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Where we go with some of these trade policy issues, and it's certainly been an issue for investors. Financial markets broadly defined, including fixing on markets.
Let's talk about that now.
Karen Manna, investment director, fixed income, Federated Hermes.
It's Burg, Pennsylvania, the Pride. She's a graduate Penn State.
It's the university.
I'm a monster fan of Penn State. My son graduated from there at great school. Karen, thanks so much for joining us here.
What do you tell your clients these days when they seem you are getting whip saled every day by news events as opposed to maybe some fundamentals of the bonds.
They do own.
Good morning, and thank you for having me. It's a real pleasure to be here in studio with you. So uncertainty is deeply uncomfortable, and treasury markets have been misbehaving, perhaps swinging in a volatile way, which is not what's desired by fixed income investors at all. So we say, realize that the uncertainty will be resolved when those in the administration resolve it. But position in a way that highlights a couple of things. First and foremost liquid instruments.
Be cognizant of your liquidity so that you can be nimble and position yourself appropriately when we're not doing scenario analysis, but we have actual facts to deal with. Stay up in quality, and for newer money, we like the idea of shorter duration one to three years. Pick your flavor there. Multisector gives the portfolio manager a little more opportunity to to add value to your portfolio. But so basically, stay short, stay high quality, stand liquid instruments.
Well, Karen, I mean you're the investment director of Fixing. Come confederator Hermes, and I have to ask you this, how much time are you spending looking at the foreign exchange markets? The broad dollar index is down three percent year to date. I mean, forget about it. I mean it's non dollar denominated debt, like my emerging market local currency debt, which is leading the way up five percent
year today. Talk to us about the role emerging markets or for that matter, non dollar denominated develop market that plays in a broad fixing come portfolio.
It most definitely has a role in a role now that is worth consideration. EM markets have withstood the tests of inflation and all the shifts over the past couple of years, and we saw dramatic tightening and spreads last year that we were able to take advantage of, and then we and our portfolios move back to a more neutral stance. But within EM what you've highlighted is that
you have different ways to invest in the markets. The current and see the sovereign debt, the local currency, corporate debt, and that gives the portfolio manager some latitude. So it's an area that we like. But you also highlight the shift to international and what does that mean for US dollar domestic based fixed income. That's a different landscape, playing field, whatever you want to call it, than we've had for a very long time.
I'm looking at the IG function on the Bloomberg terminal, the Bloomberg Index browser. The best performance in fixed income in the US has been US mortgage backed securities.
Talk to us about that market.
How you guys view that we are overweight to mortgage backed securities. We see that as a strong positive, and we've been there for a very long while. You have a situation with mortgage backed securities where you had two of the largest buyer step back, creating a technical opportunity, and that was the FED as they've paired back their
balance sheet, and then the US banks. So mortgage backed security is the second largest market in fixed income behind US treasuries, buying opportunity for US and one that we think will persist for a while longer.
And Karen, does that extend I mean residential mbs. We're talking not CMBs. But let's talk about abs. Let's talk about some of these other more complicated securitized asset classes. A lot of them are short duration. I mean, what are your thoughts there? I mean, where do you think we should position along the curve? And does that kind of filter through into your you know, your willingness to want to invest in, say, asset backs versus mortgages.
In our shorter duration strategies and approaches, we are using asset backed securities to a great extent. Our asset back team that is also in charge of those short duration portfolios has an affinity for those types of instruments and sees value at the short end. As you point out, they are short duration, not long term maturity. They offer
more value than similarly rated corporate bonds. So an attractive space for the markets, but one that has simply grown right when we came from the depths of the financial crisis and then to their most recent conference in Las Vegas. Huge interest in that segment of the market because of the yield that can be created.
Yeah, it's not just student loans, credit card receivables, and I want a loane floor plans anymore, I guess right. And that's in that spectrum. What other sort of non traditional asset classes, subsectors of that abs world are you investing in.
We tend to stick to the more defensive elements, what you might call the plane vanilla areas of that market, the more receivables, but we're watching with interest what goes on with that market. We have other areas within alternatives that are short duration and floating that we employ in our portfolios, and that's namely trade finance.
So we like municipal bonds on the show, actually it's municipal bond Friday. We have sponsors segment later this morning. I'm just about me the municipal segment.
Well, municipals are always near and dear to my heart. It's where I started in the industry as an analyst public power and electric utilities from my bread and butter for many, many years. But muni's offer nice stability for portfolios. The credit quality is very, very solid. We've seen a walk back and spreads a little bit this year, some dislocation in the market because we've seen a tremendous amount of supply.
Year to date.
MUNI supply through early March is up twenty four percent, So you're seeing issuers trying to position get out in front of a couple of things, right, move early rather than later. But the credit quality is there, and I think right now investors are seeking that income protection because it's fairly simple. You're getting more income in your portfolio and you want to protect it to the greatest extent possible.
Well, Paul, you know, Karen makes a great point. A lot of that MUNI supply here to date has been universities in colleges. So the tax change with the law, you know, legal changes that are happening Columbia with the new with the Trump administration, is driving a lot of these universities to tap the municipal bond market here, and you know my question and we should be asking Rima Sarafi, this is the bevice share of TAXI KPMG in a minute, is how much of that? I mean, you know, is
really do you want to own in your portfolio? I mean, you know, we mentioned abs, we talk about student loans, we can talk about all of that. I mean, just how much exposure do we want to have to that element to that end of the market here, Karen.
Well, specifically muni's tax exempt investing for universities. That's an area where you could see some credit issues, even setting aside tax policy. We all know that there's fewer people going to university simply because of age wave and challenges and cost. So we have a number of universities that likely, even if you look through the sector to just the underlying financial statements, wouldn't pass credit muster because of how
they're positioned. So that's an area where we do have less exposure or would be underweight in our munior tax exempt portfolios.
Karen, thank you so much for joining us. Really appreciate you coming in Thanking on a Friday. Get a double gold stret Friday.
I'm looking around here.
I mean Karen Manna, Investment Director, Fixed in Come Federator Hermes.
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Let's talk taxes because I don't know what's happening when tax has come out of this administration, and I think a lot of investors are also a little bit uncertain about the tax situation and the strategies of this administration. I think the expectations were for a positive scenario, but we're just not sure.
Rama Sarafi. She gets paid to think about this stuff.
She's the vice chair head of Tax at KPMG Raimber. What are you telling your clients about how the tax structure in the United States is likely to evolve over the next one two, three years.
Well, thanks for having me today. It's a pleasure. So it's a really busy and exciting time to be in tax and KPMG is looking at what we call the tax policy trifecta. Right now, there are three things happening at once. One is the twenty twenty five to cliff, which is set to expire at the end of this year. The second is Goal will reform, and the third is any other regulations that are changing on the horizon, including
the impact of President Trump's tariffs. So our clients are looking at the confluence of all three of those things, which are huge disruptors to their business, so.
Tough to us. I mean, what are you hearing from your clients here, Rima, I mean, what is like the number one issue? Is it the tariffs? Is it potential tax changes from the Trump administration? What do you getting queried on most We're.
Getting queried on all of the above, and that's what that's what's super interesting and exciting right now because they're all happening at once. So because it's multi dimensional, we need to model. Our clients need to model scenarios for both the short, medium, and long term. And that's what
our platform, Digital Gateway has. It has the ability to take data and put it in one location and be able to model those scenarios at one time and be able to pivot based on as you know, the daily changes that are happening in the market and with regulatory change. So our clients are basically talking to us about all of those things, depending on their facts and circumstances.
So how do you think this tax cut discussion, this negotiation in Congress will go.
It's my understanding that it's they can't.
Do anything until they pass a budget here, So I'm not sure how this is going to play out.
What do you advise in your clients?
You're absolutely right, No one's sure how this is going to play out. Right, The hardest part of passing this bill still lies ahead. We need both chambers of Congress to agree on the provisions of the bill, and that's the hardest part. So lies ahead, we don't know, and that creates even more uncertainty. And one of the things we're advising our clients, among many things, is to not
wait and see. Our clients really need to get after this now and be able to model out the scenarios because once legislation starts to become clearer, things are going to move really fast and companies are going to need to be able to react to a bill. So while it's not going to be it's not certain when it will happen. It probably will, it's just the hardest part lies ahead.
Rama, all my wealthy friends up in New Canaan and Greenwich, Connecticut are worried. They're HEDGEPHND managers, they're private equity managers, They're worried about the carried interest here. I mean, talk to us a little bit about your thoughts there. What are you advising clients on that end?
Yeah, So again, there's so many dimensions to this that have yet to be seen. And like I said, the big picture here is that companies need to and individuals really need to look at the impact of all the dimensions of the changes, and really time will tell what all the various specific questions are that individuals and companies have related to any impending bills.
RIMA outside of the US.
What are kind of the key issues that you guys are facing here for your global clients.
So our global clients are facing into that second prong of the tax policy trifecta that I talked about global reform, which the impact of Pillar two among other things. So, BEPS, I'm sure you've heard about it, and so what are the impacts outside the US even though the Trump administration has indicated that it's not going to be amenable to bep's Pillar two. Companies that operate outside the US still need to comply with Pillar two regulations that are in
place in the countries in which they operate. So we're advising our clients on their global footprint and looking at what tax planning or what operational changes they need to make in light of that uncertainty as well.
RIMA, I know KPMG is the first of the Big Four to be licensed to practice law here in the US. What's the motivation before behind that?
Yeah, So KPMG is really proud to be the first of the Big four KPMG Law US to provide what is really an increasing need in the legal market space today, which is providing process driven, technology enabled services for our clients. And that is a real growing need. The volume of transactions, the volume of contracts that need to be managed, the ability to put that on one technology platform, which I talked about our Digital Gateway platform is really important in
the marketplace and being validated by our clients. So that's what we are going to do, and we're already getting tremendous receptivity in the market in that for that need.
Riema, thank you so much for joining us.
Rima Sarafi, Vice Chair for the tax practice at KPMG. KPMG Big Four. I remember when they're a Big eight, Oh my god. Yeah, and then the Big six and now we're down to the Big four.
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Let's talk about the you know, global supply chains in a world of rising tariffs. What does it mean for trade here in this part of the world and around the world. Alyssa Rusnov joints is. She's the CEO of l Tex. She joints us here in our Bloomberg Interactive Broker Studio, which gets her double stars because it's our Friday being in our studio.
We Liza, thank you so much for joining us.
What are you telling your clients about tariffs and what the ultimate impact will be on trade between the US, Canada, US and Mexico, the North American in general? What are you telling your clients these days?
Yeah, so pleasure to be here. There is a lot of volatility obviously in the markets. But I'm finance and trade, so there's a lot of crosswater trade that I've seen on my side, whether it's Mexico, Canada, or other parts of the world. And obviously there is a lot of uncertainty happening and a lot of suppliers, small suppliers in Mexico and Canada, bigger corporations and specific sectors that are
really impacted by it. So I financed a lot of industry related to cars, car parts, energy, commodities like coffee, which I'm a big com consumer off obviously being in New York from New Yorker, So there's certain a lot of volatility in that sense. Meaning if you look in for example, at the car parts or just car export slashing port trade, that's a crazy amount of operational volume because it's not just you know, a car is being let's say manufactured and Mexico just goes into the US
and you can just put a tariff on it. The reality is the car parts go back and forth maybe three, four or five six times. That's absolutely right. Uh, there's a lot of operational logistics there because apparently shipping is actually quite cheaper than manufacturing in certain in certain regions. So reciprocal tariffs do not necessarily make sense even from an operational standpoint. It's just really really hard to do.
And unfortunately trade is not necessarily digitized, so operationally you have to have tremendous amount of staff on the US border or Mexican border, Canadian border to really be able to do all that. And then if you will look into the car sector, if for example, we will impose fifteen to twenty percent tariff on Canada in Mexico, our car price will probably go up by you know, four to eight k, right, So that's that's a lot that goes on the US consumer obviously, So and that impacts
a lot of other jobs, not just the consumer. That obviously is an inflationary matrix, but it also affects a lot of jobs because we have, you know, a few large sports in the world, whether it's New York, New Jersey, California, Pennsilana, et cetera.
Alyssa I love and Paul I love trade finance as a strategy. It's been around for so long. It's been a cash cow, I mean from my historically speaking, And please listen, you know, correct me if I'm wrong, high single digit, low double digit, you know, very smooth, you know, returns over time. Can we as an investor still expect those same type of returns? I mean, I love asset classes that are complex and structured where you can engineer performance. Is that still the case in trade finance?
That's absolutely right, Not just you, but my investors like that a lot. So I've been financing for over a decade now. It's very true. It's a very liquid market. There's a lot of volume, there's a lot of various types of supply chains and gaps where financing is needed, whether it's on the supplier side or on the customer side, which is called recivle financing of factoring. So there are different structures you can create to actually finance a trade.
And there's a lot of crossboader trading obviously, because you know, we we still live in the globalized economy, globalized world, so everything that we're seeing in front of us right now probably is coming from other countries in certain supply chain factors of it, but in terms of volume of it.
If the tariffs do occur, and you know, they are imposed, so I would expect the volume to go down, and we've had it last year, right, Sometimes we just have to go back in history and we can look at a smooth Holly Act or law in nineteen thirty and the global trade back then went down by you know, sixty plus percent, right, So it impacts you know, the US economy, it impacts the global economy. And I guess investors are very still interested in the in the trade finance.
But we're just going to turn about the.
Volume of it. And just thirty seconds left, April second, is at a big date for you.
Yes, I'm having a lot of coffee that's kind of from brazila Columbia.
Okay, I mean.
Right, and so so the tariffs. Alissa Rusinov, thank you so much for joining us. Alyssa is the CEO of l Tech, talking about trade finance in a world where trade is you know, coming under some pressure with all the new potential policies coming out of this White House.
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Lots of new slow coming out of Washington, DC. Let's get right to it. Jennifer Lawless, politics professor at the University of Virginia, who I will note are not in the men's tournament. It's just brutal. Jennifer, Thanks so much for joining us here. There's lots of ways to go here. Let's just talk with a topic. We're just asking Margaret Brendan and the CBS about reports that Elon Musk is getting briefed about China at the Pentagon today. What do
you make of this story? What are the risks, what are the opportunities, what do you make of it?
Well, good morning. The entire thing is quite stunning.
It's unheard of for somebody who's not part of the administration or not a member of Congress to receive this kind of briefing, despite the fact that he has received several types of clearance.
The speed with which this briefing is.
Taking place, given that this information was only recently shared with other members of the administration, is also somewhat stunning, and it just demonstrates the access and proximity that Elon Musk has to Donald Trump, and the fact that he has a finger in everything, not only domestic policy and the economy and DOGE, but also in national security concerns.
All Right, we have to note, certainly that President Trump has denied these reports. So we'll see how this news story plays out throughout the day. Another big thing coming out of the Washington DC is an executive order to end the Department of Education. I wasn't sure that was a thing, but apparently it is. How is this going to play out?
Well, the executive order begins dismantling the Department of Education. You actually need an Act of Congress to get rid of an agency, but there are already members of the House and the Senate who have.
Introduced legislation to do just that. So what Donald.
Trump did with the executive order was make it clear that he was serious about dismantling the department, and he signaled to members of Congress that they should move forward.
And they are.
And this too is quite stunning for a variety of reasons. We knew that he planned to move student loans outside of the Department of Education, but the department does far more than administer student loans. When we think about education funding standards and testing, school lunches and those kinds of programs, access for students who have learning disabilities, all of that is now extensibly going to get returned to the States.
And that means why variation across the board, no real federal standards, and the extent to which you receive a decent public school education is now going to be contingent more than ever on where you happen to live.
And we see a lot of universities here in the US turning to the public markets to raise money. As I guess, you know, a war test and you know against all this, you know, talk to us a little bit more. I mean, what is the economic impact of all this nonsense with the Department of Education.
It's pretty substantial.
I mean, partially it will have to do with public schools K through twelve, which is what I was just talking about. But universities and colleges across the country are also playing a major role. If their funding is linked to this administration or what Donald Trump's priorities and preferences are, They're in a very precarious position. We've seen, for example, the more than four hundred million dollars cut to Columbia University.
A couple of days.
Ago, pen received notification that it was going to be losing one hundred and seventy five million because of its transgender athlete policy. So universities and colleges across the nation now have an incentive to do two things. First, raise alternative sources of funds that they can continue to exist if they're targeted, but also, to the extent possible, comply with what Donald Trump is asking for because they were lies so heavily on federal funds.
We know that student loans were postponed under the Biden administration during the period of COVID. Talk to us about that front. Do we expect, you know, students or former students to begin paying back their loans anytime soon and is there any news on that.
The tricky part about that is that the administration has said that they obviously want people to pay them back immediately, that they don't support the delays that the Biden administration implemented.
The problem, though, is that.
They've gutted the people who are the ones monitoring this and the people who can actually share with students the amount that they owe and how they should go about paying this back, and so they seem to be at cross purposes with themselves. We'll see what happens, but the latest reports that I've seen suggests that neither the Department of the Treasury nor Commerce want to absorb responsibility for student loans.
Jennifer, I love to talk to you about the politics of the Democratic Party here. You think about the White House, you think about both Houses of Congress. Republicans obviously won all three, but by very very narrow margins. Yet the Democratic Party has been essentially invisible over the since President Trump was inaugurated.
He takes all the air out of the room.
Are you surprised that Democrats haven't stood up to this president more forcefully?
I am.
I would say that Democratic attorneys general across the country have been doing an insanely high level amount of work to push back through the courts. So I think that the Democratic attorneys general across the country have really risen to the occasion. When it comes to elected members in Washington, it's somewhat puzzling, And we saw last week, based on what Chuck Schumer did, that the party is not entirely
on the same page either. I think some Democrats thought that the wind would eventually come out of the Trump sales, and they assumed that it would be sooner rather than later, so they just kind of wanted to sit around and wait for that to happen.
It hasn't happened.
Others think that they should just compromise because Trump is going to get what he wants anyway, and so maybe the Democrats can extract something. And still others think that because there's unified control in Washington, the Democrats have a responsibility to put up a unified front and try to block everything and then blame Republicans for any unpopular outcome. And unfortunately for the Democratic Party, they're not all on the same page and they're all just kind of flailing.
All right. Very good, Jennifer Lawlis, thank you so much. We appreciate that.
Jennifer lawis Politics professor at the University of Virginia, Lovely Charlottesville of Virginia.
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Kathy Hepworth.
She is a portfolio manager for PGM Fixed Income, not just pGEM Fixed Income, but the head of the pgm's Fixed Income's Merging Markets Debt team. I just don't know how this happened, Kathy. Thank you so much for joining us here in our studio. Really appreciate it. Emerging markets, with gew political tensions, with global tariff issues. How is your market kind of performing these days?
Well, the interesting thing is, so far this year from a total return perspective, when we look at credit, we look at FX, and we look at local rates, it has very positive total return numbers and outperforming other investment grade and even US high yield market segments. And there are reasons for that. Some of that is the attractiveness of the carry in what's deemed to be a still okay world, big question mark there though.
Yeah, no, I mean, Kathy's not doing our acid class justice. I just have to say it is the best performing acid class here today and that there's a good reason for that. The reason in my mind is the FX, right, I mean, this is an FX story. This is the Euro versus the dollar and spillover effects not just into the broader EM but more specifically the Eastern European segment of the market. Talked to us a little bit about Poland, Hungry,
check the CE four Romania. I mean, our investors really finally in fixed income putting their money to work there locally, Well, a couple.
Of things there. There have been decent portfolio flows and FDI flows into some of those countries, Hungary in particular, even Romania. But I think what we saw out of the EU over the past couple of weeks really is a c change, and I think that that can help anchor some of those countries in the region. Of course, you know, in the context of a trade war, some of those economies are quite open economies and they are vulnerable.
So you have to balance those different risks as trade offs, if you will, as to how those countries might be impacted by a trade war versus are they going to get flows otherwise?
Right, Well, I mean the periphery there. I mean, the EU represents paul seventy five percent of all exports out of Czech Hungary, pol And. That that's so sort of Eastern European periphery. So you know, you can see how it's kind of tracking there. But you know, the one market which really caught my eye this week. It's the only country in the planet that's actually hiking rates in the face of what we're seeing here, and that's Brazil. They just hike rates by another one hundred basis. I mean,
we'res the policy rate fourteen and a quartercaty. I mean, talk to about Latin America about carrying in some of these sort of high yielding emerging markets.
And that's exactly what's driving those those high returns, is it's carry So Brazil is doing the right thing right in the face of uncertainty and credibility as it pertains to fiscal policy. Actually even more so than inflation in Brazil, they're hiking rates, you know, to to try to anchor expectations there, and that's why it's so attractive, I think, to be investing in the currency some of the local
bonds as well. When you think about the vulnerability of Brazil to a global trade wark, it's really low when you compare it to say a Mexico, right which clearly has much more direct trade links with the US. I'm not saying, you know, it's going to all end badly for Mexico, because I think Mexico has some leverage for Brazil is somewhat differentiated in that regard, so I think those investors in the currency are also looking at from that perspective as well, from the fundamental perspective.
O Kathy, I know you've been busy this week focused on Turkey. Probably talk to us a little bit about what's going on on the ground in Turkey.
It's all about confidence and credibility and the market getting ahead of the fact that, oh my god, are we going to get back to that period before the recent change in policy where maybe you're going to see dollarization again in the local Turkish economy. And that's what all those levered investors that I think it's probably close to twenty billion that we've seen outflow from the currency markets in the local bond market so far this week. We
won't know the numbers until next week. It's is that going to put pressure on the locals who perhaps are going to be less comfortable owning the Turkish lire.
I think the fact that the.
Turkish Central Bank, you know, hiked the overnight rate this week was a very good thing, a good measure.
Kathy Hepworth Portfolio Mager PGM Fixed Income. Kathy, you mentioned Mexico that it's you don't think it's terribly for the met Well, I could see a scenario where it could end terribly for them.
How do you guys think about Mexico.
Mexico has leveraged in that the economy between Mexico and the US is so integrated, right particularly in the auto sector and some of the electronic sectors, that it's really not in the US's best interest to impose maximum teriffs on Mexico. So I think in that regard, Mexico has leverage because it's kind of a negative impact on the US economy, and I don't think that that's what the US policymakers actually want to happen, and there are there
is credibility with their institutions. The Central Bank there, we think is going to continue to cut rates and that will help put a floor on growth. But of course, in a really worst case scenario, USMCA is sort of disregarded, then of course Mexico can enter recession.
Kathy, all eyes are always on the US, even in emerging markets. And you know, I just want to ask you, you know, when you're you know, in the war room with Greg Peters and Tom Pricelli and the US guys over at PGIUM, what are they thinking right now? I mean, I think the market, oh, as US front ends are pricing in two and a half cuts through your end, you know, I think it's backloaded. But still, I mean that's it's quite a lot compared to where we just were.
I'm wondering where do you think rates go from here?
Yeah, so caution, caution, caution, right, and tail risks have definitely gotten fatter. So and we do think the risk of recession has risen. It's not a base case. It makes perfect sense to have two or three cuts priced in. Is that a FED put? It's not clear to me that's a FED put. I still think you need to be cautious in the overall amount of risk that you're taking.
But as an active manager, you know clearly that presents opportunities under and overweights, and EM is the great asset class to do that right, because there are countries who are less vulnerable than other countries, and the countries who would be hurt less than those most vulnerable.
Kathy, I can't let you leave with that asking me about China. I mean, look at the MSCI. I know you're not in it. We're not equity people here. I know that, Kathy, you out to remind me, but you know, I mean the MSCAI China is up like thirty percent. I think Bob is up something like seventy percent. Is that just you know, is that just a trade or is there any longevity to that? Is there anything structural fundamental that an investor can get behind there?
I do think there's something fundamental happening in China, and I think that we heard it a few weeks ago, and I think they are now ready to focus on the consumer, to deal properly with the problems in the property sector, and they very well behaved. I think visa the the Trump administration so far, and there's more yet to come. Right, we haven't seen the full extent of what's going to happen with China, but I think that China is much better prepared this time than they weren't Trump one point.
Now, last question for me. There are only a very small, small handful of currencies that are actually down relative to the dollar this year. India and Indonesia are two of them. The rupee and the rupee. Talk to us a little bit about Southeast Asia. I mean, how should investors approach that region.
Yeah, so clearly from a currency perspective, I think they're a little bit less attractive. From a local rape perspective, it's more attractive because of deflation. I do think they're going to be cutting rates. Indonesia is a bit of a change right because the mark is concerned about the Minister of Finance potentially leaving and the new president having
some policy changes. I think in India was in part because what happened in the fourth quarter, and they used reserve too, So I'm much more constructive on India than I am on Indonesia.
That was a masterclass folks in emerging markets.
Damien Sasa or Kathy Hepworth, Portfolio Manager, PGIM Fixed Income.
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