Why It's Time To Be More Optimistic On EM Assets: PGIM's Rajan

Let's talk about emerging markets with Arvin Rajan, Managing Director and the head of Global and Macro at p JIM Fixed Income, helping to manage more than seven hundred billion dollars of customer assets. Are Vin a pleasure to have you with us. Give us your thoughts right now on what is going on with emerging market investments. Yeah, thank you for having me on TIM. It's it's a fascinating time and markets because um as often happens during periods

of tightening global liquidity and global votility. Emerging markets have been taking it on the nose. So we have had nine consecutive weeks of outflows. We've had a bit of a slow lead, but there's not yet a total capitulation. In terms of emerging assets UM. In fact, you know, it's countries with which have current account deficits that have actually sold off the most, because those are the countries

that benefited the most from YEO chasing inflows. We've had elections, you know, just now in Turkey, but looming in Mexico and Brazil. Trade wars obviously are taking a tool, and geopolitical issues and idiosyncratic problems in EM. But I want to tell you why I still like EM in spite of all of this, and it is somewhat of a

falling knife. I don't think the sell off is necessarily over yet, but I see several bright spots here, so emerging market debt in particular, all right, So is it's idiosyncratic bright spots where you're looking at specific countries and UH specific companies and emerging markets or is it is it more broad than that. It's actually a bit of both.

So the on the broader side, i'd say that the assets are now much cheaper, So we've had a five to eight percent sell off in depth hard currency as well as local currency, and I believe that the leverage cycle broadly speaking and emerging markets is not as scary as it was in the past, a more diverse group of investors today than than in the past, stronger reserves and strong commodities UM, and so far pretty healthy China. Having said that, obviously a China US trade war could

challenge that last point. UM. What I'd say basically is that idiosyncratically, there are a couple of things going for e M. I mentioned commodities, and that helps the commodity exporters, but also there's policy responses to the volatility. So emerging market policy makers, I'm not sitting by idly as global markets are pushing their assets down. They're responding with interest rate increases and with macroeconomic. Macroeconomic responses that would strengthen

these countries just have to break in there. Because we saw that Argentina raised interest rates to three times in one week, and we saw Turkey try also to raise interest rates and markets weren't budging, they weren't buying it, they were not getting control over their currencies. A lot of people are speculating that in an emerging markets that some of these central banks have lost control. Do you disagree? Yes,

I do disagree. I think that in certain individual cases, and I think you might have vargued for a for a response that came sooner rather than later. So UM, it's true that I think, in the case of Turkey in particular, that the policy response has been lagging. It now remains to be seen whether after the election and Duane's confirmation for another term, that he uses that consolidated

power to take more definitive economic reform actions and policy actions. Um. In Argentina's case, as you know, they have actually gone ahead and applied for a fifty billion dollar loan program with the I m F and other multilateral lenders. So I think that with that in their pocket and with the determination to do better on current account deficits, Argentina

is um, you know, doing appropriate things. You know, from the policy standpoint, it is true that markets are never fully in sync with these markets are off often evaluating whether these policy responses are adequate at the moment that they're announced. But these panics when they are often in

emerging markets and opportunity to buy cheap assets. And I think that this is not an exception to the twenty years so sell offs that we've seen in emerging markets over the last twenty years, each of which in many cases has mean reverted, you know, back to to higher prices in subsequent months. Are are there specific companies that you have on a list that when they fall in value you say, these we got to scoop up or

we have to add to a bigger position. So UM, I can't speak about individual company investments, but I can tell you that there are different opportunity sets when it comes to hard currency, that the currency itself and local rates, and we tend to think about those three in separate mentions. And the fourth dimension is, of course corporate debt, and corporate debt has actually been least impacted of these four

asset classes this year. I see the best opportunity set for investors in EM away from equities because we don't do equities, but we see that in hard currency debt because that has been taking it really on the nose, and it's because of investor related portfolio outflows. It is true that some of these countries have two large a percentage of their markets owned by foreigners, and I think

that that's h exacerbated volatility. I'd say countries such as Mexico, which is about to have its election, Brazil where there's uncertainty around the election outcome Indonesia UM, where the ownership of foreign assets has created a lot of voulatility in

spite of decent economic management. Our ex amples of places where we might find really good UM investments that are that are now presenting value, Just real quick, in about thirty seconds, I'm wondering a The m c I index of Developing nation currencies is down about half a percent today. It's its worst performance on a Monday since August twenty sixteen. Do you think that these e M currencies are poised to rally or do you think that they're going to

deteriorate further as the dollar strengthens. I think tactically we are concerned about those currencies. I think that you know, while the dollar is on a strengthening spree as it is today, it is definitely a falling knife. UM. That said, I would say that if you took a somewhat longer horizon, like one to three years, that these currencies are actually looking starting to look really cheap, both on a nominal as well as on a real effective exchange rate basis UM.

And the reason why is because global growth we expect will be come most sunchronized over the rest of this year. UM, we do think that inflation pressures will not really in the base case increased significantly. So that said is roughly priced in for eight and the rally and the dollar overall should therefore come to an end, and in turn, you know, the pull of capital out of emerging market countries should abate. Aranjan, thank you so much for being

with us. Arjen Managing director and head of Global and Macro at PGIM Fixed Income, talking about why he likes emerging markets fixed income. From here, could the United States prevent Chinese companies from investing in US companies and what could be the effects. Brooks Southerland, Bloomberg opinion writer for Deals and Industrials, joins us now about potential curbs on Chinese investments. Brooke, what have you learned in terms of

detail about what the president is proposing? So? I think the most significant thing here is he's looking to use this sort of antiquated and not very commonly employed tactic of invoking a national economic emergency to justify stricter controls on Chinese investments in the US. And then they're also looking at export controls of key US technologies. Now, I will note it's not like Chinese companies have been making

a ton of takeovers in the US. As it is, you know, there's already a significant deterrent in place, given how the number of deals that Cyphius has already cracked down upon and sort of the rhetoric coming out of the Trump administration, we've seen deal activity really slow to a trickle. And that's not just takeovers, that's investments, that's joint ventures. You're just really not seeing that deal flow. So does that rise to the level of a national

economic emergency? I would argue know that there's already a deterrent in place for these deals. So there is a real question about how President Trump is going about implementing some of these directives, rules, orders, and I'm not sure exactly how they will be implemented. But then there's a question of what they mean. I mean, investments is pretty ambiguous and uh, you know, really important sort of central areas to the US. What does what does that mean?

I mean, what break this down for US? What are we talking about here? Well, the hard thing about national security is, as we've seen, the Trump administration has really used this to justify all kinds of things that are not actually national security. Risk, Like, does a car imported

from Germany really pose a dangered America and its citizens? No, But there's just so much flexibility, so much latitude once you start talking about national security, that you could really be talking about a very broad swath of the economy. So going back to this idea of export controls, the Wall Street Journal has reported this would be targeting technologies that China is looking to uh, you know, elevate through its initiative. That includes aerospace, that includes clean energy, cars,

that include semiconductors, advanced materials. I mean, you start talking about this, you're really a number of companies can be impacted, and it's not exactly clear how this would work, but even taking away a decent chunk of any of these companies businesses to China would be very painful, especially for somebody like Boeing well and bowing shares down today. Right, So I have to wonder just to push back a

little bit and play devil's advocate here. You know, some may argue China has been stealing intellectual property from the US for a long time. It entices companies to come over to that nation and then basically copies the different trademarks that they have and then pumps out their own stuff. And this is President Trump trying to curtail that activity and say, you guys can't do that ahead of your

Belt and Road initiative. Uh, you know, five understood. But what was interesting to me about this is it's not going after deals that have already been done. It's not seeking to undo transactions. It would just be limiting future investment. So at that point, these investments, these joint ventures that exists that have supposedly been facilitating this transfer of US technology to Chinese firms, technically those relationships would be allowed

to continue. And I don't know that you know, limiting US exports of technologies is necessarily going to have the impact that's desired. You start broadening this out and making this such a wide definition of key US technology, I think that may ultimately end up being more painful for US companies. I mean going back to Boeing, so they're really trying to ramp up their China investment. That's a

huge market for them, a huge source of growth. But China is already developing its own domestic plane manufacturer that could be a real threat to Boeing. As it is, you limit Boeing's exports ahead of that. I mean, you're

talking about a really potentially painful loss of market share. Okay, But just to continue Leasa's point, I mean, if the United States is going to secure its UH physical security and military security, um, can it be argued that you can't have it both ways and that you're going to have to sacrifice profits in order to protect the national

interests of the country. And that would mean limiting the transfer of technology that is sensitive and that could be used eventually to supplant US companies such as Boeing like you just described, and that what is happening now is something that while it may be quote too late, it is at least an effort on the part of the administration to protect the national security interests of the nation. But they're also trying to make the argument that this

makes America more hospitable for businesses. They're trying to sales.

You know, that's the marketing. That may be the marketing around it, but but in terms of the actual you know, being able to transfer military technology or technology that could be used in a military setting, or anything that's sensitive that, as Lisa said, is pretty well known that Chinese companies in many companies can just copy sure, and I think there's a valid argument for paying close attention to that and trying to limit those instances when they do happen.

I will, you know, point out that CIFIAS has already been rather active on this front. President Obama prevented a Chinese own company from building a wind farm because it was too close to a Navy base in Ohio. So there are already these considerations underplay. There's a bill in front of Congress right now that would tighten cifius is scrutiny of these investments, give them more ammunition to go after these types of deals in a broader range of

industries and a broader range of scenarios. I would argue that that's probably a more powerful way to actually curb this than just invoking national economic emergencies and taking a unit lateral approach to this. Brook Sutherland, Bloomberg, Opinion, Deals in Industrial Calumnists. Thank you so much, as always for your insights. How do small towns attract bigger businesses to their shores or to their lands in order to drive

up economic activity. This is the question at the heart of an article that Craig Torus wrote that I found truly compelling. Craig tourists, economy and Federal Reserve reporter for Bloomberg News. He joins us now from our Bloomberg Unit and One Studios in d C. Craig talk to us about Greenville and why you decided to focus in on

this particular city for a story. Okay, so high Lisa Hi pim Uh I worked with one of our data scientists, Katerina Sa, and we start looking at where has new business growth occurred in the context and of overall slumping new business growth, and we found that Greenville stood out among regional piers and was kind of keeping up with the national average and even kind of competing with bigger cities like Boston in terms of new business activity. So we went down there to take a look. So what

did you find. In addition to Michelin which has the North American headquarters, they're also Lockeed Martin's got a big presence because the old Donaldson Air Force Base is now a technology center. Also General Electric has has business operations there. So what we found was a community and I mean everybody very focused on startups. Um they could be technology startups, they could be biotech startups. They could be companies like Boyd Cycling, which makes high end road bike wheels in

a warehouse on the side out of town. As long as it was new and innovative. Both the civic leaders in Greenville and other businessmen were very interested. And to me, Pim and Lisa, the key ingredient was a big Angel network willing to fund new ideas right there in a corner of South Carolina. So here's what I'm struggling with. I feel like that's a cultural issue, and I'm wondering how many other small towns have the Angel money to pour into this, or could they do something similar simply

with tax cuts and other benefits. I'm glad you raised that. Probably U, I and most people listening to this have driven through a city, no matter what state, and asked ourselves what happened here? And as you know, this is shaping politics and policies as we put in place tariffs and immigration. So what can they do? In the story, we visited Danville, Virginia, which suffered tremen and this loss

through exitive textile and tobacco. And I'm glad to use the word cultural, Lisa, because that's what they talk about we need cultural change. How do we bring innovators to this city. It's not easy. Incentives play a big role, for sure, But instead of looking for one big answer like Amazon HQ two, what they really want are small cells of innovation that feed on each other. Well, what's an example, I mean, give us tell us some of the startups and how it works, because uh, you know,

you talk about the culture. It's one thing to have the culture, it's another thing to have the money to actually fund these things. Okay, So one of the one of the secret weapons that Danville has is the region sold off a health system, giving them about a quarter billion dollars to start putting incentives into community development. And I found the people who run it um very interesting. So obviously when you have that much money and that sort of corner of the state, you get a lot

of asks. And they don't give money just to anybody. They give money to change agents that's there. That's their standard, and a change agent could be a social change agent. Like they built a brand new y m c A right on the river. It was the first building on the riverfront and maybe years and like they told me, it's very racially integrated. Which is an important achievement down

there in terms of business. Uh. What they're doing is trying to convince UM high tech manufacturers that their community college has a special program that a third year program that imitates workplace environments with cut topics like conflict resolution, and they can provide the human capital for that kind of operation. And they've had a cup bull of successes recently Kaio, Sarah and a biotech company called Panaceutics. Are

there any other cities like this? A lot of cities are visiting Greenville trying to find out what the secret sauces UM. You've probably heard of places like Boise and UM. I think uh Nashville as having some success with startups. UM. I'm glad you used the word city because it does take single minded civic focus that this is what we want to do. We don't want to just create a number of low skilled jobs. We want high skill, high talent jobs. And if I may, I'm going to give

you an example. Okay, there's a company in Greenville called kaya Tech. UM. It's a biotech company. They're doing something very disruptive. They're testing cancer drugs on live patient cells. The company was welcomed into the local healthcare system. Their lab sits in the cancer ward of Greenville Hospital. The state is both an equity partner and a grant tea to this company. And you gotta ask yourself, why did they did do this? This is not going to generate

hundreds of jobs. It's a long term bet that this disruptive technology well somehow spin off even more companies and more jobs. I found that very progressive. Thanks very much, very interesting story I recommended to all of our listeners. Craig Tours is our Economy Federal Reserve reporter for Bloomberg News. You can follow Craig on Twitter at c torres Reporter and you can check out his story on Bloomberg dot com.

Just minutes ago, a Treasury Secretary Stephen Manuchin tweeted out on behalf of President Donald Trump, the stories on investment restrictions in Bloomberg and Wall Street Journal are false, fake news. The leaker either doesn't exist or do the subject very well. Statement will be out not specific to China, but to

all countries that are trying to steal our technology. We will bring you more as we get it, But this of course is referring to the to the topic that we were just talking about the last segment about these restrictions that President Trump plans to put out there under using or incurring the scipious rule to do it. We will bring you more right now. I want to bring in Peter Kenny, founder and owner of Strategic Board Solutions, also founder and owner of Kenny and Co. Coming to

us from New Jersey. Peter, Uh, you know, this is just just one little snapshot of the back and forth that we keep getting with respect to trade. Is there anything that we've gotten so far that would cause you to change your recommendation as to what investors ought to be buying or selling right now. Because of the lack of clarity, and because of the number of variables, and we're talking really large, large global variables, it's difficult to

say anything other than be cautious. And we're seeing that in the flattening Yelker. We're seeing that in the tenure today. For example, I mean treating a two point eight seven yield. That's telling us that investors are cautious all the one second. I'm sorry to break in here, but the idea of caution at a time when you are seeing inflation pickup and you are seeing the Federal Reserve hiking rates isn't clear.

What does expressing caution mean in markets today? Well, what it's what we're seeing is a flattening Yelk curve and the fact that investors are looking to hedge their bets. We're seeing your to date return on the SMP five, the Dow Jones, which is largely flat to negative. We have seen that performance by the NASDAC. But there's clearly caution in the market. And that is in spite of what you just you know, just mentioned, which is clearly the fad is going to be raising rates as many

as four times over the next twelve months. So we're at a it's a very odd point in time for markets and investors because we are seeing really great earnings, great guidance, rising rates, healthy inflation, and yet we're seeing very little in the way of positive traction for equity. So, I mean, that's a conundrum. The bottom line is caution seems to be ruling the day, and we're seeing that

in the treasure yields and we're seeing that in equity prices. Well, Peter, is this the time to be cautious when everybody else is I mean, don't you want to be buying when people are not interested in buying and you want to sell. Yeah, so what would you be looking at right now? All right? So I mean, if you don't want to take too much of a chance, what do you go out and buy? Well, you know my from my perspective, we're going to continue to see some really solid earnings and great economic data.

Those two functions are the drivers of equity prices, and as a result, I do think that the bias remains very, very positive. As a result of that, I still like the financials, primarily because of the fact that we're going to see rising rates and that related to expansion of an interest margin. I also like to see homebuilders in spite of the fact we're seeing some some asset bubbles there. Um. I think that there's the demand for housing is absolutely

through the roof. We're seeing that in the dislocation and pricing. But housing and financials continue to be and will be in my opinion second half and well into next year. Leaders Peter, how shall we think about oil because amid all of the trade talk, we're getting the OPEC agreement to raise output, but that is sort of offset by the issues that we are seeing in Venezuela with oil output really dramatically declining there, and of course the tensions rising in Libya, and then I ran, I mean, how

are you thinking about the direct prices? Super super interesting, UM, So you know, crude US is just such an interesting topic because it's so topical relative to economic growth. The Opaque announcement on Friday was frankly, yes, a cut, but it was so nominal and so confusing that it really didn't act to allay the fears of rising of rising energy prices. So we saw that huge spike up five point over five in one day, best one day performance for the for w t I CREWDE in six months.

Today we're seeing a largely flat move marginally fractionally higher. The bottom line is on Saturday the Opaque Minister UM from Saudi Arabia said we're going to do whatever it takes to keep energy and oil prices stable, which is an indication that there's more room for accommodation, an indication that there's more room for production increases, which is why we're not seeing any followed through from Friday's move higher.

I do think that we're probably very close to a new turn top in CREWDE prices, But I think the downside is limited because of the global growth, the global demand, and because of those three factors that you just mentioned. Venezuelle as implosion, concerns over Iran and um Iraq, met the whole Middle East, you know, matrix, and the fact that there really is an awful lot of instability in

terms of the producers and what they can produce. For example, there's really only three major Opeq and non Opeque aligned producers who can really move on increasing production. They can substantially, so that matters a lot. But many of the OPEC members really are at full production right now. All right, we gotta leave it there. I want to thank you

very much for joining us. Peter Kenny, founder a strategic aboard A Solutions that talking about the current investment climate, and uh here joining us now to talk about the current tweeting environment. When it comes to Treasury Secretary Stephen Manuchin is our own Salija Motion who co wrote the story about the US planning curbs on Chinese investments, this citing a security risks as the reason. Selia, what do you make of the Treasury Secretary's response to this reporting? Yeah,

you know, he always speaks very very carefully. UM. I think it's interesting that he said quote the statement will not be specific to China. So there's a statement and then there's a lot of other matter that would go. You know, there's a public side of any report and there's a private side. So our sources have told us that the research that's being done in the administration has

to do with China. We have White House, the top economics sorry, top trade advisor Pierre Navarro, who has laid the groundwork for such actions, specifically towards China, with a thirty six page report that he put out last week that is all about China and China's economics aggression. Uh. So I think Manuchia using the opportunity to refer just to his statement, uh and maybe not directly to what goes behind that. Just real quick here, you've got about

a mint left. Is this unusual for Secretary Treasury Secretary Munition to take to Twitter to respond to something? He does follow in the President's footstep with a lot of these things, and not footstep, but take lead from him. It is rare for him to call out a specific media report at the same time he is probably hearing from investors from market participants and even Chinese officials for more details, and so I actually wonder if part of the message is to go to allies or specifically to

China or markets on this. We will of course be waiting to hear more news from the Treasury Secretary and look forward to getting that the news release. I want to thank you very much Selia Molson for your story well worth reading on Bloomberg dot com Treasury Department planning to heighten security of Chinese investments in sensitive US industries under an emerging see law, and we'd wait to hear if there's any update on that. Much appreciated for your reporting.

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