to meet those redemptions and then we're

talking feb one. So really what you're looking at and this is you know, just talking about credit conditions, Lisa, which you and I are just kind of, you know, harping on here as we emerge from the holiday, you know, sort of Christmas holiday. How US credit markets react to that and whether they normalize where they remain type is going to be absolutely critical to performance in Thanks very much for sharing your time with us and your expertise.

Damian sassau Are Bloomberg Intelligence knows everything about emerging markets and emerging market credit and indeed, just taking a look at the Eye Shares m s c I Emerging market et F, it is down more than twenty percent since the beginning of the year. And it's time to talk about fees. You know, Lisa, whenever we talk about exchange traded funds, we speak about why they are popular, and of course one of the big reasons has to do

with their low cost fee structure. Specifically when it comes to big index funds, let's say those that are offered by Van Guard. So I want to know about in the advisor space, what is happening to fees. Greg Gore is the senior vice president of wealth Management for Commonwealth Financial Network. He is east in Boston, as many of those people at Commonwealth are, and he joins us here in Austin, Texas. Greg, it's a pleasure to have you

here with us. Tell us the latest when it comes to the trend in fee structure and how it's working for the advisor community. Yeah, thanks for having us him. UM. So there, you know, we're in the midst of probably a ten or fifteen year secular trend away from commission business. UM and his advisors have you know, migrated UM away from commissions and into fees. Uh. The entire industry, UH is moving toward lower cost, greater transparency. UH. It's great

stuff for clients. You know, they're seeing expense ratios go down. In many cases, they're seeing the total overall fees they're paying their advisors go down. UM. So clients are big winners here. And you know, it seems like as this trend progresses, UM, you know, commission business will continue to erode and we may eventually get to a point where the vast jority of advisors are fee based. So you said that most advisors are most clients anyway are going

to be lower paying lower fees. That means that the advisors are earning less. Do you expect some to go out of business as a result. It's interesting and that you know, client fees there, there's different components to it, right, So we started this with the exchange traded funds, which certainly you know carry you no far lower expense ratios

than your typical actively managed mutual funds. So a lot of advisors UM have migrated clients from higher cost expense ratio products to exchange traded funds UM, you know, maintain their fee structure or only modestly adjusted it down UM, and clients ultimately may still benefit there. And then you've also seen some advisors reduce their asset management fee UM, but charge a separate financial planning fee, so sort of

an unbundling of the advisory fee if you will. UM. We we definitely see a trend towards that as well. What is the breakdown if there is one based on demographics? In other words, older customers, younger customers, because many younger customers they've never lived in a world where commissions were the basic way in which he got paid. Yeah, that's a that's a great one, PIM. I think what we're seeing among our advisor group is, you know, the older

clients I think are very comfortable UM. You know in both the commission and a few world A lot of them grew up with commissions, you know, sort of came out of that era where there was still stockbrokers, you know, where there was right Jacole Jamada trade and then you've got your slip and you realize that you paid, you know, you paid the demission. You know you paid, you paid for the transaction. So so they're very comfortable with that.

I think, um as you move into the younger generation that you know, they just consumed services differently, right, So to them, they've grown up in the world where you know, to them, commission is just they have no reference point

for that. They don't pay commissions. Um. So, so that's where, particularly as we think about next gend clients, a lot of our advisors are adjusting their fee schedule for those folks, charging things like you know, recurring financial planning fees that could be on a monthly basis, that could be on a quarterly basis, like a subscription, like a subscription fee. That that's how they you know, these folks like to

consume services exactly. I have to wonder if there is more transparency and given the fact that fees have been compressed across the board at what point will clients just say I wanted to be lower and if you don't lower it, I'm gonna go elsewhere we I'm gonna go to a rob robo advisory and I'll make it work myself.

I think you're seeing that now. I think, um, you know, clients are asking, they're better educated, and they're asking hard questions around fees that probably ten years ago they weren't. Now for us, as we think about you know, our advisors sustainability, UM, I think as long as you're providing far more than just investment management, it gives you a nice mode, if you will, protection from like a robo advisor, it's primarily focused on investment management. So most of our

advisors do play in the comprehensive financial planning space. So investment management is just a small part of what they get paid for. Insurance products, annuity products. They all come with their own fee schedules based on the products that may be sold. Do you see that that is going to be an area that is going to change over the next couple of years. I do, UM. I think you know, the insurance industry maybe hasn't been on the leading edge of this movement from commissions to advisory fees.

But I think we're starting to see signs that they're going to move that direction. UH. Some of the major v A carriers now have moved aggressively variable annuities have

moved aggressively into advisory based contracts UM. I was just talking today with one of our insurance partners, asked ash Brokerage UM, and they were talking about the evolution among some of their insurance partners that are getting more into the fee UM advisory based insurance products UH to support you know, advisors who can't receive commissions who have made that move in their affiliation model that their ent fee.

So I think the evolution is going to continue and we're going to get a lot better products from it. It's funny as you were talking and you were saying they need to provide something more than just investment advice PAM.

Based on some of the conversations we've had here over the past two days, it seems like being someone's family therapist is part of it because you have to talk about what their life goals are, what they envisioned for themselves when they're olders, how their relationship is, how they would like the world to be. Is that accurate, and

that is accurate. And uh, you know, we think about what our advisors do and and all the services they deliver, and all the conversations they have, and if you brought ten of them over here, I bet you they'd tell you they spend less than ten percent of their time talking about investments with their clients. UM. It's really, you know, it's not what most clients want to focus on. Um that you know that they want to know, do I have enough money to retire? You know? And am I

going to be able to take the trip? And I am I gonna be able to fund my grandchildren's education? Um? So it it the the investments, you know are important, and certainly from the advisor's perspective, they do pay the bills to some extent. UM. But but I don't think it's you know, always the top priority for clients. Fiduciary rules, that was a big topic last year. It's less so this year. Do you believe that many firms are going to just adopt fiduciary rules standards because it's good business.

I think we're in a wait and see right now, you know. Um, certainly the d L fiduciary rule UM was a wake up call. I think for a lot of firms to sort of look at their business and say, are we future proofed? Are we in a position that you know, we can comply with this UM Now everybody got a reprieve from that. UH, that may route to be temporary. Right. The SEC is out now with the best interest proposal. We've heard from UM the d O L that they may take take another run at some

regulation here. UM. So our advisors, I mean of our business is already fiduciary. So so our advisors are very comfortable with that. Ultimately I think goes that direction, we'll be just fine. Greg Gore, thank you so much for being with us. Greg Gore as senior vice president of Wealth Management at Commonwealth Financial Network normally in Boston right

now in Austin, Texas. Definitely, one thing that is shaking at least the energy stocks in the SP five hundred and beyond is the ongoing decline in oil and the ten day losing streak is setting it up for possibly the worst route on record. The ten day loss has been the biggest since November two, sixteen, and that was one there was basically a free fall going on in the price of oil. So it's using a lot of questions here, given the fact that we have entered a

bear market. Now to talk a little bit more about this, Julian Lee Bloomberg oil strategist joining us Julian can give us a sense of why what is the mean driver behind the oil price declines recently. I think there's a number of things going on. We are seeing that forecasts of demand growth of being revised downwards by all of the major agencies. But I think that the bigger thing is is really a supply issue. UH. The US government has raised its assessment of how much oil the United

States is producing. Both the most recent weekly and the most recent monthly data show that production is growing at a rate of two million barrels a day year on year. That is a staggering amount of oil. I mean that is adding as much oil as is produced by Nigeria and Gabon to OPEC members in the space of a single year. UH. That I think has really spooked markets

and there's more shale to come. Julian. If you take a look at the price of crude on the NIMAX, since the beginning of October, the price has fallen more than twenty per cent. If this was a stock market indicator, people would be jumping out of windows. They would be seeing their stock portfolios lower by a five. Is there a rebound that will happen. There may be a temporary rebound. I mean we are moving towards a period of of

much stronger seasonal demand. I mean, if you look at one indicator, if you look at US refinery runs, the amount of crude oil processed in US refineries, it's just coming to the end of what is typically a seasonal low point, and the amount of oil being processed will pick up over the period to the end of the year by as much as one and a half million barrels a day. That's going to give a a short term boost to the demand for crude oil UM, and

that might provide a bit of relief for a while. UM. But I think eyes are going to be on on Opaque and Russia, the group of countries that said they would cut output. They are meeting on Sunday. This is not a policy making meeting. It's a meeting to sort of assess how their current agreement is going. But it will set the tone I think for their discussions over thecoming coming weeks. Is there a price point Julian at which basically people start to go back to fossil fuels,

go back to using oil. That stymy is the development of alternative energy sources. In other words, that's good for the oil industry long term. In other words, three dollars a barrel, it would be actually for the long term, probably pretty good for them. For the oil industry now, it would certainly be good from a demand point of you. I think the problem with thirty dollar a barrel oil is that that really starts biting into investment in future production.

And we saw that when oil prices fell, when they were getting down to those sort of levels, in investment in new projects just dried up um. And we're still I think seeing the tail end of that. Now. What is you know, what everybody I think agrees is that we need some sort of stability around a price that doesn't choke off demand too quickly, but also is high enough to allow the industry to continue to invest. What that level is is is the thing that nobody can

agree on. When oil prices were thirty dollars a barrel, OPEC said it was round about fifty. When it got to fifty, they were talking well maybe it's round about seventy. When it got to seventy, well maybe the target was eighty. So you know, this is a very much a movable feat all right, it's a movable feast, but the feast

is sometimes stuck in the ground. Reserve values they are used for collateral purposes if you happen to be borrowing money, which many exploration companies in the shale patch actually do.

They taken on a lot of debt. When do they have to revise those assumptions for how much that oil at fossil fuel is in the ground, how much it's going to be worth well, I mean most of these companies are looking at a sort of revising the estimates of their break even prices and the value of oil in the ground on a usually on a six monthly basis. So the next one is is probably coming up towards

the end of this year. But at seventy dollars a barrel, sixty dollars a barrel for w t I I sort of work in a Brent world being in Europe, but you know, sixty dollars w t I, most of these companies producing in the shale patch have probably cut their break evens two round about thirty thirty five dollars of arrel. So from that point of view, I think they're still

fairly comfortable. The people who are going to be suffering as prices fall if they continue to do so, are the people who are looking at investing in very big, expensive, long term projects, and that's where the investment has really dried up. Julian Lee, thank you so much for being with us. Definitely oil in the spotlight today and your perspective is greatfully, really insightful. Jeffrey, Julian Lee is Bloomberg Oil strategist. Uh coming to us. We are currently in Austin,

Texas at least RAMA. What's along with my co host and colleague Pim Fox. This is Bloomberg. Then we're going to talk a little bit about financial literacy financial education and joining us now to help us do this is Maggie John Drew. Maggie is the president and owner of Gendre Wealth Management based in Farmington, Connecticut. Maggie, thank you very much for joining us, ke you for having me.

Just by way of introduction, I just want to mention that the not only do you have a b a. In economics from Providence college but also an m a Master of Science rather from the London School of Economics. You've taken your educational perspective and you've decided to turn it into a trivia game having to do with financial information. Tell us about your your your trivia game. Sure absolutely

so UM. I actually joined my partner Laurie, who's been in the business for over thirty years, and a goal of mine was to reach out to the next generation of investors. And everyone's done the sit down seminars where you have the state dinner and you know, maybe you leave with a prospect, maybe you don't, UM, and not

necessarily everyone gets a lot out of it. So I thought, how can we make this for the next gen and UM we started doing him at more interesting places like breweries for instance, and we would have a trivia game which include your typical trivial questions but then also financial ones, and at the end of every round I would give some financial advice, so anything from basic insurances to for owen k plans in your match too of course student

loans UM. And they've been wildly successful, to the point that some corporations have started asking me to bring them in in house. So Maggie, You've worked at a lot of Well Street banks, from Barclays and JP Morgan, uh most prominently among them. I'm wondering, our millennials really different

from anybody else? And is it really a group that can be isolated with a characterization and when it comes to investing sure, UM, I think a little bit yes and a little bit no. I mean, in the end, everybody wants to have a good life, right and however they define that. But I think one place specifically that millennials are different than boomers is that they do believe in social socially responsible investing. In fact, I believe sixty six percent of millennials want that that social peace and

boomers about half. UM. So often when I am working with millennials, I have clients asking me to invest in of course clean energy, Um, they want to invest in companies with a lot of women on the board. They want to invest in bettering the water supply. So that's a major difference, I would say. And then the second one, of course, is the student loan debt. I think we

have to deal with that a lot more. The use of technology in order to stay connected with your clients, with your customers how has that changed your ability to actually run the business but also to give that kind of advice on a continuous basis because people are much more mobile today. Absolutely. So, while headquartered in Connecticut, I spent quite a bit of time in New York as well, um and I have clients there. So when I'm in Connecticut,

we skype. We have used FaceTime before. In fact, I had a client that was spending a whole year in Italy and she inherited money from her father and wanted it figured out before she came back years a long time, and we did everything or skype. One other sort of cliche about millennials is that they're scared of the stock market because they grew up at a time during a lot of turmoil in equity markets. Is that true? I

would say it is. Yeah. We we have seen of course two eight most recently, and then some even saw the dot com crash. Um. But the way I've been commanding that is through education. Um. So again, the trivia nights are a great example, or just having small group group events in our office where we can explain the impact of long term investing and how even after those that stayed invested are relatively Okay, today, what is f our next Gen. This is something that you put together.

It's a subscription service for financial planning. Tell us about f R next Gen. Sure, So, a lot of professional millennials who would be wonderful clients don't have necessarily the a M that a traditional assets under management. That's right. They don't have the money to have a financial advisor manage it, but instead a lot of that money is tied up in their four own K. And I've seen people come to me and their default in their four

owne K is simply a money market. So they're really not getting the benefit of that investing, but they're putting away for a four owne K. And so for people like that, they can come to an advisor, pay that subscription service on a monthly basis, and we can give them advice on their four owen K, how to better allocate it, on student loans, on buying a home, really providing that holistic financial planning without necessarily having the assets er management. Maggie, I want to go back to something

that you said, which is the student loans. That's a serious issue that we need to deal with. How has the massive student owned a student loan debt, which is has surpassed one trillion dollars in United States, affected family formation, retirement savings, etcetera. For millennials. Yeah, I think everyone's putting it off a little bit, meaning buying a home, starting a family, not only because of student debt, but I know from speaking with clients that is definitely a reason. Um,

I think another reason though his career. Right, So in the past, if you had a child, maybe you had to make some some decisions without about your career, whereas now people really want to be set in their career, paid on some of that student loan debt, and then be able to start a family or buy a home. And in fact, I am starting to see that I get a lot more questions about home buying and five

plans than ever before. Unfortunately, sometimes it all doesn't work out and there are divorces involved, and as someone that helps family plans, those families can change in disposition over the course of years. Tell us a little bit about that part of your practice and how you specifically are able to help women who are going through those issues.

Great questions. So we actually are women practice, uh, not necessarily but by design, but definitely enjoy that peace and because of that, we do have a lot of women coming and seeking advice about financials. A lot of women were home caretakers and hadn't worked in many years um or they've never dealt with the finances before. Uh, and so when they come to us, we definitely do holistic planning. So we start with a financial plan, making sure that

the budget is sound. Then maybe they're they're likely inheriting money that they haven't had before from their spouse, right, well, inheriting is the wrong word, but but obtaining, right, And so what does that mean? And now retirement is no longer with somebody else, it's alone, and what does that mean? Both emotionally and financially. So that's definitely a part of our practice we've developed. And just real quick, I'm wondering, how many people do you say that you work with?

How many different clients? Sure? We have a hundred and fifty households. Yeah, all right. It's really interesting to hear about how the different generations are different, to try to extrapolate out into what we're seeing in markets and how that's reflected. Thank you so much for being here, Thank you for having me. Really interesting Maggie at Jendrew, President, owner of Jendrew Wealth Management in Farmington, Connecticut, but obviously

not today. She is here in to in Texas at this conference, at the Commonwealth conference that we have been at. So we are looking right now at markets that are in the red. Perhaps this is just another bout of concerns about overvaluation, with the NASTAC leading the way down one point four percent decline, uh SMP five hundred down a little a little bit less than nine tenths of

one percent. In the bond market, you can see yields actually coming down across the board, despite some speculation that the deficit is only going to increase and the FED is on pace to raise rates. Coming up, we're gonna take a look at emerging markets. What does the FEDS path of rate hikes mean for them. I'm Lisa Bromo was pim Fox, and this is Bloomberg Markets. Thanks for listening to the Bloomberg p m 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 bloom or Radio m