YouSaid · the spoken record

Thomas Haugaard

lines on the record: 51
first: 2023-12-14
most recent: 2023-12-14
sittings or episodes: 1
sources: podcast

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“Might sound a bit like a cliche, but I think realizing that your mental attitude can materially change what you get out of life. I mean, putting on and deciding that you want to have a positive mindset. And often it is a pretty simple decision. It is about ignoring some of the things that do not matter. Stop wasting time on things that are out of our control. Stop spending more time on the past and principle also the future and more time on the current. I think that is something that is valuable. I'm not saying that I can practice it all the time, but if you remember it in the morning, it's much more likely that you get more out of life.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“One of my friends at university said, Stay true to yourself, you'll never be bored because if I'm not motivated, if I'm not enthusiastic, I'm really bad at everything. So trying to do things that are not natural for me is not a good idea. But he turned it around and said, yeah, just do that and you'll never end up being bored because you'll never do things you don't like. So stay true to yourself.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Is last year, and what happened last year was that our team of four managed to trust each other enough to leave one company and join Jenny Sanderson together. That process is a very delicate and stressful process, as you can imagine, when four people move together and have to align all of their hopes and expectations to a new company and agree on that complex decision. When we decided and signed with Janice Henderson, I think I can speak for the rest of the team, that was the happiest moment in our professional life. And we grew even tighter as a team during that process.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“The simplest answer would be my colleagues Benjakov. And I know that sounds maybe a little bit cheesy, but they put together our team and they decided that I should be part of that team back in 2013. And it is impossible to imagine anything that has influenced my professional life more than that single decision that they made back then. Being part of this team for 10 years, which I think is a very unusual thing anyways, going back further, my thesis professor at University Klaus Lester was his name, he argued that I would probably find it more fun and rewarding to go into the financial sector than to deep dive into academic research and do a PhD because I was considering that. He suspected that would be a little bit of a lonely endeavor for me. So he at least brought me to the private sector. And that was pretty important as well, I think.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think one thing that people find funny about me is that I'm quite the geek also in private life. When I make decisions, I like to gather data. When I buy a car, I gather data for all the characteristics of cars. I follow the used car market for a long period of time and I build models to estimate fair value for cars. I do the same when I make espresos. I register time and quality of the coffee I make and I do data analysis. So I don't think everybody knows that, but a lot of my close friends, they know I do that.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“I love sports, actively participating and watching. Right now I play a lot of pedal tennis and I roast coffee between you and me, I am a coffee geek. So you can imagine I cover a lot of Latin American countries. It's a fantastic perk to be able to drink good coffee and have it as a hobby as well.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“First chapter of his book about emerging markets is called perception. And he also said all assets are risky. The only place risk is priced probably is an EM. He has a world upside down view of things where EM is the good part of the world and developed markets are more challenged.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“One name comes to my mind, and that is a Swedish professor by the name of Hans Rosling. He wrote a book called Factfulness. And that book is about how we misperceive things and how we are inherently biased to see the negative things around us. He argues that you need empirical foundation to understand what's going on around you. You need to look at data to understand what's going on. And he says, basically we are operating under perspective distorting emotion-fueled instincts about how the world works. And it often means that we often assume the worst. So I think the advice he gives and the way he illustrates empirical facts, that lesson was very important for me. And then one person more in the EM specific space. And that is a guy called Jerome Booth. He's formerly ESMO.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Think what we're looking at going into 24. The big question that everybody is looking at is will historical gravitational forces work on the US economy or will it continue to grow and surprise like it did in 2023? Because many of the other drivers of uncertainty that has influenced our asset class are coming to an end. Inflation has come down quite a bit. You're definitely in a more comfortable space now where risk seems to be more balanced in terms of where US treasury yields are going. And on top of that, the Fed does look like it's very close to the end of tightening. So those factors, they are in themselves positive for EMSs, what the challenge is is the way the US economy slows down. If that slowdown is orderly and it doesn't create nervousness about how deep it goes, it's a very gradual process.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“And then on the other side, when you have all kinds of questions on global macroeconomic conditions with U.S. rates up and the potential for recession, slowing economies, what are the risks that you're looking at a year and a half, two years?”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Financing is not an issue for these countries, given that many of the safe IG countries are trading at very low spreads. Many of the opportunities are in the gray zone area, in the low-rated names, because that's really where you could potentially see this very unique characteristic of our asset class, which is when you're shot out of market financing or you're somewhere in between, it's too costly, you access lower cost financing because you promise to make changes that ultimately will make credit risk go down if you implement them successfully. So many of the African countries like Ivory Coast, Senegal, Benin, IMF programs, relatively strong credits to begin with, they are interesting opportunities.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“We've come out of three years of unprecedented shocks. COVID was the first unprecedented shock and then very tragically we now also have wars back in terms of the overall global market picture with Russia invading Ukraine and geopolitical risks elevated in many places. So it is an environment, I think, where you have lots of winners and losers. If you look at just a simple measure of standard deviation of spreads in EM, It is almost at historical highs. So picking the right winner and loser has become much more challenging and much more important. So when you ask me about where are the exciting opportunities, I would have to say that if you just look at it in ratings buckets, you have a lot of high-rated IG countries, some of them in the Middle East, that has benefited from a period of high commodity prices and the fact that”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, as a disclaimer before, I answer your question, it is important to notice that for us, China is a much smaller part of the investment universe than for most. So when I think about China from a direct investment perspective, it's 4%. And on top of that, when you then look at valuation in China on sovereign US dollar bonds, we've realized that it's not attractive for us. So we don't have investments in China. It's not from a more or less ethical perspective. It is from an investment perspective. We don't have that. That can change, of course. So for us, China is more of a driver of global market sentiment. It has indirect influence on the asset class, for sure, because ultimately you have the US, China, and Europe. Those are the three big forces that can change dynamics of global macro.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“alpha. We believe that part of our analytical framework is a statistical exercise. It also means that you have to have the law of large numbers to be on your side, high conviction doesn't come from that analytical approach. So we rather want to have many positions. I haven't even traded a bond in my life, which most people would probably say is unusual when you've invested in EM hard currency for 10 years. But I have very good guys who know that much better than me.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“They have the overview from Sweene and myself in terms of the country exposure and the kind of overall risk we want to have in the portfolio. They have to take into account that overall risk. They have to take into account liquidity. And most importantly, I would say they spend a lot of time making sure that portfolio is very diversified. This is core to our strategy. Our strategy is characterized by many positions and not high conviction. We've seen plenty of accidents in EM the last 10 years. So putting all your eggs in a couple of baskets has never been our approach. We tend to have relatively measured bets. As an additional characteristic of the portfolio is that we don't take global macro bets. So we try to generate when all weather portfolio in the sense that you don't have single risk factors that will significantly influence your.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, I have to disappoint you there a little bit because the way we have designed our team and set up the investment process, I don't construct the portfolio. I give all the feedback into views of countries and then Benjamin Jakob.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“To have dollar liquidity and to not overwhelm the local market. And for quite a period of time, those short-term risks took up all the focus of the market. But if you understood the politics going on and if you expected correctly that they were implementing a fiscal risk, And finally, we're seeing it catching up now.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Our focus is to pick countries to overweight and underweight relative to the benchmark. In terms of inefficiencies, part of it comes from our way of aggregating many of these factors into something that is one and a half two years out that the market might not be paying attention to right now. Some of it is related to our evaluation of credit risk-relevant policies where we tilt our rating in a direction depending on if we believe it's positive policies that are coming. I think a good example could be a country like Costa Rica. For several years, we had a very strong rating compared to where the rating actually was. And we could see that the market was not pricing that rating. Part of the reason for that was because they had some short-term challenges in terms of approving issuance of external debt. And they needed to come to the market.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Systems from a dreaded risk perspective, in theoretical terms, if you have the benevolent dictator, the ultimate dictator allocating resources efficiently, making all the right decisions with a high degree of willingness to pay. That would be a very low risk setup, but at the same time, it would not be a democracy. Unfortunately, autocratic regimes are not the benevolent dictator in any way. There is a lot of risk with it, and I think we've seen many cases in the past. And luckily, some of these countries like Zimbabwe, et cetera, are not in our investment universe, but you do see that time corrupts and a lot of the feedback mechanisms that you have in democracies, they disappear. They don't exist in the long term. And I think that's the biggest challenge. It's not a one to two year sovereign credit risk assessment that we are taking, but it's more the long-term implications of those systems that”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Systematically, I'm not able to give you a clear answer on that. It is very clear that in most cases where you have less democratic countries, you will also find that across the board, governance measures, institutions, regulatory quality, rule of law, in most cases they are a lot lower, which means that sovereign risk is higher. What is complicated is that political stability is sometimes very high when you don't have elections. Now we're talking about a small subset of countries in the investment universe. But what that means is that you actually have a very high degree of political stability. And we all know that political change comes with uncertainty. And this is not just an EM thing. It's a US thing. It's a European thing that the political cycle creates some certainty. So I would say there are pluses and minuses in terms of political.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“And implement policies and regulations. It's basically like a grade book of how market friendly is a government, how does it allow the private sector to grow. And I think that has very important implications because it says that not only do we need to understand fiscal policy, because that is already captured in the fiscal policy variables, outside of fiscal policy, general issues of governance that influences how the overall perception of the quality of policies and institutions, that matters a lot. But you cannot predict for 80 countries governance measures. So we have spent a lot of time to try to figure out what pushes these governance variables in a certain direction. It can be fiscal policy focused in Brazil. It can be structural reforms in other countries where they have perhaps good setup in terms of economic policy.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, if you take a closer look at some of the key factors that drive sovereign risk that you need to understand and try to predict, most important is the fiscal indicators. Because after all, it is about the ability to service your debt or the willingness. So different measures of public finances in terms of the sheer size of debt to GDP, but also in terms of interest costs, debt servicing costs and the debt profile and different things. Those are key to understand what's the ability to pay and debt dynamics generally is at the very top of the list of empirically relevant factors. But what might surprise a lot of people is that we also included the World Bank governance indicators in the statistical model. And the second most important variable to understand where ratings are going is regulatory quality. That captures the perceptions of the ability of a government to form.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Would not have expected, and it also identifies their relative importance in terms of these betas. How much does that metrics matter? How much does growth matter? Ultimately, the question of aggregating all these risk factors is the challenge for us. And this way, we collect forecasts from different sources to try to figure out where the rating is going. We are, of course, not ignorant in the sense that we know that everything cannot be modeled and quantified. So you have to have a combination of the quantitative empirical foundation, the better, the cleaner, the more objective it is, the better starting point it is to understand sovereign risk. And then you need to qualitatively take into account the things that you know are not accounted for in the quantitative model. So a combination of quantitative and qualitative analytical frameworks is needed to understand sovereign risk in a forward-looking market-relevant way.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“And then we need to take into account what's the journey from today till two years out. How is that ratings process going to play out? And how will that influence this behavioral inefficiency that we've seen in the market where you over and undershoot depending on if the ratings process is changing direction? We believe firmly that the way to understand sovereign risk needs to have a good foundation, an empirical foundation. We believe that variation in ratings in the past 20 years over time and between countries allows us to extract that information in an objective way. So we build a statistical model that identifies what explains ratings. It identifies around 85% of the entire variation. It gives us all of the risk factors, which could be something like GDP growth, debt, current accounts, all the traditional ones that you would expect to be in there and some other ones that you probably”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“An additional piece of information from that study was that there seems to be some inefficiencies in the way that the market behaves when you have turning points, when you move from a positive rating story to a neutral rating story, or when you move from a downgrade story to a stable story. At the end of a positive rating story, we almost always found that the market is pricing one to two notches too much of the good story. So when credit risk is actually not going down anymore, there's a tendency for investors to stick with a good story for a little bit too long before you realize that it's no longer an improving story. And I would say even worse so on the downside, that investors tend to punish the bad stories too much. So it takes time to understand that it's no longer a deteriorating story. So those two observations convinced us that we try to predict where the rating is going one and a half, two years out.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“So we looked at how the market trades different types of ratings processes. And the way we did that was we calculated an implied market rating. This is basically just a statistical way of translating a spread for Kenya of 600 into a rating, which means how is the market pricing Kenya relative to all the other EMD hard currency countries? Is it a B-plus? And we track that for all these countries in our universe. And we realized that there is a systematic relationship between ratings and that market pricing. The dynamics of that relationship is market is forward-looking one and a half, two years. And this is a stylized fact. There are plenty of deviations from that depending on specific economic development phases. But in general, the market is forward-looking by one and a half two years. So you need to form an opinion about where ratings are going.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Easily agree that ratings are public information. There's no market relevant price information in those ratings. You need to uncover what's the dynamic nature between how markets are pricing sovereign risk and ratings. And we did a big study of that. And we realized that, first of all, ratings move very slowly. They tend to move with a lot of trend and persistence. They don't move up and down in a short period of time unless you understand there's a very clear shock. So for us intuitively, that was important because it suggested that there is measure of sovereign credit risk that moves slowly with trend. And you can imagine, and that goes to your question, how do you cover all these countries with two people? If you can identify something that is more slow moving with trend, you can reduce the analytical frequency needed to understand it. But of course it needs to be relevant for the market.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, as I mentioned, Kenya, let's say trading 600, Mongolia trading 500, and the variation in all these spreads, that's the market interpretation of what sovereign credit risk is. And ultimately, you could argue what we would like to say something about is what's the fair spread. And modeling those with economic, financial, and governance variables, we realize that this very high frequency market data with a lot of noise from the market, beta movements, supply, technical things that influence risk premium. Again, the relationship to these more slow moving macroeconomic and governance variables was not very clear. So we ended up looking at ratings. So the question is, is there enough information in ratings between countries and over time that will allow you to understand sovereign credit risk and allow you to understand it in an investment relevant way?”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Of sovereign credit risk because you could say ultimately you have three kind of expressions of sovereign credit risk. You have the actual defaults. That is a binary variable. Either a country is defaulting or not. And you can try to gather all the macroeconomic, financial data and even some governance data if you can find that. And you can model that and see if it explains those incidences of defaults because that is what you would like to say something about. The probability of default and then you would have to make some assumptions about the recovery value. But in 13 and 14 when we worked on these tools, we didn't have that many defaults. And you had several serial defaulters. It means that when you stress test the model like that, you put in some extra defaults, they have massive implications for what matters and how it matters. And it was a very unstable exercise we did back then. Then we looked at the risk premium in the markets.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Where you think that you understand what's being priced in a country and then you have to form an opinion about what's going to happen in the next one, two, three months. That is not a feasible approach with our setup. So we decided back then that we will try to build some tools that can guide us in systematically assessing sovereign credit risk. And that sounds very fluffy, I would say. But what it basically means is that can you find some data out there that can help you identify what is important for sovereign credit risk? And can you use that data to guide you in forming views of sovereign credit risk? The second question is, can you form a view of sovereign credit risk that is investment relevant, something that seems to drive markets somehow? Those were some of the basic questions we asked back in 2013. And we studied many different measures.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“This is probably the question that we've been facing the most when meeting institutional investors because they look at our team and we are a team of four, that back in 2013 was put together to design a hard currency strategy from scratch. And the way we chose to set it up was somewhat, I would say, unusual, where we have Jacob and Bent on the portfolio management side, risk management side, liquidity management, and responsible for picking bonds within countries. And then we have myself and my colleagues on the country research side. So now you already have the number of people looking at countries and you still have 80 countries to look at. We realized back then that we need to build some tools that can help us. It is not feasible to cover 80 countries at hockey. It's not feasible to know what's going on in all these 80 countries all the time. That thinking”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“You just look at sharp ratios, simply look at the return relative to volatility, and you rank it. I think it's a relatively competitive as a class. So definitely indicating that there is some kind of premium to be harvested. And I think we've been doing this for 10 years and we have consistently seen how you can generate alpha. I think it's one of the asset classes where there are good alpha opportunities and I think the history not just for us but for hard currency managers in general, it is an asset class with a lot of inefficiencies at the country level or even at the security level.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Normally functioning and a middle income somewhat boring EM countries and there are plenty of those where you've seen a significant transition to policy setups that are very similar to developed markets. And that is not something that reaches a lot of headlines, but it is something that has been happening in the past 20 years, I would argue.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Better than perception. We also weighed down a little bit by some of the bad names in the investment universe. It is far more likely that you will see headlines that are negative. You won't see a headline in any of the popular media saying Costa Rica approved a fiscal reform back in 2018 when in fact that was very important for the country and it put it on a path that is far better than what many people feared. And you probably also see more news about Venezuela. Russia is the obvious Turkey mentioned some of these controversial leaders Venezuela was sanctioned and out of the assay class that now seems to be coming back. Russia is out of the asset class as well given sanctions and the war in Ukraine. But some of these bad names are inherently connected to emerging markets and that creates a sense of risk and we're forgetting many of the very”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“You've seen many crises and some defaults and restructurings in EM at the country level. That is something that you haven't seen in developed markets for a very long time. So I think there's an inherent bias just from history. On top of that, I think there is some inherent bias in the sense that most people understand developed markets have faith in the institutions. There's a longer track record of prudent economic policies, independent central banks. And that track record is shorter for EM. So that gives rise to a bit of uncertainty about how stable they are in some countries. To answer your question, it's very difficult to talk about 1EM because you can dig into EM. It has 80 countries or more in it. So of course you can find countries where there's reason to be pessimistic and where reality is probably even worse than perception. And there are definitely a lot of countries where reality is.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“That is an immensely complicated question because it goes to the very core of our investment process is how to understand sovereign credit risk. So it requires somewhat lengthy explanation, I would say. Ultimately, credit risk is about the ability and willingness to pay. The risk premium for a country is an expression of the default probability and loss given default. And that's a combination of these two factors of ability and willingness to pay. That defines the risk premium for a country. And you could say, my job is to figure out if those two in combination is expressed in the price or not.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“At the country level. So if Kenya trades at a spread of 600 to US treasuries, my job is to figure out if that is fair or not. And if it's not, then to take a position on it. So you have these two components, a DM component and an EM component”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“So children return comes from a combination of carry and potential capital gain. So in hard currency, the underlying interest rate is the US treasury yield. And it's a relatively long duration asset class. So duration is a little less than seven years. That means that you can imagine what kind of volatility you've seen in total return in that asset class just from the basic fact that you've seen massive volatility in US treasury yields this year. So you have a developed market component of your total return, which is movements in US treasury yields and the carry that you get from that if nothing changes. We are not focused on that. We focus entirely on the EM side of the asset class. So we focus entirely on the risk premium, the spread that you get on top of U.S. Treasury yields. And we focus entirely on figuring out where that is going.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“It is widely split all over the globe. So one thing that is peculiar about hard currency is compared to other EMSA classes is that China is a relatively small part of it. You typically see China being a very big part of other asset classes. So EM equity is huge. It's very difficult to avoid China in many ways. In the hard currency, investb universe and in the MB, there's probably around 4.5%. China is a much smaller part than it is in most asset classes, but you have a relatively equal distribution across regions in EM hot currency.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Benchmark no country weighs more than 5%. So you can imagine if you have 70 countries, they all weigh less than 5%. It's a very diverse group of countries that you have there. In the local currency space, the benchmark is a GBIEM, and that is where you can have countries weighing up to 10%. I think if you take the top 10 countries in the MB, the hard currency index, they constitute around 42% of the total index. If you take top 10 names in the local currency index, it's around 86% of the index. So it is a very wide, diverse asset class. And I think globally it's probably at the country level the most diverse asset class that you can find. And remember, it constitutes around 50 to 60 percent of global GDP and 80% of the entire global population. So it's an asset class that is very...”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Hard currency as an asset class constitutes around 1.3 trillion USD. It's very comparable in size to the US high yield market. And you could say the hard currency space is dominated by large sovereigns. So you have quite a lot of issuances that are above 1 billion. So it's a relatively large sovereign and relatively liquid market. You find more than 80 countries issuing hot currency. And that number of countries has more than doubled in the last 20 years. The local currency, you could say benchmarked universe is more narrow. It is around 20 countries. So the benchmark that we typically use, which I think is a good description of the asset class, is the JPMorgan's MB Global Diversified. And that benchmark has close to 70 countries. It is only US dollar bonds from the sovereign and 100% state-owned companies, so what we call quasi-size.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Currency, the investment universe there is defined by EM countries issuing either in US dollars or euros predominantly in hard currencies, which basically means that it's a credit risk asset class. There's no local currency risk contrary to the local currency side, which is where the local effects risk is dominating historically those returns. So that is Brazil issuing in Brazilian RI. And of course, Brazil also issues in dollars. But we focus entirely on part currency space.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“I'd love to walk through the investment opportunity set in EM hard currency debt. And as a starting point, why don't you just walk through the basics of the differentiation between hard currency and local currency markets?”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“I like to look at policies and what are the consequences of economic policies. And those are some of the key drivers in hard currency. And it's a very fundamentally oriented asset class.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, the easy answer was that the opportunity that arose in 2013 was very unique. And you could say it could have been any EMSA class. And I would probably have jumped to it because it was about analyzing EMs. My now fellow colleagues, Ben and Jakob and Sreen, they were put together to set up a team from scratch to run an EMD hot currency strategy. I think in hindsight was perfect in the sense that hard currency for me is one of the more analyzable asset classes of EM at the country level. And that is really what interests me is what happens at the country level. I'm not that motivated by the nitty gritty of understanding what a central bank does next week, how inflation moves. I like the bigger drivers of risk premium of countries especially.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Of course, piqued my interest quite a lot. I spent 10 years in the central bank looking at EM, the Danish Central Bank, and then finally in 2013, I moved to the buy side and decided that putting my hand on the plate instead of just writing research was the next step that I really would like to take.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“So I started off on Saleside. So I covered mainly China, Latin America, or Swedish commercial bank. But in terms of getting closer to the investment side of things, I did a short internship at Goldman. That was between my bachelor and master's degree. And that was the initial peaking of my interest in financial markets and emerging markets because I worked for Jakob Novi and Ignisen was back then head of the CE department, economic research of Eastern Europe. And I saw the power of convergence of developing countries. They were basically looking at the Romanians of this world and trying to figure out how being a part of the EU and potentially the Euro area, how that would lead to convergence that we've seen in southern Europe as well. And you saw some of the implications investment-wise in terms of interest rate convergence and the amount of wealth being generated in those problems.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“When you started speculating about the sustainability of those fixed FX regimes, that's when it cracked. And then you saw the downside of it. So I think I learned from that that financial markets are very powerful. Expectations can be self-fulfilling. And if you make the good policy choices, you can have slow and steady catching up. And if you don't, it will be a bumpy ride and you can have capital flows coming in and out in a very brief moment.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I learned that if you make the wrong policy decisions, it can have huge implications. These countries had fixed exchange rates and they opened up and attracted a lot of capital. They had a very long period of high growth. So in the short term, those policies had huge potential. You saw a lot of catching up in many of the Asian economies, including Thailand, Indonesia, Korea. And then you saw the implications of financial markets speculating in these economies. You saw huge short-term capital flows being channeled into property sectors and other investments that didn't really generate hard currency in the long term. And eventually, if you don't accumulate FX reserves and you have a lot of risk taking and you assume that you have fixed exchange rates, then there is a risk that you overshoot. And that's what happened. Then immediately.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, it's been a long journey. I think my first interest in EM was really an academic interest. This was during university back in the late 90s. That's where you saw all the financial crisis. You saw the Asian financial crisis. You had the backdrop of the Mexican crisis in the 80s. And you had other crises in Latin America in the 90s. So for me, the academic interest in understanding how a financial crisis plays out and the implications and how you can avoid it. I think that was the first interest in EM because back then financial crisis was really an EM concept.”
2023-12-14 · Capital Allocators · Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356) · IDENTIFIED FROM THE TRANSCRIPT · source