EM FIXED-INCOME BUBBLE?
FRAN RODILOSSO, PORTFOLIO MANAGER: I think the most frequently-asked question we have received over the last several months is regarding the credit bubble: are we in another credit bubble? I find it a really interesting question, because I think there's a big distinction between bond prices, bond valuations and how much leverage is in the system. I think using the word "bubble" right now, whether or not you think interest rates are too low and bonds are too expensive, is not thinking about the situation in the right way. Back in 2007 and 2008, there was leverage in the system and there were structured products in which people were holding all sorts of fixed income through leverage. During this period, companies and banks were more leveraged.
Today the only entities that are more leveraged are sovereigns in the U.S. and Europe, and that is an issue. But in terms of companies borrowing irresponsibly, we haven't seen that. I mentioned earlier, in emerging markets and even in developed markets that the vast majority of corporate issuance last year was done for refinancing purposes. At the height of the last credit bubble, and what you would see in most credit bubbles, is a lot of leveraged buyout (LBO) activity and huge cap-ex spending. In a lot of sectors, cap-ex was cut last year to make up for lower bottom lines. Many companies put off potential acquisition plans. Private equity managers were sitting on cash last year, and bankers were frankly bored. I do not think we are in a credit bubble. I think you can argue that there is less upside in fixed-income, particularly in hard currency going into 2013, than there was in 2012.
ERIC FINE, PORTFOLIO MANAGER: On this bubble question, I definitely agree with you on the hard currency. It is very hard for us to find value in hard currency credit right now. Generally speaking, on the bubble issue my opinion is that investors are moving to emerging markets debt because they see superior fundamentals and because they do not have enough of it in their portfolios. I do not believe they are buying it because they think there is going to be a higher bidder or because they think it is a big trend or theme. That ultimately is the definition of a bubble.
Turning it around, what are EM debt buyers getting rid of? Well, they are leaving U.S. dollars, where the U.S. central bank does not allow the market to determine interest rates. This situation, to me, seems a lot more worrisome as a phenomenon. In other words, trusting a central bank to maintain low interest rates and then trusting the currency that bank creates seems problematic – especially when you compare it to investors looking for countries with relatively good economic policies, independent central banks, and strong balance sheets, in my opinion.
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