Ep 9 - Leonardo Da Costa - Are There Any Catalysts on the Horizon for Emerging Markets? - ROI Podcast

In this episode, Ryan speaks with Leonardo Da Costa, portfolio manager at First Trust Global Portfolios, about why returns for many international investments have been muted in recent years, why US investors shouldn’t ignore international allocations, and what catalysts may provide a boost over the next few years. 

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Chapters

• 0:00 Intro
• 1:24 Local Currency Emerging Market Bonds vs. Dollar-denominated
• 7:58 International equity market opportunities
• 11:16 Potential catalysts for under-performing foreign stocks
• 16:04 Can the USD sustain strength going forward
• 20:20 Best prospective opportunities
• 20:30 Expectations in China
• 26:30 Outlook in India
• 28:40 Opportunities in EM and Latin America
• 32:55 What is Len optimistic about?

Transcript

00:00:00:00 - 00:00:40:18

Ryan

Hi. Welcome to the First Trust ROI podcast. I'm Ryan Issakainen, an ETF strategist at First Trust. Well, if you're like many investors, you may have begun to question your allocation to international equities and fixed income. After a period of sustained underperformance in many of those markets, investors wonder what the case is for maintaining an allocation. Valuations have become much cheaper relative to the U.S., and many are also asking questions about whether or not that represents attractive opportunities.

00:00:40:20-00:01:05:05

Ryan

Today my guest is Leonardo Da Costa, portfolio manager at First Trust Global Portfolios. Land and his team manage the first trust emerging market local currency bond ETF Ticker FMV for First Trust. He also sits on the Investment Committee of the subcommittee for our first trust fixed-income ETF models. So I'm very much looking forward to the conversation today with Len.

00:01:05:08-00:01:24:00

Ryan

I think we'll learn a lot, and I hope you enjoy it. Thank you for joining us on the First Trust Radio podcast. So here we are in London. We're right near the historic Tower Bridge. This is more your backyard than my area. So thank you for having us here, and I really look forward to our conversation today.

00:01:24:05-00:01:49:00

Ryan

One of the things that I mentioned in the intro was that you are a portfolio manager that focuses on local currency, emerging market bonds, as opposed to the fact that I think the majority of emerging market bonds are dollar-denominated. So maybe to start off, explain what's the difference between emerging market local currency bonds and dollar-denominated bonds.

00:01:49:02-00:01:58:04

Len

Yes. I mean, if I may correct you, the vast majority of bonds out there are actually local currency-denominated bonds. And that's. Maybe I got a point.

00:01:58:07-00:01:58:17

Ryan

Separate.

00:01:58:19-00:02:34:15

Len

Right? Yeah. It's one of these misconceptions. Your local currency bond market is around $16 trillion in size. Right. So it's quite a significant asset class. It's seen as being quite niche, particularly to us investors, I think, in Europe, because investors tend to be a bit more comfortable with currencies. They focus on a bit more. There was actually a first-trust employee speaking to them about local currency, and they said, well, you know, lend to most US investors; there are only two currencies in this world: dollars and cents.

00:02:34:17-00:03:04:09

Len

Right? And so, you know, there is that conception of that. But if you look at the $16 trillion market, you know, about half of that is China. And we know, you know, a very significant economy. But then there are also stalwarts like South Korea, India, and Brazil in that universe. And really, the distinction between that local currency universe and the dollar-denominated universe is that the dollar-denominated universe dominates.

00:03:04:09-00:03:16:00

Len

It's inception was that it's hard to argue, but you know how to put a point on it. But after the Mexico Tequila crisis in 1995, you had the initiation of Brady bonds, which.

00:03:16:02-00:03:22:16

Ryan

There was a I don't know anything about this tequila crisis, but I want to dig into it. Second, what is the tequila crisis?

00:03:22:17-00:03:44:08

Len

Well, it's when Mexico had its debt crisis back around 95 or 96. Okay. And so it was the Treasury secretary, Brady, who stepped in and allowed Mexico to issue dollar-denominated bonds, which were backed by or underpinned by US Treasury bonds. Okay. And those became some of the first.

00:03:44:14-00:03:46:00

Ryan

Collateralized with tequila.

00:03:46:02-00:04:11:13

Len

No, no. Well, that would have been different, right? And so, you know, that was the initiation of the Brady bond market, which then evolved into the Eurobond market, which is essentially the issuance of dollar-denominated debt overseas. It's in many of these emerging markets. Back at that stage, they had very small, underdeveloped local savings pools. So, you know, think of your pension funds, asset managers, and banks.

00:04:11:13-00:04:44:05

Len

And so they look to attract or get capital overseas by issuing dollar-denominated bonds overseas. And then they use those proceeds within their budgets. As those economies developed, they were able to develop their own domestic treasuries. So not issuing like a corporate world in US dollars, but issuing in their own currency. So again, if you look at Mexico, they've got a fully developed monocurve, as we call it, which is issued in Mexican pesos.

00:04:44:07-00:05:14:17

Len

And so if you look at the distinctions between the two universes, the M universe, there's about 70 countries. A lot of them are frontiers. So think of names like Mongolia, Gabon, and Angola. And they tend to be the first point of issuance for these countries, right? The average rating is subinvestment grade, whereas for the local currency market, it's about 20 countries.

00:05:14:19-00:05:58:13

Len

You're more advanced. IDMs are your China's; India is Brazil's. Mexico is of this world average investment grade rating, even though the emerging markets are so issued in their local currency, a lot of these government bonds, and you know the yield is pretty attractive as well relative to the dollar-denominated bonds you do. The one distinction is that you do need to focus on the embedded currency risk because you're investing in foreign instruments denominated in foreign currencies, whereas in the dollar debt market, they are dollar instruments, but they essentially trade like spread products.

00:05:58:17-00:06:24:07

Len

So it's spread over US treasuries. So you get the US Treasury duration under there, which in the US is quite significant because these countries tend to push out the maturities as far as possible. The index duration is somewhere between eight and nine, so it's quite a long-term asset. So you get a lot of US interest rate sensitivity there, and that's really the major distinction between the two.

00:06:24:10-00:06:30:21

Ryan

So you're saying you get more interest rate sensitivity in the dollar denominated, not the local currency?

00:06:30:23-00:06:32:07

Len

Yes, that's right.

00:06:32:09-00:06:55:06

Ryan

It certainly sounds like an area where active management is needed, especially in that local currency, where the local currency is issued, and where you want to have the ability to perhaps hedge and not hedge. It seems like an environment or an asset class where you can really have some advantage to having an active manager as opposed to an index fund. And obviously, you manage a fund.

00:06:55:06-00:07:02:22

Ryan

So maybe you've got a biased opinion, but that seems to be self-evident that that's the case.

00:07:03:00-00:07:25:17

Len

Yeah. So absolutely, you want to be. The important thing is that you want to be dynamic. So you can invest in the asset class purely on a hedged basis, but the hedges have a cost to them, and they can be quite significant if the hedge cost is typically based on the domestic deposit rate. So when you're hedging, you'll be paying the domestic deposit rate and earning the US deposit rate effectively.

00:07:25:17-00:07:45:01

Len

That's how the price is determined. And so sometimes you don't want to be hedging because the hedging cost is quite excessive. But other times, you know, it's a lot cheaper to hedge, and then you can also help manage the broader volatility of the portfolio by deciding when to hedge and what areas of the market to hedge.

00:07:45:06-00:07:46:08

Len

Look.

00:07:46:10-00:08:16:23

Ryan

I also want to get your opinion. I know you, as a portfolio manager, focus more on fixed income, but of course you have pretty wide knowledge about the equity markets in which you invest as well. And so I want to start out broadly. One of the questions that we have gotten in the last several years has been really about what's going on with the international equity markets, because I think as people evaluate their asset allocations, they see some attributes of international equities that seem attractive.

00:08:16:23-00:08:39:06

Ryan

On the other hand, after a period of underperformance, I think there are people who have maybe begun to second-guess those allocations. So I guess as a broad topic to start off, you know, what's your opinion? Is this something where investors should be second-guessing their international allocations, or is there some opportunity that may be on the horizon?

00:08:39:08-00:09:17:01

Len

It's completely unsustainable, like you say, because international equities have underperformed so significantly, especially since the global financial crisis. S&P has pulled ahead. And you know, more recently, it's been driven by the Magnus Magnificent Seven. But more broadly, we've seen US equities perform much better than both Europe and those in many parts of the emerging markets. So, if you look at the end of 2008, yes, since the financial crisis, the S&P has averaged around a 13% annualized return.

00:09:17:03-00:09:25:13

Len

European equities have been about eight. But if you measure it in dollar terms, it's been about 6%.

00:09:25:14-00:09:38:05

Ryan

So what you're saying is that in their local currencies, they had an average return of 8%. But because of the dollar translation back to the US dollar, for US investors, that's actually about a 6% rate, if I got that right. Okay.

00:09:38:06-00:10:03:16

Len

Yeah. So over the same period, we've seen US equities outperform and the dollar do really well, which is not surprising. Currencies are typically correlated to equity markets. But you know, that's what's added to the negativity surrounding international investing. And it's not only a problem for us investors. You see it here as well, where, if you look at the MSCI world, 68% of US stocks, right?

00:10:03:20-00:10:33:19

Len

In the MSCI Acwi, it's around 60%. So there's this big concentration in the US, and for investors, yeah, you know, when you're looking to invest in the US, you're taking that risk as well. So you're cognizant of that currency risk. So yeah, it has been quite a significant force since the global financial crisis. If we do look prior to the global financial crisis, we did see international stock performing significantly better.

00:10:33:19-00:11:03:10

Len

So ten years before the end of 2008, emerging market equities were analyzed at just under 10% a year. S&P, because the ten-year period would include the dot-com bubble. And until then, the global financial crisis that was there was slightly down, about a percent and a half or so annualized. And European equities in euro terms were actually up over that period.

00:11:03:12-00:11:16:00

Len

So it hasn't been, you know, that there's been times where we have seen international equities outperform for U.S. investors. The last ten years have been very difficult.

00:11:16:02-00:11:49:15

Ryan

It's kind of interesting to me because there are certain other parts of the equity market that have, I think, similarly underperformed. So, for example, one of my thesis right now is that the market may broaden out in the next several years, and that may have an opportunity for equal weight biases or maybe bias towards smaller stocks. But it's kind of the same story in that over the last decade, those large-cap top heavy indices have really outperformed, and there are some significant valuation advantages in even some of the US pockets of the market that have underperformed today.

00:11:49:17-00:12:22:00

Ryan

But certainly in European markets and other international markets, we see pretty massive discounts in terms of valuations. You know, one of the challenges is what's the catalyst that may allow those to either grow their earnings above average or maybe expand their multiple. So I want you to: I know that's a really long question, but how's your thinking about that? You know, what's the catalyst that might allow these stocks after a period of underperformance to maybe outperform?

00:12:22:02-00:12:50:23

Len

Yeah. So, yeah, good question. I mean, they are cheap, right? You know, one of the measures we look at is the relative PE ratios between US equities and European equities. And we look at discounted premiums on U.S. equities. And at the moment, European equities are trading at about a 33 to 35% discount at the index level to two US equities in EAME; it's similar to around 30% here in the UK; it's almost 50% discount on one piece.

00:12:51:00-00:13:13:08

Len

So your PE in the UK is just above around ten, and the S&P is around 20. So those are quite significant discounts, and, you know, apart from that, we can kind of bang bang the value, or these are cheap as long as you want. But what's going to change that, right? And I think the way we look at it is, where do you see higher multiples?

00:13:13:08-00:13:49:04

Len

It tends to be in higher-growth areas, right? So if you're looking at some of the faster-growing emerging markets, they are trading them at higher multiples. And not only that, if you look at intramarket countries with high, high growth, they typically have high multiples. But also, if we look at the time series of these p-value ratios and all these discounts, one measure that we look at with currencies is a valuation measure called purchasing power parity, where we're looking at the relative value of a currency versus the US dollar.

00:13:49:06-00:14:10:04

Len

And when we do that on aggregate as a basis for emerging market currencies, what we see is that it maps very, very well with the growth differential with the US. And so as the growth differential with the US changes, we see that M currencies get cheaper. And if you do apply the same thing to that ratio of PE multiples, you see a similar dynamic.

00:14:10:05-00:14:33:00

Len

So really, what we would need to see in Europe is higher growth pushing through, which is quite difficult to see right now. You know, we've had some pretty poor data coming out of Europe. Germany has found it particularly tough. If you look at some of the underlying data, the ECB now seems to be on pause.

00:14:33:02-00:14:56:23

Len

Inflation still remains sticky, and it's almost a similar dynamic to the US. The unemployment rate in the euro area is the lowest it's ever been, around 6.4%, so there's still a relatively tight labor market. So those rates probably have to stay higher for longer. So it's difficult to really see the growth multiple coming through in Europe.

00:14:57:01-00:15:26:11

Len

You know, some of the opportunities then may be outside of Europe. So looking at some of the emerging markets where you do have higher growth, the other way to look at it as well is not just not to drag this on, but the makeup of the European market tends to be a lot more cyclical. And, you know, maybe that explains a lot of this undervaluation.

00:15:26:11-00:15:50:02

Len

So if you look at something like the PE of total energies, it's around eight points in a bit, and that's similar to the PE of something like an excellent, you know, so there are two energy companies in the two markets, but they're trading at relatively similar prices. And so because European equities are much more value-oriented, and we know value is particularly cheap right now, that could be an explanation for where we are.

00:15:50:02-00:15:57:04

Len

And also, when European equities might start performing better, value stocks outperform better.

00:15:57:06-00:16:20:00

Ryan

Something else that you mentioned earlier was the fact that the US dollar has been so strong that it has detracted performance from sort of the local economies and the local stock markets. And so my question for you is, as you know, you spend a lot of time thinking about hedging currencies, and that's part of what you do in the strategy that you run.

00:16:20:01-00:16:32:20

Ryan

What do you think about the strength of the US dollar? And, you know, we've had this really long run of sustained strength. Is this something that you would expect going forward? Is this something that maybe we'll see a pause for? How should we think about that?

00:16:32:22-00:16:58:09

Len

Yeah, so if we look at the timeline back a bit, you know, the US dollar, I think we're looking at something like the US dollar index or if we're looking at a trade rate of the real dollar. So it's essentially a trade-weighted basket of the dollar, and it's adjusted for relative inflation rates over time. So if we look at that measure, the dollar is approaching the peak that we've seen historically.

00:16:58:09-00:17:22:10

Len

So the first one was around 1985, and that's where we had the Plaza record, which, you know, I would have been still young by then, but that's when the rest of the world, in concert with the Fed, worked to have a weaker dollar. And you know, we recently measured the real effective exchange rate, which was about 10% below that level.

00:17:22:12-00:17:49:06

Len

The other peak was around the dotcom bubble. And actually, when I joined the industry investing in emerging markets back in 2004, that's when we had Greenspan actually talking down the dollar because the dollar was still near that peak. And we saw that that really came around to the global financial crisis. And then the dollar's just been a one-way trade since then.

00:17:49:08-00:18:16:08

Len

There is this theory that's called the dollar smile. Right. And it's essentially the dollar tends to outperform when US growth is exceptional and has been really strong, and we've seen it look very strong for long periods of time since the global financial crisis. With us, growth has led, and we hope, but we also see the dollar tend to outperform in recession-type scenarios because you get the flood of capital back into the US.

00:18:16:08-00:18:41:14

Len

Right, right, right. And so in a very high-risk recession scenario, the dollar does well, you know, and when US growth is strong, it does really well. So typically, at the bottom of the smile, where you see the dollar typically underperform, we have broad global growth in areas like the times before the global financial crisis, when we had strong M growth more globally.

00:18:41:16-00:19:14:14

Len

And so that's what we would potentially need to see where we're sitting right now. We're at the top of the valuation cycle of the US dollar. It's difficult to see what's going to really trigger that lower, given that the Fed's going to remain sticky higher for longer. But if we do start seeing the growth differential between the US and the rest of the world compress, then we might see that at the bottom of that smile.

00:19:14:16-00:19:35:03

Ryan

So while it's tough to see the dollar at its current point, you know, make a case for why it will weaken. It seems like if we're close to a peak, it probably would be tough to argue for the dollar to go much higher than the rest of the world. Currencies. Do you agree with that, or is that something that we could see continue to push higher?

00:19:35:08-00:20:01:11

Len

Yeah, I mean, I always could, right? But it would be quite exceptional. It would take a lot to do that. So, you know, the US really already has quite restrictive monetary policy rates. Right. You know, I think the consensus is maybe one more or so, but you're not looking at another 5% write rate rise. And so you know it's really that dynamic seems to be like it.

00:20:01:12-00:20:11:20

Len

We are in the process of that changing, and if you can get paid to wait for that to happen in some of these cheaper international asset classes, that might be a way of looking at it.

00:20:11:22-00:20:28:01

Ryan

Okay. So we've talked about equities. We talked earlier a little bit about fixed income, but I know that's an area that you specialize in. And so, as you kind of look around the world, looking at currencies, looking at fixed income markets, some of the pockets have the greatest opportunities that you see.

00:20:28:03-00:20:59:04

Len

Yeah. So when you're looking globally, basically from a US perspective, investing in developed-market global government bonds doesn't seem to make much sense right now because US policy rates are relatively high. So both are hedged on an unhedged basis. You know, many of these curves in the developed market and global government bond space are inverted as well, and so that makes it relatively tricky in that space.

00:20:59:06-00:21:29:11

Len

What two areas have become quite interesting are where we've quite decisively ended the period of zip, right? So with the zero interest rate policy, we saw that across most of the developed world, interest rates converged around zero, and that compressed what we call carry opportunities. So your interest rate differentials between countries—what we've seen now is that spread has increased quite significantly.

00:21:29:11-00:21:58:18

Len

And so when we're looking at currencies, a large driver of currency returns is that they carry differentials. And so, you know, using that advantage in certain currencies is definitely quite appealing right now. We have a lot more opportunities. The other area is, you know, not wanting to talk my book a bit, but knowing we are seeing quite cheap valuations in emerging market bonds.

00:21:58:18-00:22:24:11

Len

Right. And you're getting paid some really attractive yields to be in the space, and you have the potential upside from, you know, if the dollar does, you move sideways or depreciate. You know, those are the two areas where we are concentrated. You also have steeper yield curves. You've got positive real rates. So rates adjusted for inflation are positive in many of these emerging markets.

00:22:24:13-00:22:28:13

Len

So we continue to see quite a few opportunities there.

00:22:28:15-00:22:50:01

Ryan

I want to talk about China, because that, of course, is such a big part of fixed income markets and equity markets. They've gone through a period where, you know, obviously COVID was their focus and eliminating COVID and then reopening, and things maybe haven't played out with the sort of growth that many people had either hoped for or maybe even expected.

00:22:50:01-00:23:08:15

Ryan

And so, just in general, as you think about China, what are your expectations going forward? I guess you think that there are opportunities in either bonds or in equities. And what is your forecast for the Chinese economy, at least in the next year or so?

00:23:08:17-00:23:34:14

Len

Yeah, so there was a lot more opportunity—sorry, optimism—to go to China earlier in the year. Right. So they were coming out of the COVID-Zero policy. But that seems to have ebbed quite significantly. And really, if you look over the last few years, what seems to have been really working against growth in China has been that there's been three policy areas that you can just quite test.

00:23:34:14-00:24:07:13

Len

You point it out. One was the zero-covid policy, where you definitely saw that go on for longer than many people expected, and it had quite a negative impact on growth and the return of domestic consumption and investment. The other area was quite a strong regulation push in the IT sector and finance. We saw that, and, you know, even in the gaming industry, it took quite a significant knockout of many of these private Chinese companies.

00:24:07:15-00:24:31:12

Len

And we're starting to see some efforts to normalize that and bring it back. But that was definitely an area of concern. And the last really is that it's been more recently, although it started quite a way back in the real estate sector. You know, I think with Evergrande's first default, it was 2001 when we had the first issues, but that's just continued.

00:24:31:12-00:24:58:23

Len

And initially, the Chinese government did try to take out some of the froth in the real estate market, and maybe that's gone a bit too far. But having said that, there has been an effort to provide stimulus. It's been quite a drip feed. So, definitely, from the market's perspective, it seems to be, you know, not one really big bazooka.

00:24:59:00-00:25:28:10

Len

It's been incremental changes, trying to remove some of the restrictions in the real estate market, making it easier to take out mortgages, and reducing some of the limits and restrictions there. It's also been more recently announced that there was a $1 trillion B infrastructure increase in infrastructure. We've had some cuts on the overnight rates, which have been relatively marginal, and the reserve rate requirement.

00:25:28:12-00:26:00:05

Len

The one thing I would say is that, within all this, do you mean China does have quite a lot of room to stimulate the economy? Right. So they've got quite significant foreign exchange reserves. They were there, they got positive, and they've got leeway in their monetary policy rates. Right. As a result, they have room to cut rates. The central bank balance sheet is relatively small compared to some of the developed markets, at around 15% of GDP.

00:26:00:07-00:26:22:17

Len

So if they do want to stimulate and have the potential to do that, that's one thing to look out for. And really, the focus is going to be on that domestic demand or consumption demand within China. One notable date is now the 11th of November. We've got Singles Day in China, which is their equivalent of Black Friday.

00:26:22:17-00:26:28:10

Len

You know, it's their biggest and premier shopping event of the year. And so, you know, that will be closely watched, I'm sure.

00:26:28:12-00:26:52:11

Ryan

Okay. So then, what about India? You mentioned a few times some of the growth that has taken place in India. Their equity markets have performed relatively well for most of this year. Today we look at valuations, and they've certainly moved higher. So, what's your outlook for India? And I guess both bonds and stocks, but I'm more focused on stocks at this point.

00:26:52:13-00:27:20:09

Len

Yeah. So I mean, you know, it's one of the bright lights of M right, and the economy is growing at 7 to 8%, so you know a lot of potential there but priced accordingly, and that's maybe where the challenge lies if you've been positive on India for quite a while and you know all the or many of the elements are in place for them to capitalize.

00:27:20:09-00:27:51:04

Len

You know they've got a big demographic dividend and a young population, and now they've overtaken China as the world's most populous country. But they also have relatively low urbanization rates. So around 30–35%, whereas you see most developed markets around the 80% mark. So there is a lot of potential there, and quite, you know, in a few industries they are, they do make a big impact.

00:27:51:05-00:28:17:03

Len

But as you said, you know, the valuations in some of them for the aggregate market are around 26. That's for the broader index; it does seem like it is quite, quite expensive. You know, in order to pay for that growth, And even if you look at the breakout of that index, it is quite financially heavy, which typically you would expect to be a lot cheaper.

00:28:17:04-00:28:34:05

Len

Yeah. So you know it's really a great story, India. We like the story, particularly on the fixed income side, and you've got to be a bit more selective within equities, you know, to find those value pockets.

00:28:34:07-00:28:54:18

Ryan

So last question on the emerging markets: We've talked a little bit specifically about India and China. As you think about other parts of the emerging markets, Are there areas where you see opportunity? And, you know, one of the risks with some of these OEMs has historically been that they tend to be sensitive to Fed policy, the strength of the dollar, and that sort of thing.

00:28:54:18-00:29:05:03

Ryan

So where do you see pockets of opportunity, and how do you see Fed policy, and maybe whichever way the dollar moves impacts returns for premiums?

00:29:05:05-00:29:30:04

Len

Yeah, sure. So I think one of the areas that is quite interesting in emerging markets is Latin America. I guess at one point in terms of when you look at emerging markets, it's sometimes easy to brush them over with. You know, these are emerging markets, but they are quite distinct between regions and between countries. I've often said that China, given how large it is, should be included in the emerging market bucket as, you know, the world's second-largest economy.

00:29:30:06-00:29:54:16

Len

And we bundle that in with emerging markets. It clearly is, you know, not well, but maybe that should be considered, and it should be considered separately on its own. So, one of the areas that has been quite interesting is Latin America, and we've seen Latin American equities perform quite well. They've outperformed the S&P 500 over the last three years, and they've really benefited from this commodity cycle.

00:29:54:18-00:30:22:00

Len

You know, they weren't impacted by the negativities of or any knock-on effect from the Russia-Ukraine war, but they benefited from higher commodity prices. Yeah. Yeah. On top of that, quite a few Latin American countries have been quite disciplined when it comes to inflation. So, you know, they never stimulated their economies to the same degree as many developed markets did through COVID.

00:30:22:00-00:30:52:06

Len

So they never had that huge money supply shock that you saw in the US, for example, and in Europe. But, you know, as inflation started to rise, the central banks were really proactive. So Brazil has already started hiking in March 2021. You often say that these emerging markets never had the luxury of calling inflation transitory, right? which some of these developed market central banks had, and now they've hiked rates.

00:30:52:08-00:31:30:21

Len

In Brazil's case, up to 13 and three-quarters percent. Inflation's come down in Brazil; it's around 5%. And now they've been able to proactively start normalizing and easing their policy rates. Right. So the real rates are still really attractive. Brazil's put in place 100 basis points of cuts already, and that's generally progressing both. And you could say, well, doesn't that mean if they started to cut rates, you know, isn't that bad for the currency or what have you, but potentially if they were too aggressive, but their real rates are so high relative to the US right now that they've got so much leeway to do that?

00:31:30:23-00:32:03:02

Len

So we're quite positive about Latin America. You get some really attractive yields there. In the ten-year bond space in Brazil, you're getting around 12, 12, and a half percent, and you know, they are benefiting from a strong commodity cycle. And then obviously, you have their central banks with quite restrictive policy rates and the ability to cut. Now, what you kind of mentioned, well, how does that, you know, the Fed's what we're seeing from the Fed and the US dollar impact that?

00:32:03:04-00:32:39:05

Len

And it's really, you know, we haven't seen them perform, at least in the bond market. We haven't seen real outsized returns. And I think part of that is related to this consternation or this concern that the Fed potentially isn't done hiking rates. But what we've seen historically is that when at least the Fed pauses, their ratings rate hikes, and the market starts looking down the other way, these emerging markets, particularly those that have strong real rates, stop performing really well.

00:32:39:06-00:32:45:10

Len

And so that's why our outlook is quite positive for many parts of Latin America. Okay.

00:32:45:12-00:33:04:12

Ryan

That's very helpful. My final question for you is one that I ask all the guests of the Arrow podcast, so I'll ask you to Glenn. You know, there's a lot of reasons why people, especially me, find fixed-income managers and bond managers tend to be pessimistic for good reason. You're managing risk. That's a big part of what you do.

00:33:04:14-00:33:20:07

Ryan

But I'll put you on the spot now and say, as you think about the world, as you think about the economy, maybe markets, our industry, whatever, what are you most optimistic about? And this, by the way, doesn't necessarily have to do with financial services, but I want to know what you're optimistic about.

00:33:20:09-00:33:42:04

Len

Yeah, right. That's a great question. I guess. Yeah. As you said, most fixed-income managers are that optimistic, but you need to be optimistic when you are in emerging markets. Right. It is a growth space. You know, there is a lot going on. And I think it's because we've gone through a long, long cycle of underperformance in equities and in fixed income.

00:33:42:06-00:34:08:17

Len

You know, it's been quite a difficult period for the asset class, and we haven't seen much flow in general in the asset class, but we're starting to see the light or the green shoots by where you've seen a lot of these central banks be really disciplined in their monetary policy. You know, when I first started back in the early 2000s, you still had emerging markets that weren't targeting existing interest rates.

00:34:08:23-00:34:32:04

Len

Yeah, they were still ad hoc, maybe targeting the money supply. And so you've really had a strong institutionalization of these in emerging markets. And, you know, we never saw a significant wave of defaults in the more advanced OEM's; even through some of these tough periods, we saw more recently in some of the frontier markets, definitely.

00:34:32:06-00:34:52:21

Len

But we never saw that in the more advanced themes. And so that makes me optimistic for the future of the asset class. You're getting really attractive yields. You get some great stories out there, and you know the great potential for growth and to earn some great yields in these countries. All right.

00:34:52:22-00:35:01:21

Ryan

Well, we will leave it there. I really appreciate you coming on and having a chat with me. It's been very, very enjoyable. Maybe next time I'm in London, we can do this again.

00:35:01:23-00:35:03:04

Len

Yeah, of course.

00:35:03:04-00:35:07:12

Ryan

But thank you. And actually, maybe next time you come to the US to visit, we can also have.

00:35:07:16-00:35:11:15

Len

yes, absolutely. No, that's been great. I really appreciate it. All right.

00:35:11:17-00:35:32:21

Ryan

Well, again, thanks for joining us, and thanks to all of you that are joining us on the First Trust: Our Way podcast. See you next!