Speaker 1: Welcome to trains.
Speaker 2: I'm Joe Webber and I'm Eric Delchernas.
Speaker 1: Eric twenty twenty six is already off to an interesting start.
Speaker 1: I was on vacation for the holidays, lost track of time,
Speaker 1: didn't know what day of the week it was, and
Speaker 1: then I woke up to the Venezuela news and was like,
Speaker 1: I guess I have to work on Saturday now. It
Speaker 1: was eventful.
Speaker 2: Yeah, absolutely, I think most people were shocked by it.
Speaker 2: But yeah, the news flow is ridiculous. It's like a
Speaker 2: year of news in a week every week. But in fact,
Speaker 2: the Venezuela thing already seems a little distant pass but
Speaker 2: it is a major deal. And we were struggling to
Speaker 2: get somebody on ETFIQ, the TV show I do we
Speaker 2: want to talk about this? So I did a f search,
Speaker 2: which is the search through ETFs, and I said, okay,
Speaker 2: terminal on the terminal which ETFs hold at least one
Speaker 2: percent of Venezuela, and only four results, and they're all
Speaker 2: bond funds. And the only one that had the one
Speaker 2: that had the highest and was act was vemmy right,
Speaker 2: and that's the het v emy and this is an
Speaker 2: active manager. I hadn't heard of them. I know Vertics
Speaker 2: it was a white label, but Stone Harbor was the
Speaker 2: name of the manager. I basically reached out to my
Speaker 2: buddy seth Over at Vertice.
Speaker 1: He hooked us up with.
Speaker 2: Jim who is on the show today, and we had
Speaker 2: a great discussion. He came in at last minute and
Speaker 2: talked about the bonds and why he owned them, and
Speaker 2: he bought them a year ago, so he saw something
Speaker 2: pretty early, and I think that's interesting. Then I looked
Speaker 2: through the portfolio and it's doing really well, and there's
Speaker 2: some of these really interesting countries that are like really
Speaker 2: killing it, like Latin America countries, but also outside of that.
Speaker 2: So I thought we should really get into this like
Speaker 2: em debt situation because we could see other situations right
Speaker 2: where some really left for dead bonds get restructured and like,
Speaker 2: how can you benefit from that?
Speaker 1: Can't wait to continue the conversation. The Jim that you mentioned,
Speaker 1: Jim Craig, who is the CIO and head of Emerging
Speaker 1: Market and co founder at Stone Harbor. The ETF that
Speaker 1: we're going to be talking about Vitus Stone Harbor Emerging
Speaker 1: Market's high Yield bond ETF. Again, that ticket v E.
Speaker 3: M Y.
Speaker 1: Also joining us Damien sas hour fixed income analyst with
Speaker 1: Bloomberg Intelligence, this time on trillions around the world with
Speaker 1: emerging market's debt. Jim Damian, Welcome to Trillians.
Speaker 4: Thank you, thanks for having me.
Speaker 1: Okay, Jim, what did it feel like when you woke up?
Speaker 1: I was on vacation, woke up on that Saturday to
Speaker 1: you know, the US basically going into Venezuela and extracting
Speaker 1: its president Maduro as well as his wife. What did
Speaker 1: it feel like to wake up that morning? For you?
Speaker 4: It felt pretty good. We were anticipating something would be
Speaker 4: happening in short order. You did never know the timing,
Speaker 4: didn't know exactly what was going to happen, but that
Speaker 4: was certainly a pleasant surprise. We've been witnessing the kind
Speaker 4: of collapse of Venezuela for a long time, so this
Speaker 4: is a positive change in our view.
Speaker 1: When were you able to actually get exposure to the
Speaker 1: country because you know there's sanctions, It's it's very difficult
Speaker 1: to be thinking about this if you're an oil company.
Speaker 1: The only one that has a meaningful presence there is Chevron.
Speaker 1: They have a special waiver. So what makes emerging market
Speaker 1: debt different.
Speaker 4: So this is a country that defaulted and was restructured
Speaker 4: in the early nineteen nineties. In fact, I was part
Speaker 4: of that, part of that team. So the debt has
Speaker 4: been been outstanding and trading for quite a while. More recently,
Speaker 4: the sanctions were removed from trading the debt, and that
Speaker 4: was several years ago, and we've been accumulating that debt
Speaker 4: since then.
Speaker 1: How do you go about doing that?
Speaker 4: So trades pretty actively. So it's one of the more
Speaker 4: actively traded entities in our in the emerging market's step market.
Speaker 4: It trades over the counter. It's all denominated in dollars,
Speaker 4: has coupons and maturities. Obviously they're in default, so you're
Speaker 4: you're able to pick from a menu of options.
Speaker 2: Okay, quick question on the bond. So you bought them
Speaker 2: a year ago. I believe they're up like one hundred
Speaker 2: and forty percent in a year now. They went up
Speaker 2: like one hundred percent before the extraction, then they get
Speaker 2: another boost after the extraction. Was the run up in
Speaker 2: return because people thought an extraction was going to happen,
Speaker 2: almost the way like animals can tell a tsunamis coming
Speaker 2: before humans or would you have a restructuring, even if
Speaker 2: there wasn't an extraction or was this was this whole
Speaker 2: thing on bet on something happening with this guy.
Speaker 4: It's really the claim value of what you're getting when
Speaker 4: you buy default of debt. So whf you think about Venezuela,
Speaker 4: they've been into faults in twenty seventeen, So your claim
Speaker 4: value was par one hundred cents on the dollar plus
Speaker 4: past due entrants interest, which is about one hundred another
Speaker 4: fifty cents or so, So I'd say one hundred and
Speaker 4: fifty to two hundred points in claim value, and the
Speaker 4: dollar price was somewhere around twenty, So you're buying something
Speaker 4: at twenty. The claim value is very high. That the
Speaker 4: what is difficult part is figuring out the timing of it.
Speaker 4: So last year, the timing was getting closer to whatever
Speaker 4: the whatever that means. We didn't know there was going
Speaker 4: to be an extraction of Maduro, but there's going to
Speaker 4: be some sort of change, and that was closer, and
Speaker 4: as that closeness becomes more of a reality, the bond
Speaker 4: prices went up.
Speaker 1: How do you go about figuring out what percentage of
Speaker 1: the portfolio you should expose to something that could be
Speaker 1: you know, kind of a gamble.
Speaker 4: We do a lot of probability analysis and everything that
Speaker 4: we do, so we put probabilities around, what's the upside,
Speaker 4: what's the potential downside, and we weigh it based off
Speaker 4: of that, and we literally we do this every month
Speaker 4: for everything in our portfolios. The probability that Venezuela was
Speaker 4: going to have a regime change of some sort had increased,
Speaker 4: so that increased our weighting in Venezuela, and that's something
Speaker 4: that we feel very strongly about. I mean, you have
Speaker 4: to factor in the downside as well, and we're not
Speaker 4: out of the woods yet, but that downside I think
Speaker 4: is lower now than before, so that warrants a larger weight.
Speaker 1: Okay, so the name of the ETF has emerging markets
Speaker 1: in it. Is Venezuela actually in our market or is
Speaker 1: it more like a frontier market.
Speaker 4: It's more of a frontier market right now, but it
Speaker 4: used to be just an emerging market. So it's hopefully
Speaker 4: coming back and adjusting the emerging market category.
Speaker 1: And I mean there's so that that line is obviously
Speaker 1: like where there are countries that are uninvestable almost and
Speaker 1: obviously Venezuela's entered into the realm of being investable. But
Speaker 1: do you how do you think about the risk reward
Speaker 1: for these profiles, because a lot of the countries that
Speaker 1: are in the in the portfolio, Lebanon being another one,
Speaker 1: like these are countries that are you know, the reward
Speaker 1: could be ten years off really, so how do you
Speaker 1: go about figuring out what's real and what is just
Speaker 1: too risky.
Speaker 4: That's a great point because the reward could be ten
Speaker 4: years off, for five years off, for two years off,
Speaker 4: and that time value of money is very very significant.
Speaker 4: About half of the emerging markets that morning and that
Speaker 4: genius and a rockstar, but about half of the market
Speaker 4: itself is actually investment grade, so a lots change over
Speaker 4: the past thirty four years I've been doing this. And
Speaker 4: the other half is non investment grade. And within that
Speaker 4: there are different tiers of non investment gradeness. Put it
Speaker 4: that way. In Venezuela Lebanon are at the lower end
Speaker 4: of that, and those are the ones where those can
Speaker 4: be kind of your deal drivers if you think about
Speaker 4: it from a financial terms, those are the ones that
Speaker 4: could have if you have a good information as you could,
Speaker 4: you could do really.
Speaker 1: Well in what can't you invest in right now?
Speaker 4: Things like Cuba, although Syria may come on board at
Speaker 4: some point. There's North Korea. These are countries which you
Speaker 4: that you really can't you can't invest into the.
Speaker 1: Ones when you use your compliance training at your job,
Speaker 1: it's like, yeah, do not do anything that involves these.
Speaker 4: Exactly Russia is in that right now. So these are
Speaker 4: these are countries where you just you you, you get
Speaker 4: put in the bag into the bad house if you
Speaker 4: if you invest in those for obvious reasons.
Speaker 1: But do you have to keep up on them because
Speaker 1: at some point, like maybe Russia comes back online and
Speaker 1: that becomes an opportunity. Right, you can't be completely in
Speaker 1: the dark about them.
Speaker 4: One percent. We have an entire team just going through
Speaker 4: the oh fact Office of Foreign Asset Control website, see
Speaker 4: what new new updates there are as a country been
Speaker 4: put on or taken off. That's very important and obviously
Speaker 4: you well maybe it's not obvious, but to me, you
Speaker 4: want to be ahead of that. So so country comes
Speaker 4: off of that sanctions list.
Speaker 1: As Venezuela sounds like it did, it did were there exactly?
Speaker 4: The Venezuelan bonds at one point traded at two so
Speaker 4: now they're trading at thirty five, So you want to
Speaker 4: be you want to kind of front run that flow
Speaker 4: if you can't be there when it's two.
Speaker 2: Right, Uh, let me bring Namien in because this he's
Speaker 2: a mile deep in this stuff. I always hear him
Speaker 2: over here, him talking about this. You're you're writing about
Speaker 2: this all the time. Were you into Venezuela a year ago?
Speaker 2: How have that has Let's just start with that country
Speaker 2: for you. How's your research been on Venezuela before and
Speaker 2: after the extraction?
Speaker 3: Well, I think we have to look back at the
Speaker 3: fact that these bonds were sanctioned. They weren't you weren't
Speaker 3: allowed to own them, right until President be former President
Speaker 3: Biden basically removed the sanctions on trading in the secondary market,
Speaker 3: which opened the door for Jim and for others to
Speaker 3: start buying up these bonds again. Right, So that's relatively recent.
Speaker 3: And if you look at like the return, I mean,
Speaker 3: you're absolutely right. I mean, if you look at the
Speaker 3: JP Morgan NB Venezuela bond index rose one hundred percent
Speaker 3: last year. But it's not alone Lebanon, Ukraine, I mean,
Speaker 3: Sri Lanka, Gana, all of these sort of Zambia, these
Speaker 3: distressed em dollar bond issues. Issuers have had tremendous years
Speaker 3: in twenty twenty five, so you have to kind of
Speaker 3: parse out how much of the move is due to people,
Speaker 3: you know, expecting regime change in Venezuela and how much
Speaker 3: was just the beta trade that we saw on em
Speaker 3: high yield over the better part of last year. My goodness,
Speaker 3: it's been a good run.
Speaker 1: But what's underlying that that beta trade? Like why there
Speaker 1: why the enthusiasm for countries that we haven't really been
Speaker 1: hearing that much about.
Speaker 3: I would say the risk sentiment, suppression of volatility, the vics,
Speaker 3: all the things that we look at, right, I mean
Speaker 3: vall is that cyclical lows across equities, bonds and effects, right,
Speaker 3: So I mean that's a perfect the environment for investors
Speaker 3: to go and you know extract carry right, and look,
Speaker 3: Venezuela doesn't pay off, right, I mean, these are the
Speaker 3: faulted bonds. There's no coupon income there. But you know,
Speaker 3: the point is to take a little bit of a
Speaker 3: punt on, you know, a very binary outcome makes a
Speaker 3: lot of sense when the bonds are treading at you know,
Speaker 3: five cents on the dollar, right, and the rest of
Speaker 3: the universe in em distressed is up in double digits plus. So,
Speaker 3: so you know, kudos to Jim and the team at
Speaker 3: Stone Harbor for identifying that, and you know, identifying the
Speaker 3: fact that the bonds are no longer sanctioned and that
Speaker 3: they do they do demand the place in investor portfolios,
Speaker 3: albeit probably a very small waiting, you know, relative to
Speaker 3: other more developed markets.
Speaker 1: Well that's a really good point, Jim, like the you
Speaker 1: wouldn't be able to get this exposure through any other
Speaker 1: ETF right, Like, so, how do you talk to institutional
Speaker 1: investors about how to put this into a portfolio when
Speaker 1: you know what you're offering here is not something that
Speaker 1: anybody else is going to get through, like you know, bond.
Speaker 4: Well, it's interesting because most of our most of our
Speaker 4: client bases is actually in institutional investors and they want
Speaker 4: that exposure. So they they view the market very differently
Speaker 4: than a lot of others. They view this as a
Speaker 4: this is a market that that has historically outperformed by
Speaker 4: the fixed income comes with higher volatility. They appreciate that,
Speaker 4: they understand it, but that volatility can be a friend
Speaker 4: as well, So they want that exposure. And something like
Speaker 4: a venezuela is something they understand from a from a
Speaker 4: risk and reward standpoint, and they want to be exposed
Speaker 4: to that. But to your point, I'm on the ETFs,
Speaker 4: aren't that many ETFs that that actually own it?
Speaker 2: This is where I think ETFs are perfect because this
Speaker 2: makes something very complicated and almost impossible for most people
Speaker 2: very easy. You just, you know, roll out of bed
Speaker 2: and you click buy and you own all these cool
Speaker 2: bonds right from these uh frontier countries, the diversification.
Speaker 1: Market countries, some of which happen to.
Speaker 2: Be em well, I'm looking at the portfolio. I mean, honestly, Kazakhstan, Ethiopia.
Speaker 3: Yeah, stand's a pretty good credit. I mean you got
Speaker 3: to take a step back here, I mean, because now
Speaker 3: you get it into the long reads with me. You know,
Speaker 3: like you know, Venezuela is a very unique situation, right,
Speaker 3: I mean you call it frontier. I mean it used
Speaker 3: to be one of the most developed of emerging markets
Speaker 3: going back to the seventies and eighties, and everyti things happened.
Speaker 1: Well, you know, ours figured prominently in a James bond.
Speaker 1: I learned through all.
Speaker 4: This, ye Caanakas.
Speaker 3: But but look, I mean I think you have to
Speaker 3: kind of take a step back and say, okay, you
Speaker 3: know it's not just ETFs guys, and I know this
Speaker 3: is you know, this is trillions here, but active fund managers.
Speaker 3: You know, I'm hard pressed. I did a whole research
Speaker 3: report last year. Last week, I was looking for anybody
Speaker 3: who had Benny on their books, and outside of a
Speaker 3: few funds run by Ashmore won by GMO, very few
Speaker 3: funds have greater than three percent of their portfolio in Venezuela.
Speaker 3: And that's after last year's one hundred percent plus game.
Speaker 3: So you know, it seems like investors have been very
Speaker 3: very I don't us a conservative, but they've been very
Speaker 3: They've been managing that concentration risk really really well. Because
Speaker 3: we're not just talking about many sovereign bonds. We're talking
Speaker 3: about Petavesa, the state on oil company. Again, these are
Speaker 3: all dollar denominated bonds, but those are the two big issuers.
Speaker 3: There's other little LACR, the utility, there's some other you know,
Speaker 3: sort of any linked debt out there, but you know,
Speaker 3: buying and large. What we're talking about is Petavesa and
Speaker 3: thezel Venezuela sovereign and those bonds sixty call it seventy
Speaker 3: billion dollars outstanding. Just how much of that can you
Speaker 3: own in a portfolio to give you, I don't know,
Speaker 3: double digit exposure. I mean it's it's going to be
Speaker 3: a challenge.
Speaker 2: Yeah, well let me bring real quick here. We don't separate.
Speaker 2: There's em debt, there's investment grade, which would be the
Speaker 2: big tickers EMB. Then there's high yield, which is the
Speaker 2: big tickers emhy. Those are the two big I shares
Speaker 2: products your high yield. So you're basically trying to be
Speaker 2: e e mhy. Now let me go back to Damien
Speaker 2: on this. Like let's say you're you know, I don't know,
Speaker 2: your college roommate texts you and says, hey, I saw
Speaker 2: this venezuela. This happens to me sometimes and it's like
Speaker 2: I kind of want to get in on this stuff.
Speaker 2: Like do you tell them, hey, look, uh, maybe don't
Speaker 2: do high yield? Do more of the investment grade or
Speaker 2: like is or should you have both? Like what's the
Speaker 2: normal person's play here in terms of like adding this
Speaker 2: to a portfolio and the difference between going high yield
Speaker 2: or investment grade.
Speaker 3: So I guess for me, Look, you know, I mean
Speaker 3: most people link emerging market debt forget about investment grade
Speaker 3: or highyield with an EM they assume it's HIG yield.
Speaker 1: Yeah, I mean that's the historical assumption.
Speaker 3: Yeah, you know, we were always the guys we em
Speaker 3: you know, portfolio managers and traders. We were always the
Speaker 3: guys they plunk us at the end of the row,
Speaker 3: right next to the US HIG yield guys. We were
Speaker 3: like the you know, the stepchild, right, the one nobody wanted.
Speaker 3: And you know, obviously as the acid classes developed over
Speaker 3: the better part of the last twenty five thirty years,
Speaker 3: you know, things have changed. But you know, far be
Speaker 3: it from me to judge, you know, what makes you know,
Speaker 3: investors kind of you know, look at emerging markets. In
Speaker 3: my opinion, it's going to be about carry. It's going
Speaker 3: to be about you know, higher coop. It's going to
Speaker 3: be about you know, and you're paid for that risk, right.
Speaker 2: All real quick. Just for anyone who just was like,
Speaker 2: what does that mean? What is just describe carry.
Speaker 3: A return over and above US treasuries. In my mind,
Speaker 3: if you're talking about US dollar debt, if you're talking
Speaker 3: about dollar denominated paper, you're benchmarked to the US Treasury curve. Right,
Speaker 3: So how much excess return excess yield are you getting
Speaker 3: by investing in an emerging market dollar debt all else
Speaker 3: equal maturity duration, equal relative to US treasuries and you
Speaker 3: get considerable. I mean, there's very few asset classes US
Speaker 3: dollar denominated fixed in COMACI classes that can give you
Speaker 3: that additional that that additional, that incremental carry, that incremental coupon.
Speaker 2: Yeah, so, Joel, I'll give you the numbers. The GOVT,
Speaker 2: which is the I shares government bond ETF to covers
Speaker 2: the whole curve is up seven percent in the past
Speaker 2: two years. VEMMI is up thirty one percent, EMHY up
Speaker 2: twenty seven percent, and emb up twenty one percent. So
Speaker 2: that's the carry, right, you got So it has worked
Speaker 2: out for sure, and high yields done even a little better.
Speaker 3: Yeah, fair to say, yeah, absolutely. And look, you know
Speaker 3: again what we're kind of when you look at you know,
Speaker 3: emerging market debt, most people it's mostly sovereign quasi sovereign issuers,
Speaker 3: you know, but in this instance, you know, there's there's
Speaker 3: you know, we're talking about both, right, We're talking about peteveesa,
Speaker 3: which is a you know, state on oil company i
Speaker 3: EA quasi sovereign issuer and you're talking about Venezuela the sovereign, right,
Speaker 3: So when you look at EMB, it's all sovereign, it's
Speaker 3: all quasi sovereign, but they avoid all EM corporate stuff. Right.
Speaker 3: So if you want to kind of expand the universe
Speaker 3: into EM corporates and start looking at the Pemmexes and
Speaker 3: the Petrobrass, well, PEMS is a quasi but you know
Speaker 3: valet is another one. You know, carry I mean incremental coupon,
Speaker 3: you know, return potential goes up that much more. So
Speaker 3: it's really about how you carve up the universe. And
Speaker 3: you know, from from I guess you know, Jim's perspective
Speaker 3: did a pretty good job of identifying what was really
Speaker 3: one of those last few vestiges of you know, incremental
Speaker 3: upside and EM because I mean, as far as the
Speaker 3: I could see, there were very few with the potential
Speaker 3: to do a triple digit return year over your return
Speaker 3: like Beny did.
Speaker 4: It's been a it has been a it's been a
Speaker 4: good year. There's been a not a lot of those
Speaker 4: opportunities out there. There's still a few out there that
Speaker 4: are right now. But no, to your point, you have
Speaker 4: to you have to identify them. That's the benefit of
Speaker 4: you know, tooting our own hon here from an active
Speaker 4: management standpoint. But I think it's important to note an
Speaker 4: actively managed GTF in this format I think really does
Speaker 4: work well in the strategy because you can't overweight those opportunities.
Speaker 3: Yeah.
Speaker 1: Actually, on the question of sovereign versus corporate, and you
Speaker 1: brought up Petavesa there, like, Jim, what exposure.
Speaker 2: Do you have?
Speaker 1: Is it all sovereign or and is there any desire
Speaker 1: to try and go get the Pedavesa debt.
Speaker 4: No, we definitely own Petasa debt. In fact, that's we're
Speaker 4: more overweight in the product and in the exactly. So
Speaker 4: overall we're about fifty five percent sovereign forty five corporate.
Speaker 4: So we do yea by design by design, so it's
Speaker 4: fit roughly fifty to fifty by design, but we're overweight
Speaker 4: sovereigns right now. But to your point, the corporate market
Speaker 4: is has grown substantially in size and volume, and it's
Speaker 4: very liquid and these or name brand you know, companies
Speaker 4: that are world renowned and they do quite well, and
Speaker 4: they actually offer a lot of extra yields, So why
Speaker 4: not take it well.
Speaker 3: Jim, can I ask you how much of your position
Speaker 3: is in those eight and a half percent Venezuela. I'm sorry,
Speaker 3: Petavesa twenty twenties, because you guys should be aware not
Speaker 3: all bonds are created equal, and this particular bond is
Speaker 3: secured by fifty point one percent of SIDCO, you know,
Speaker 3: SITCO here in the US, Venezuela, the three big huge
Speaker 3: refineries here in the US, as well as convenience and
Speaker 3: gas stations across the country. You know, there has been
Speaker 3: quite a bit of movement there. I'll let Jim go
Speaker 3: into it a little bit about Paul Singer and the
Speaker 3: folks at Elliott and some of the recovery that's already
Speaker 3: been priced into that particular issue.
Speaker 4: Right, and that bond never really sold off as much
Speaker 4: as the rest of the Venezuela and Pedasa debt, and
Speaker 4: it's now trading at par so the claim value is
Speaker 4: obviously very very real in that and that's working its
Speaker 4: way through the court system. We don't know that we
Speaker 4: preferred to put the risk in lower dollar price bonds
Speaker 4: and try to get somemize more of the upside, but
Speaker 4: I'm very happy that that's working its way through. I'm
Speaker 4: I'm happy for the bondholders that they'll get some recovery
Speaker 4: value there, and I think that's appropriate.
Speaker 2: Let me ask you about Latin America, because you twenty
Speaker 2: eight percent of the fun is in Latin America. A
Speaker 2: couple of weeks ago we did our twenty six ets
Speaker 2: to Watch in twenty six Joel knows. I picked OTGL,
Speaker 2: which is a latinam ETF. I saw the news in
Speaker 2: Chile about their new leader there. Just saw what happen
Speaker 2: in Argentina. That stock market was on fire. And I
Speaker 2: know from covering ets for twenty years, if there's ever
Speaker 2: like even a little hope that a pro business leader
Speaker 2: takes over for a socialist, the market goes wild.
Speaker 3: Right.
Speaker 2: I always say it's a geopolitical sports book. Is these
Speaker 2: single country em ETFs. You have a lot of these
Speaker 2: in here, and like Ecuador was a big winner, you
Speaker 2: know in Latin America, how big is this story of
Speaker 2: political change there?
Speaker 4: It is big because we are shifting more towards the right,
Speaker 4: and we had shifted more towards the left. A lot
Speaker 4: of reasons why, but the shift towards the right is
Speaker 4: very important. If you look at a country like Argentina,
Speaker 4: ten percent yields You've had a big transformation there. You've
Speaker 4: had a pro market government that came in and put
Speaker 4: some very significant fiscal discipline. Great team obviously engage with
Speaker 4: the US Treasury, which has been well publicized, and all
Speaker 4: of that is transformative from a country standpoint. So if
Speaker 4: you look down the road, you're going to see a
Speaker 4: lot of foreign direct invests of going in Argentina. Do
Speaker 4: the GDP coming down, inflation coming down, et cetera, which
Speaker 4: is we want to be part of that story.
Speaker 1: And how do you decide that twenty eight percent is
Speaker 1: the right number?
Speaker 4: Yeah, So there's a lot of opportunities around the world.
Speaker 4: You mentioned Lebanon and Ukraine, and there's a lot of
Speaker 4: Sub Saharan Africa, so it's kind of a nice buyer's
Speaker 4: market out there. So the twenty eight percent of Latin America,
Speaker 4: we don't have a huge weight in Mexican sovereign right now,
Speaker 4: we don't have a huge weight in Chile. A lot
Speaker 4: of things going very very well. The yields aren't high
Speaker 4: enough for us at this point. But we do like
Speaker 4: you know, Venezuela, and we like Argentina, we like Ecuador,
Speaker 4: We like countries such as that and that gets you
Speaker 4: from the bottom up to your desired weight. But those
Speaker 4: are other opportunities around the globe which are equally as fascinating.
Speaker 3: Well, I mean, you know, let me just expand a
Speaker 3: little bit on that pro right pivot across the whole
Speaker 3: of Latin America, referring to we have a number of
Speaker 3: elections coming up this year. Right, We've already seen Chile,
Speaker 3: that's the pro right pivot. By pro right, we mean
Speaker 3: more business friendly, more of a pro US pivot. We've
Speaker 3: got Peru coming up, and we've got quite frank Columbia
Speaker 3: coming up, sorry in May, and we all know what's
Speaker 3: going on there. And the fact is the Columbia President,
Speaker 3: Gustavo Petro can't sit for another term, right, so there
Speaker 3: will be changed. So by and large, the next person
Speaker 3: sitting in that seat will undoubtedly be more pro US
Speaker 3: than the current administration. And then you've got Brazil at
Speaker 3: the end of the end. Now, don't get me wrong,
Speaker 3: Lula has nine lives.
Speaker 1: We all know this.
Speaker 3: But you know, this pro right pivot that's going on
Speaker 3: across the whole of Latin America is real, and it
Speaker 3: makes sense, and it's good for business, and it's good
Speaker 3: for the bond prices, and that's the way the market
Speaker 3: tends to be trading. Here one thing about Venezuela. If
Speaker 3: you want to kind of read through into what this
Speaker 3: means for financial markets and for investors, and again Latin
Speaker 3: America speaks to this out and clear commodities, not just oil,
Speaker 3: but minerals and metals as well. Right, And you know,
Speaker 3: if you just look at you know, Venezuela, it's a
Speaker 3: top three holder of in ground gold. If you look
Speaker 3: at you know, gas, it's the seventh largest holder of
Speaker 3: gas reserves in the world. It's obviously got the largest
Speaker 3: proven reserves of oil in the world. If you think
Speaker 3: about this, if the US actually does have some modicum
Speaker 3: of say over you know, energy supply or oil supply
Speaker 3: coming out of Venezuela, you take Gyana, you take Venezuela,
Speaker 3: and you take the US and you add it all together,
Speaker 3: the US is going to have I guess a say,
Speaker 3: over thirty percent of the world's oil reserves. That's a
Speaker 3: massive geopolitical shift, considering Saudi Arabia controls only what twelve
Speaker 3: to fourteen percent, So this is this is kind of
Speaker 3: striking and this is pretty big news.
Speaker 2: All right, Jim, we've covered Latin America, Venezuela. Now your
Speaker 2: portfolio again. I look at it and I just it's
Speaker 2: like a trip around the globe. You know, it's really
Speaker 2: it's there's Honestly, there's a country year I'd never even
Speaker 2: heard of, and I feel like I'm pretty smart. But anyway,
Speaker 2: I'm gonna yell out a country or I'll say it.
Speaker 2: I won't yell it, but I'll say a country lightning round.
Speaker 2: You guys, give me real quick, like you're one sentence
Speaker 2: or two sentence take on this country in terms of
Speaker 2: your you know, optimism or pessimism.
Speaker 4: Okay.
Speaker 1: Jim also has to say if he's been there, Yeah, okay, okay.
Speaker 2: Great, okay, all right, Well, Dominican Republic.
Speaker 4: Been there, So a shift to the right. Similar to
Speaker 4: our prior conversation, a lot of yield tourism is up.
Speaker 4: It's a significant part been upgraded. Spreads your continue to tighten.
Speaker 3: You gotta let me talk about Dominican Republic. It has
Speaker 3: been one of my favorite calls for the better part
Speaker 3: of the last not only year, two years. And I'm
Speaker 3: not just talking the dollar denominated debt. They have local
Speaker 3: currency DP denominated debt as well. This is a country
Speaker 3: that is still running a current account deficit with the US,
Speaker 3: so it's not on Trump's radar yet. It is the
Speaker 3: fastest growing economy in you know, Latin America writ large.
Speaker 3: I've been there a couple at times of myself. They
Speaker 3: have some good golf courses, and look, the reality is
Speaker 3: Theminican Republic is it's credit rating, it's credit profiles improving,
Speaker 3: it's friendly the US business, and so yeah, I mean,
Speaker 3: I'm I'm very bullish on Dominican Republic. Okay.
Speaker 4: Sri Lanka have not been there extremely important in geopolitical sense,
Speaker 4: So if you think about where it is in the globe,
Speaker 4: there's a big ocean right around it, so it's very
Speaker 4: very important. China's made some huge in roads there. We
Speaker 4: think that that's changing where we went through a restructuring
Speaker 4: last year. We like the restructured debt a great deal.
Speaker 4: We do think there's been a fairly significant political transformation
Speaker 4: as well. But I think the big important point here
Speaker 4: is how strategically IMPORTANTCE Sri Lanka is in the world,
Speaker 4: and I think the US understands that, it appreciates it.
Speaker 4: So I would expect that that's going to be a
Speaker 4: big focal point for the US going forward.
Speaker 3: Yeah, you know, I've not been to Sri Lanka either,
Speaker 3: but I will say when you think Sri Lanka from
Speaker 3: an investor standpoint, you think China. And by the way,
Speaker 3: this just dials right back to Venezuela. I mean, did
Speaker 3: you know that loan commitments by country coming out of
Speaker 3: the China the Development Bank. Venezuela is the sixth largest
Speaker 3: country that has received loans from China. Right, So let's
Speaker 3: think about, you know, a workout scenario for these Veny
Speaker 3: and PETABSA bondholders. Right, there's a lot of bilateral loans
Speaker 3: to China and Russia that need to get paid off
Speaker 3: as well. And where do you sit within the capital stack, right,
Speaker 3: Who's priority, who's subordinated? These are questions that are going
Speaker 3: to take a while to kind of come through. This
Speaker 3: is going to be a very complicated restructuring in Venezuela.
Speaker 3: But when I think of Sri Lanka, I think of
Speaker 3: the port that's been funded by China. I think of
Speaker 3: you know, its ties to China, and whether or not
Speaker 3: those continue or not is going to be, you know,
Speaker 3: really front and center in the eyes of US dollar investors.
Speaker 2: All right, this Ivory coast, I couldn't even tell you where.
Speaker 2: I know it's in Africa, but like I couldn't point
Speaker 2: it out on a map. What's going on there?
Speaker 4: High growth, recently upgraded, cocre prices are high. It is
Speaker 4: really a poster child for what to do right in
Speaker 4: subterran Africa. We expect that that is a country that's
Speaker 4: going to continue to see a lot of foreign directive
Speaker 4: investment going in. I mean, it's major export is coco,
Speaker 4: so we like to see high coco prices there. But
Speaker 4: they've really gotten to handle on the finances and it's
Speaker 4: been reflected in the fact that they've been upgraded and
Speaker 4: spreads and yields are are much lower. So it's one
Speaker 4: of the countries we've actually started to take off a
Speaker 4: little bit. It's done so well.
Speaker 3: Yeah, well, I think I think one thing you have
Speaker 3: to point out, even though these are dollar denominated bonds
Speaker 3: from Coutevar, the it's part of Ekowas, so effectively the
Speaker 3: currency that's used domestically on the ground in Kotevar is
Speaker 3: the Euro. Right, it's a French ship's former French colony,
Speaker 3: and that whole region there's probably seven or eight of
Speaker 3: them from beneath to Berkino Fassis Senegal. They're all you know,
Speaker 3: euro denominated, so you know their balance sheets and their
Speaker 3: sort of trade deficits are a little bit easier to read,
Speaker 3: so to speak. But yes, Kotevar has had a wonderful run,
Speaker 3: unlike it's partners Senegal. But the risk there is a
Speaker 3: lot of the risk were seeing in places like Nigeria.
Speaker 3: It is very very close to the Sahel region, where
Speaker 3: you know, there's a lot of terrorism, there's a lot
Speaker 3: of isis, there's a lot of you know, potential for
Speaker 3: things to kind of derail the success story there. But
Speaker 3: now it's it's managed really really well well and it's
Speaker 3: had some considerable upside. Yeah, all right.
Speaker 2: Another country I was actually in the last well not
Speaker 2: about fourteen months ago, Vietnam. My wife is of Vietnamese descent,
Speaker 2: so we went there. We go like once every twelve years.
Speaker 2: And look, is a hard working group of people. But
Speaker 2: I don't sense a lot of innovation. Like it's a
Speaker 2: lot of like selling stuff out of the front of
Speaker 2: your house kind of economy, but very hard working. Nobody
Speaker 2: is like slacking off. There are no people just hanging around. Really,
Speaker 2: it's very busy, But what's the deal there, what's the
Speaker 2: trade there? Is that also opening up or is it
Speaker 2: just more you know that they're taking a lot of
Speaker 2: the manufacturing from China.
Speaker 4: They're taking a lot of the manufacturing from China. That's
Speaker 4: pretty well known and it's also known by the Trump
Speaker 4: administration as well. So if you think of the tariffs
Speaker 4: that were put in place, and really outside of China,
Speaker 4: Brazil to a certain extent, Vietnam and maybe handful of
Speaker 4: others really didn't affect our market, but Vietnam is one
Speaker 4: that that does stand out to us as being more vulnerable.
Speaker 4: So that's one that we've taken down more recently. Economy
Speaker 4: is doing very well. It's a hardworking society. It's a
Speaker 4: fantastic long term investment, but probably more from an equity
Speaker 4: standpoint than at debt.
Speaker 1: So there's a moment in which you start to pair
Speaker 1: back because you're just like, this is we've done this
Speaker 1: already and it's had its upside, and now we have
Speaker 1: to kind of laura. So when you go from two
Speaker 1: to four percent in Venezuela, you go from four to
Speaker 1: two in Vietnam.
Speaker 4: Right, And that happens a lot in our markets. You know,
Speaker 4: things get ahead of themselves and the euphoria comes in,
Speaker 4: and I think in a country lament Vietnam, I understand
Speaker 4: why just don't you don't get a lot of upside
Speaker 4: out of that?
Speaker 1: And how active do you have to be as an
Speaker 1: active manager in a portfolio like this? How often do
Speaker 1: you have to be recalibrating these numbers?
Speaker 4: I wish more often. These things take a while to
Speaker 4: play out, so it's usually you know, our well, our
Speaker 4: holding period can only be anywhere from a week to
Speaker 4: a year and a half on average, so they take
Speaker 4: a while to play out. We'd love to see him
Speaker 4: play out a little faster sometimes, but more often than not,
Speaker 4: they just take a while to play out. And Vietnam's
Speaker 4: are a classic points trades wall under two hundred now
Speaker 4: and spread and extra yield, so that doesn't offer a
Speaker 4: lot of value for us, you.
Speaker 3: Know, Jim, how much Vietnam is their outstanding right now?
Speaker 3: I mean I've always struggled to find any dollar dollar
Speaker 3: pay Vietnamese bombs.
Speaker 4: There's there's one, but I mean there's really not a
Speaker 4: lot out there.
Speaker 3: Then hence your point that it's an equity play, right,
Speaker 3: I mean, if you want to get your Vietnam explorerure.
Speaker 3: It's easy to do with VIA.
Speaker 4: I would do an aequity market, right.
Speaker 2: Okay. Actually, there's like two countries in here I've never
Speaker 2: heard of, and then a third one that I faintly
Speaker 2: think I might have heard of, but I don't even know. Okay,
Speaker 2: don't make fun of me. I'm just being honest here, Okay,
Speaker 2: I'm just gonna spell it. I mean, I'll try to
Speaker 2: say that's it. Surinam?
Speaker 4: What is that? Great little country? Were also defaulted its dead.
Speaker 4: Latin America also defaulted on its debt and has been
Speaker 4: restructured it. How did you know?
Speaker 1: I was going to say that I know everything.
Speaker 2: That's pretty good, dude.
Speaker 1: I've been doing this far too long.
Speaker 3: So yeah, I mean Surinam is northeast Latin Erica, you know,
Speaker 3: not far from g Know where you know Excellent Mobile
Speaker 3: has some offshore drilling rigs in place there, and you
Speaker 3: know some of the spillover people would kind of argue
Speaker 3: for is you know, some of the oil wealth that's
Speaker 3: being generated offshore outside of Guiana can kind of filter
Speaker 3: over into Surnon. But they've had their issues. They defaulted,
Speaker 3: as you know, and you know it's it is a country.
Speaker 3: I mean, what's what's its biggest export? I mean, well
Speaker 3: it is oil, right, yeah? So I mean so yeah,
Speaker 3: I mean you know, go figure right, I mean what
Speaker 3: do I know? But I think I think yeah, the
Speaker 3: bonds are probably they've come back quite a bit, but
Speaker 3: there's probably some upside there if you listen to people
Speaker 3: who are far smarter than I had.
Speaker 2: Joelhead, you heard of that country? Okay, thank you for
Speaker 2: being honest. One and one more I'd never heard. I'll
Speaker 2: spell it, see if you can guess it. Damien uh
Speaker 2: cursik san No, I have heard of that barely though gabone.
Speaker 3: Gave bones Easybone's an old steward.
Speaker 2: Yes, because I didn't look that bad last time. But
Speaker 2: where's this country?
Speaker 4: Africa as well? So it's an interesting little little oil
Speaker 4: trade if you think about certain think about how to
Speaker 4: how to frame it so it suffers from oil volatile.
Speaker 4: It's a small country. We happen to like it right
Speaker 4: now because we know it's oil. Prices here are are
Speaker 4: favorable to it. But it's I would say, on the
Speaker 4: on the spectrum of being dicey non dicey, it's one
Speaker 4: of the dice er credits. So we're pretty nimble in Gabon,
Speaker 4: but right now it's pretty attractive.
Speaker 1: How important is it to visit any of these countries.
Speaker 4: I'd say it's very important. I have not been to Gabone.
Speaker 4: I will say that Evan most of the other countries
Speaker 4: in our market, but it's very important. You know what
Speaker 4: you do. You meet with government officials, you try to
Speaker 4: meet with the Secretary Finance, the economy mysteries, you meet
Speaker 4: with a lot of the embassies. Great intel there. I
Speaker 4: mean it helps you paint a picture. So you can
Speaker 4: have all the great assumptions in the world, but when
Speaker 4: you get there, you really do figure out if they're
Speaker 4: right or if they're wrong, and that's what's helpful. So
Speaker 4: we typically visit thirty five forty countries a year.
Speaker 1: Jim, if we put on that optimistic here for Venezuela
Speaker 1: as we wrap restructuring of the debt is something that
Speaker 1: seems like it's going to be out there. As if
Speaker 1: we look ahead to what's next for Venezuela with that
Speaker 1: optimism had on, what would that restructuring look like and
Speaker 1: how would impact how you view investing there.
Speaker 4: So we would take our defaulted bonds in dollars and
Speaker 4: we'd sit across the table from Venezuelan's. Probably the IMF
Speaker 4: would be involved in assuming you a treasury, other investors,
Speaker 4: et cetera, and you hammer out a restructuring which allows
Speaker 4: them to grow. So the debt payments have to be lower.
Speaker 4: The probably the stock of debt needs to be lower
Speaker 4: as well, and it's something that gives us the ability
Speaker 4: to get paid back. So that restructuring is very similar
Speaker 4: to the I would expect to the restructurings that we
Speaker 4: dealt with in the early nineteen nineties, where you're exchanging
Speaker 4: your default the debt for new debt. There also may
Speaker 4: be what we call a new money component, which means
Speaker 4: you may want to put in more money. There could
Speaker 4: be an element there. There could be a value recovery right,
Speaker 4: or some sort of warrant that's given to you GDP
Speaker 4: warrant or an oil warrant like the old Venezuelan bonds
Speaker 4: that give you some upside if that does work, if
Speaker 4: the plant does work. But ultimately what you're going to
Speaker 4: be doing is exchanging your default the debt for new debt,
Speaker 4: which is then serviced by Venezuela and PETABSA and.
Speaker 3: You have to remember there. I mean, look before before
Speaker 3: the bonds, the fault in twenty seventeen in Venezuela. I
Speaker 3: mean you had nationalization by the jobs by Hugo Chovas
Speaker 3: in his regime of a number of projects on the ground.
Speaker 3: I'm thinking Conical Phillips. I'm thinking x on Mobile. Conical
Speaker 3: Phillips is own ten billion dollars and so that's why
Speaker 3: it's stock popped on the news. But the reality is,
Speaker 3: good luck trying to get somebody to pay you back
Speaker 3: for that. That's all part of a restructuring here and
Speaker 3: the conversations that go hand in hand. And I don't
Speaker 3: know if you just saw the news. You know, just
Speaker 3: over the weekend, President Trump had a bunch of US
Speaker 3: oil majors into the White House to talk about what
Speaker 3: a you know, Venezuela structuring might look like from from
Speaker 3: a perspective of investing, you know, US dollars into the
Speaker 3: oil sector. He didn't like what x On Mobile had
Speaker 3: to say. So, you know, this is a company that
Speaker 3: is owed one point five one point six billion because
Speaker 3: their assets were nationalized previously. That Venezuelan government has already
Speaker 3: paid back two hundred and twenty five million of that.
Speaker 3: So they've already almost agreed that they owe this money, right,
Speaker 3: so good luck try and I new tho she hd
Speaker 3: all this at It's going to be very, very complicated.
Speaker 3: There's a lot of different investoral interests involved. I mean,
Speaker 3: and like I said, the Chinese and Russian have a
Speaker 3: lot of bilateral loans in place as well. I mean,
Speaker 3: where do they fit in the capital stack?
Speaker 1: Well, this is what we get to watch.
Speaker 2: Yeah, no, it's fascinating and like this kind of stuff
Speaker 2: like is nowhere in a sixty forty portfolio. I mean,
Speaker 2: so I like ETFs that bring something different that your
Speaker 2: normal like sort of beta. This definitely checks that box.
Speaker 1: Jim Damien, thanks for taking a sum of tour the
Speaker 1: world our pleasure. Thank you, Thanks for listening to Trillions
Speaker 1: until next time. You can find us on the Bloomberg Terminal,
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