The Surprising Reason Emerging Markets Are Now the Most Financially Responsible Nations
Summary
EM vs DM: The guest strongly favors emerging market bonds over developed market bonds due to higher carry, lower volatility, and better policy credibility.
Energy/Oil Exporters: Geopolitical shifts create clear winners among oil-exporting EM countries (notably in Sub-Saharan Africa and LatAm), though the process avoids explicit oil price bets.
Asia and China: Asian EMs are more advanced with anchored inflation and strong external positions; a gradual CNY appreciation is seen as a catalyst for EM FX, lower inflation expectations, and stronger local duration.
Gold: The dollar’s weakness is framed against gold rather than other FX pairs, with a bullish stance on gold as a hedge amid fiscal dominance and policy forbearance.
De-dollarization: While not abandoning the dollar, the thesis is a slow sharing of reserve status with CNY rising, supported by shifting trade invoicing, central bank behavior, and currency hedging dynamics.
Local Currency Bonds: The strategy blends local and hard-currency EM debt, emphasizing valuation, carry, and risk limits; Asian local markets have been key drivers despite broader “local” underperformance.
Risks and Outlook: Main risk to the EM bond case is a surprise DM policy renaissance; Eurozone structural constraints and DM twin deficits remain headwinds, whereas EM policy frameworks are seen as stronger.
Structure/Access: The actively managed EM bond strategy is delivered in an ETF wrapper, aiming to broaden access to a mature, multi-trillion EM debt market historically overlooked by US investors.
Transcript
Historians will not say about 2025 that Eurodollar rallied 11%, right? Historians are gonna say that the dollar lost 50% against gold. So that's an important big distinction to just get out of the way. Hi, I am Ed D'Agostino from Mauldin Economics, and this week we speak with the top emerging. Bond expert Eric Fine manages emerging market bond portfolios at VanEck. Eric, I had this fancy interview all mapped out for you, and that's pretty much out the window now due to the events in the Middle East. So instead. Tell me what was the impact on your EM portfolio, and was the impact across the board? Or did some emerging markets do better than others? Number one, EM did sell off. And number two, there are clear winners in general EM bonds as opposed to EM. Equities could be described as commodities exporters, and so the countries that are replacing. Russia. Um, as Europe's and the world's energy supplier, our Sub-Saharan Africa and latam, they, we still have an investment process. We're not gonna invest on a thesis or a theme. Right? You know, we have every thing is country by country, bond by bond, but there are real winners and these are oil exporters. And my, just, my benchmark has a lot of, you know, we were active around it. Um, but just my benchmark has a lot of. Exporters which win from this situation. How much would energy normally play into your, to your process? It always has to for, um, well first for the basic reasons that it's arguably the key ingredient, ingredient for growth. And it's also a key, key ingredient figuring. Inflation pressures globally. So that's the basic answer. Number one, it's generally, generally speaking, even for oil exporters like Russia, declining oil prices is positive for growth. It's just adverse potentially for other areas of the economy or if they're in weak shape, you know, it can trigger a crisis if, if, if, uh, depending on which side they are of the equation. Number two, I already told you, but I'll just repeat it, that. Our EM bonds generally have more exporters. Than EM equities. Now that's changing. We're getting more Asians in there, like India, which is, you know, obviously not a commodities exporter. Um, but here's the other thing. I'll change the, uh, uh, uh, so yes, it has a big impact and we have risk limits around that. And we think about it. We want our companies to be cheap under a range of oil price scenarios, though, well, companies and countries, and we do not start with an oil price assumption and then pick things correct, obviously. Right. We, you know, when we're, when we're. Uh, uh, when we find a cheap asset, we do have tests and judgements on, well, are we really making a bet on oil prices? If we're making a bet on oil prices, we generally don't want to do it 'cause we're not the world's leading expert in oil prices. And our investors, I hope, don't want us investing in em bonds. Based on our oil price opinion. But the interesting, so, so that's the answer. You are naturally gonna have exposure there. Um, it does cut both ways. Namely, higher oil for an exporter can be positive. A higher oil, lower oil prices for an exporter can be positive for growth. Right? It's more complicated. That's why we have an investment process. But here I'll change the definition to reflect geopolitics, which is happening, right? We just had an event, we've had many events. Today is, you know, or this, this week is. You know, a noteworthy one. Um, something happened in the last 15 years that went largely ized. No one really put it, but you know, you, you, you, you saw, um, and, and the bottom line of it is the price at which India and China and many countries purchase their oil was not a price that anyone knew. So when I saw 80, I didn't know what in India or or a number of countries. Um, and so. That's called in economics, in this case, massive positive terms of trade shock, right? You're eating ice cream and not gaining weight. Right. It's magic. And so it's, that is a real, that's a real fact. And one that, because we don't know the number, a lot of economists just are reluctant to say, talk about it. They have a model or they have a, um. Uh, but that is a big insulator. Geopolitics can be an insulator. Now they can also get you into trouble, right? You can lose important allies that are energy suppliers. Um, but it's not as, it's, it's not as straightforward as, um. As a super, uh, as a, uh, top down description of it may be, it may be given these big structural changes. I'll put it D I'll, I'll, I'll give you the flip side of it, not just on the commodity side. When you saw similarly over the last 10 years, especially over the last five years, you know, often captured under the bricks concept, you know, can, can be overdone, can be underdone, um, uh. What were the characteristic headlines? UAE. India, Brazil, China, agree to trade in each other's currencies? Well, if you've got a, if you're a central bank and you've got a pile of, you know, um, uh, dnar, you're, you don't want it. Right, and you're gonna buy bonds. Now, you're not maybe gonna do it the first day or the first year, but you're eventually gonna do it, and you're definitely not gonna send a press release, just like you definitely did not send a press release when you were buying gold. And so that dynamic is on, it started after the GFC. It accelerated after sanctions because a central bank can't tolerate this loss, and my bonds are future reserve assets. Malaysian waring bonds and Malaysian waring was what? Exploded unexpectedly to most last year, multiple times upward positive. My countries are up to their next in dollars. So if a tariff discussion says, your currency can't weaken, what do you think you're gonna do? If you're a trader, you're gonna sell dollars. Now they. The evidence that they sold, that this whole story of selling American stocks and selling American bonds, that takes time and there's not clear evidence on that. But the hedging, there's clear evidence. You do that in, you know, one phone call. Um, and that's the real dynamic that's changed. I know we've gone off of energy costs, but the hedging costs for currencies is. Not ignorable. If you're managing, if you're at a lifer in Japan and you're managing bonds and you own treasuries and you hedge, hedge your dollar risk into yen, you're, you're getting lower yields than you are in, in Ggbs. And so that's not, that's not something you can theorize your way around. That's a practical thing every day that's affecting your p and l. So, um. So that's the big story. I think the big story is, and the big categorizations or aggregate concepts, which are the most dangerous thing in the world, I really don't, it's like we, you know, very allergic to themes and all this stuff, but, but the one that's worked for 13 years now has been the highly indebted dms have central banks that have proved that they can't maintain. A sole focus on inflation and that there are winners that the EMS have low levels of debt and they, most of their central banks have proof that they can operate. The Asians are the most advanced of the EMS, and they for six years have seen their local currency yields collapse to the us. They were the first, and for six years, the concern of the market was, oh my gosh, their currencies. These Asian currencies cannot rally because there's no interest rate differential. With the us, the typical G 10 kind of way of looking at the world. Well, they have much lower inflation than the than the US in the first place. Their currencies are all also been under upward pressure, but due to this for years. But practically speaking, I think the simplest answer is the game theory. Their NIIP namely. How far up to your next are RU in dollars is really high across the board in Asia. And you just had a meeting that called a tariff meeting. It was not a tariff meeting in which they were told. 'cause there's always a currency chapter and you never talk about it. Your currency's not, you're obviously not gonna devalue after this discussion. I don't think it was more complicated than that. It's just that nobody looked at em for the last 20 years and realized that they had grown up. And they're some of the best students of our orthodox economics, right, that the IMF imposed on these countries and can't impose on the rich countries because the rich countries are their biggest shareholders. To close the loop. So you and I started talking about this, um, this interview before the attack on Iran by US and, and Israel. So I was going to ask you about energy. Much later in the discussion I was going to start with fx, uh, specifically US dollar and the Chinese, uh, Juan. Let's talk a little bit more about that. You just brought it up. Um, you know, I think everybody, when they think about em, most of our audience, they're Americans. Uh, so the thinking about it from a, a US-centric perspective and wondering the impact of the dollar. You've, you've addressed that some, the dollar is rallying after this, this, this attack. Um, yeah. Is, is that a short term thing for, from your perspective as an EM bond investor and then layer in the renminbi, uh, the, the, the, the Chinese w into this discussion and how it impacts everything? Yeah, that's a, a great question, ed. Um, last year we got a lot of incoming calls due to the concept called de Dollarization. And so we wrote pieces and we more or less said, let's be precise about language. I'm sold at depreciation. That's old fashioned. Namely if your inflation's higher than mine. Your currency should depreciate. That's not a complicated concept, and that's something markets fully understand and this has been happening. So I think the first point is though I welcome the idea and I don't reject it. Um, uh, it. There were a lot of words and they weren't precisely defined, which is why we wrote extensive pieces breaking down the concepts. And the good news is they are only, I was sold at depreciation when we have a normal investment process for that that we've used for 15 years. But these risks only increase the upside, and they are real risks to the upside for my currencies, to the downside for the developed markets. So I'll start with, I'd also make a throwaway comment to your. American viewers, you, you were saying, you know, what do they think about it? I think it's totally fair to say, uh, most Americans wouldn't, or you shouldn't notice a 20% drop in the dollar. Most of our debts in dollars doesn't transmit into inflation. I, I would pay attention to it, but it's my job to invest in currencies and, you know, that, that, that's a, a little different of a question, but an ordinary American shouldn't care. Um. Um, uh, now, uh, there are I think, two ways of looking at this that are important. Last year, I made a comment that's, uh, uh, as follows. Historians will not say about 2025 that Euro dollar rallied 11%. Right. Historians are gonna say that the dollar lost 50% against gold. So that's an important big distinction to just get out of the way. We wrote a deep piece on it that goes, currency by currency can talk about that a lot, but that's probably not what you want right this second. But that's an important thing to put to the side. I'll make it more precise. Brazilian AI rallied at thir 30% at one point last year. So the price of gold went down 30% less in ray eye terms, right? So that's analyzable. You know, it changes the, the topic, which I won't do. But in any case, that's a really important distinction to make, uh, um, uh, now on the dollar and CNY view. So let's put gold to the side. We can talk about it if you want to. Um, our, our. Bumper sticker view on the dollar is the dollar will not lose its status, but it will slowly share its status. And our bumper sticker view on CNY is that it is a rising reserve currency if you had to put timing on it, you know, under 10 years, but probably more than you know, three, four. Um, um, and um. The dollar, uh, the dollar sharing of status is based on deep things that can't change and maybe shouldn't. Maybe if any of us were policymakers, we wouldn't change it. Sta high infl stagflation may be better than deflation. I don't know. Right? It's not my job, it's my job to react to policy. Um, but fiscal dominance says that, you know, debt's too high or central bank more or less loses traction that it tends to generate. Crises like we saw in GFC, and policy makers can either forebear, namely just, you know, keep the thing going, expand the, either reduce the price of money or increase the quantity of it, which we experimented with, um, that, uh, that was reignited in 2020 during COVID, right? All those modalities of, of leverage, um, that's a policy choice. That is apol. Now, I wish it was more discussed and understood by the expert community in the US but whatever, it's mostly em, people who kind of worry about this stuff. Um, but I think it's a choice and I don't see how you reverse it. To give you a precise example of how impossible to reverse it is the US and you know, a lot of developed markets run large twin deficits. And yet, despite this large structural financing requirement, we feel comfortable sanctioning people for lending to us. So complaining about it or saying that it might, is pointless. We, the evidence is that despite this great need, it's something that. You know, policymakers think is, it was worth the risk or didn't think enough about it and decided implicitly that it, you know, that it wasn't. Um, and uh, CNY on the other hand is low inflation undervalued. They want their currency to appreciate. Um, and they are creating financing markets in it. They're creating Borrow and CNY. In fact, in a number of countries, they're exchanging a dollar stack, a dollar pile of debt in a country with CNY debt. At lower rates. Think of this, CNY borrows at lower rates in its own currency than the US and its dollar bonds. Now there's a few reasons trade at lower yields than treasuries. Now they're capital charge reasons for that, but that's still pretty amazing and that's what I think a lot of people don't really appreciate is how, well, I think they might get sticker shock if they haven't looked at em in, in, in 20 years. Um, but I also think that that. They wouldn't get enough sticker shock. 'cause there's a lot more to go on all of this. This is a complete flip. These are future reserve currencies. So, and last point I'll make is. CNY appreciating from seven to six slowly over the next year or so, is incredibly bullish from my currencies because my countries, other than Poland and Mexico, trade way more with China than they do with the us. This is not a theoretical thing, and if my currencies strengthen as a result of this, what do you think happens to the inflation? Inflation expectations and their yield curves? They go down. What's happening in the US Unanchored inflation expectations because of fiscal dominance. So it's a reminder that when 90% of your probably even, you know, your amazing sophisticated guests, they're asked about what their view on duration is. They're gonna give you an answer without asking you which duration. Dollar duration. Yeah. I mean, you know, there's tons of durations. My country's duration is strongly supported by this dynamic. So, um, yeah, dollar won't lose its status. Um, but uh, it will show slowly sta share it. China will probably rise as a reserve currency. Um, that's their intention. Um, we could move into blocks. I did not mention Eurozone. Eurozone kind of gets lost by this. That's, I think. Probably how it, how it goes. Um, um, that's structurally not ready for this environment. Right? Who do I call again? And, you know, and I, I didn't make that, that one up, but who do I call? Right? What bond do you do? Right? What do you buy? What do you sell? I, I don't know, right? I do know what you do if things go wrong. You buy protection on France or Greece or, or whatever it is, right? But that's the structure. Um, and the fiscal and the political aren't, you know, unified. Uh, they can't issue a bond. So, you know, um, nobody really seems to want it, but that seems to be the result. And it's, and it is a big political step, although the currency was the big one, so it's a. Unusual. Um, but uh, yeah, that's our general outlook on, uh, on the major on, you know, on dollar and CNY, which you asked about emerging market bonds in general. You, you said this isn't over yet and kind of implied that we're still in early days. That's, I wanna unpack that a little bit because, um, 2025 was just an incredible year for emerging market bonds. Uh, massive appreciation is the trade moving from. Sort of undervalued bonds into better yield for a US investor, or is there still appreciation out there? You said they're cheap. Are they, are they, are they cheap? Are they, they're not just cheap as they were. Put it that way. Great question. A lot of, a lot of elements to it. Um, first I should emphasize that, uh, we invest in everything in EM bonds. So we invest in local currency bonds. A bond with, you know, a yield in, its in, in the currency of the country, like Brazilian AI or Maxx, peso or tbo. Um, we also invest in their dollar denominated bonds, which would have a spread. Um, and our, uh, so our strongest view is the trade is. To be in EM bonds and not be in DM bonds. Period. Full stop no matter what. That's the biggest conclusion. Any way you slice it, maybe just reduce DM bonds, right? That's not, you know, you don't need to own EM bonds, right? I think you should. It's been wrong not to. Um, but em over DM is the, is the risk for exactly the story I just told you. Their rates are arguably rising and their currencies are weakening. What else do you need to know? Um, so that's the biggest one. You can get detailed and, and, and, and control all the variables and say, well, investment grade, what would you do? Investment grade EM pays a higher spread, but the same rating as a us and that rating is harder for that em to get. You have to have better. Multiple. And you know, the, the net that tbit, DDA has gotta be even better than, you know, than it would for an American company. Same in high yield, higher spread. And so that is, if there's only one point, that's it. And it may be that, you know, you take away the point, oh, I should be more cautious on DM bonds. Right. Put yourself, this is, you know, I, I can only talk about my experience and the metaphor I have or the image I have is the Portuguese investment advisor. During one of the Eurozone crises who was telling his clients, oh, the safest thing in the world is these things the regulators are telling us are these zero capital charge instruments called Portuguese government bonds. Portugal was downgraded to the same below Nigeria's rating. So that's not helping anyone to ignore this stuff. We've had multiple evidences of this dynamic, and you look at jbs, the Yen, look at last year you had all these stories of the yen weakening and their rates going up. I mean, uh, you don't get more basic than that. Same with Sterling. Now, it doesn't happen every year, every month, every quarter. That's why you have an investment process and you're long and um, um, but um, that would be. You know, em over DM is the main thing, and if you take away to be nervous about dm, I don't think that's the full answer, but that's more than what most people get. Given the Portuguese example now on a DM case, it's already done better in these years of it being ignored for 20 years on an outright and on a volatility ba uh, adjusted basis. EM bonds have outperformed DM bonds, so it's already happened. Now the problem is. DM bonds were so crappy, right? The nominal yields were low. So you're not gonna get many eyeballs on the things called bonds, but now you are. And also you mentioned 2025. Um, uh, 2025 was just a big year. That got a lot of attention. That's, you know, how we, the general view, we, and we, you know, it was, it was a terrific year, um, of outperformance relative the benchmark for us. Um, but the way we generally view our portfolio is you will get our carry and there's upside risk on the spreads we have of hitting their targets, namely coming in and us making money and of the currencies rallying. That's essentially how we look and our caries generally around seven. And we were up, you know, you know, our benchmark was we beat our benchmark, but our benchmark was up almost a little shy of 20%, if I'm remembering. Um, and, uh, but we did, we outperformed even that. So there is, there is that risk. Here's the case for em, bonds carries around 6% about double what it is for DM bonds and EM bond volatility and EMFX volatility are now lower. For a few years now. I don't really know what else to say. Double the carry half the, you know, the same lower vol. Uh, you know, that, that's kind of it. So, um, I think the case is very strong, um, and it is not exposure. Investors have, especially the ems, I told you what their position is. They're long dollars. They're not long. Their own assets. And that's always the key technical on it's the most acute phase of a currency move is based on domestics positioning, down and up. It's when ties lose confidence, it's when they lost confidence. 'cause they own always the most M zero or M two of. Any actor in the world, it's when they now. It's very hard to lose confidence, right? You gotta do a lot. And that's why an EM person looking at the US is a little more worried, whereas a US person might say, ah, we've been through worse, right? And you know, the water's fine. Come on in. Right? And maybe they're right. I'm not, I'm much more worried about Europe and Japan and, and UK than I am about the US dollar arguably rallies against Yen, Euro and Sterling. If. The, the general gist of the story I'm saying plays out another example of, it's really, really a couple worlds. There's dollar and CNY, uh, there's gold, and then there are these, you know, I think Japan and UK and maybe Eurozone mostly for structural reasons. They're overall, if they were a country, they would not be that in that data. Their statistics wouldn't look that terrible. They're in a country and it's their structure. I don't really know what's a stronger argument when you have such ratios and when it's worked for decades and when you just need to read a newspaper to kind of hear these kinds of stories about debt mattering, politics, you know, political risk, geopolitical risk. Sure. Um, so yeah, that's, that's how I would look at em. And our carry right now is in the high sixes. I think there's. Upside. You know, we, we do have high cash right this moment, um, but we see potential further downside from recent developments in the region, which have not reacted, but we don't really see that, uh, for the broader market which has reacted. So South Africa sold off a little today on this broader risk wheel. That's what tens of fives of thousands of miles away at least. Um, you know, that's the always our right way of looking. Look at the actual thing. Don't think about, oh, this is gonna, Washington's gonna do this. You know, too many people are, are are doing that. Um. Uh, so I think that's the basic thing. And then, and these are all, all these stories are real stories with unclear timing, but they're all upside risk to our view. We're not depending on it. We've been trading for trading, you know, this fund for 15 years, so you can see how we've done. But, um, um, we're not every day sitting there waiting for any of these big themes. We're waiting every, we have these big themes because they're important questions we get. But, um, uh, so far they've all been. Upside risk. Um, and they've deepened our understanding. But the real risk to our view, the real risk to emerging market bonds is that we wake up one day and US, Japan, UK and Europe have figured out all their problems and got the political will to fix it. So if you're worried about that, then our, the case for em bonds is bad. How much of it is, um, like being really simplistic, right? If you think about. Some of the basic differences between the developed market and emerging markets. Uh, uh, I mean, one layup is demographics. I mean, there's growing middle class in a lot of emerging markets, uh, rapidly growing middle class. Uh, I, I don't hear my friends in the UK or much of Europe, uh, or even the US saying. How excited they are about the future of the middle class for for many reasons. Sadly, you're more or less kind of touching on confidence. But yeah, let's break it down first. The obvious stuff. EMS have about half the government debt, arguably less as a result. Another really key point, they have central banks that maintain high real rates. Inflation is anchored, right? Um, uh, I would also mention politics. We think, you know, there seems to be this general sort of projection that EM countries have, populations that won, wanna vote folks, policy makers into office that will cut interest rates and do a lot of government spending That that's just not the way it works. You can't find Mexican voters. Say you wanna leverage the central bank to harness economic to, to, to, to generate economic outcomes. They remember 1994, right? The banks disappeared and this is key. The left understands it right? Because this kills the poor. Inflation kills the poor. You lose your banks, kill the poor, the rich can, you know, can figure out ways and some will suffer too. Um, but if you're, you know, a left party, that's really, really key. So you don't see a lot of these, um, um, theories. Implemented in EMS because they can't, their voters have been through it. Um, you and you have 70% popularity levels for a lot of these reformist candidates. Shine bomb in Mexico being an obvious, um, um, example. So the politics are the big difference, the single best measure of a country's markets. You probably would agree with this. Prefer strong to good. I prefer strong to good because. Because, uh, strong can make a mistake and say, yeah, I was wrong and, and I'm still strong and I'm gonna fix it. Um, whereas good doesn't can't, and so, um, having 70% support is a real strength. Um, you saw that in, you saw that in India, a country where we're bullish on the local market, but you can't. Deny that there has been incredible, incredible and wide and deep structural reform in the country. Um, uh, and that's due to politics and that's based on extremely popular politicians. And look at the dms. The most popular politicians in Europe are like 17, 15, 20% support levels, right? So now Japan just flipped it, right? They've maybe gotten out of it. And what are they choosing? High spending low rates, right. Or whatever the mix that they come up with, which may be understandable. It may even be the least bad outcome. I'm, you know, I'm not getting into that. I'm not a policymaker there. Um, uh, um, but I do know that that's good for. The currencies on the opposite side. I do know if I'm Mrs. Watanabe, I like South Africa a lot more. If I think Japanese FX and rates FX is down and rates are higher. Um, and um, I'd also mention banking systems. I. EMS because they are the tough kids on the block. They're the kid, you know, they're the one that had to study harder, that didn't have a trust fund, basically. Right. And, and when things got a little rough, they had to, you know, they had to suffer 50% GDP declines. They had to, uh, uh, they had to tolerate inflation. They had to have, they had to tolerate changes in prime ministers and presidents. And um, and they learned and they're good students. And one of the things they learned is. You know, I was a banks analyst for some of my country's, uh, long time at Morgan Stanley. And the main conclusion I came was, you can never came to was, you never really know what's going on in a bank. But, um, uh, and I, I've never unlearned that. I don't see how that's different. Um, uh, what did the Asians do during their crisis Finance? One was the biggest financial institution of Thailand. They let it go. What did we do? We forebear. Now that may have been good policy. If you had moral hazard, if you, if you said, well, look, we're gonna cut you a break, but you're, you're in jail or whatever, there's moral hazard, right? You, you pay a price and therefore you're credibly saying, we're not doing it again, but. You know, we didn't invoke the middle laws and then 2020 happened and we used all the exact same policy tools on the quantity of money. And you mentioned demographics. Yeah, that's, uh, that's a, that's a clear one. The only reason I didn't mention that, that I, I would say that's hopeful and a reflection of something good when you have growth, uh, when you have a growing population. Because as you know, in markets, confidence is them. Main thing in everything and populations are growing are generally confident populations. The only issue I would say though is for bond investors, that's much more of an may not be as awesome. You know, it, it, it, it, I get it from an equity lens. And that's another issue with em. You talk to 90% of investors in the us you say em, they're gonna think em equities and you say em, bonds are gonna say, oh, I don't know where to put it. Where do I put it? And I, you know, and I, when I'm in a large group, I always say, not my problem. You wanna continue out underperforming, you know, you know, but I tell 'em about the Portuguese. Manager and then they, you know, start to um, um, but that's what was interesting about 2025 to bring it back to your kind of one of your. It's sort of, uh, crystallizing questions is that's when a lot of people were forced to really look at it. And, uh, um, and I think it's gonna, I think the interest is gonna happen, not because anyone consciously chooses to do it. It's gonna be the old fashioned way. It just keeps doing better and they can't ignore it. Um, and maybe equities do a little less well than they have in the past. Nothing to do with us, me, em, anything. But if, you know, I'm in a room and somebody's saying, oh, you know, the stock's gonna go 40%, you know, no one's gonna want to talk to me. It does not matter that it's their job to have bonds. Um, that you know. And, um, and if that's down to 12. We can generate, you know, 27, you know, depending, you know, have a year of that, you know, uh, then, then it's a very different conversation. But, um, uh, I'm not worried about that. I think that happens by itself. Um, markets solve that. I don't see how you can have six and a half percent carry and, and lower vol, um, and, and not get it. I can see how that can be slow, confusing, might need new personnel. Um, but that just makes me like it more. Oh, and here's the real reason. I don't care. I care as a business that's, we're very focused on raising assets, but there are other actors, central banks, you know, you can wait a couple years. Where do you think CNY is gonna be then? What do you think their interest rates are gonna be? What do you think Thailand and Philippines are gonna have ignored that. It's gonna be, lots gonna have changed by then. You may wanna show, I don't know. You may wanna be out by then. I don't. Um, so, uh, um. Um, yeah. And again, if the point is well, it's risky, well, you're getting the carry and the balls lower. So it really, you know, I think it's an airtight argument and it's really gonna, it's about people mis, you know, it, it, nor normal incent, human incentives will force this. Maybe that gets us nervous the year everybody gets activated. I don't know. Right. You know, people are, you know, and, and, uh, they get beaten up the first time. I don't know. Um, but it has, it didn't happen. So far this year. Um, and last year was quite a juggernaut year. Again, because locals don't own this. No one owns it. Who's gonna sell it? I can tell. I can, you know, we we're, we're bullish on gold, but I can tell you who will sell that. I mean, something is up that much. Of course, there's someone who can sell, but. Things that people don't own, including their own issuer. The, the citizens in their own countries that don't own it, their own pensions, and they have sophisticated big pension funds, um, that are long dollars. Right? And, uh, and so, um, it's a pretty, there are a lot of things. Uh, that create upside risk beyond the more normal, hey, the caries higher and fall lower. The, those risks, all these risks that, you know, we hear, um, that are considered new, which we've been viewing as long in train and now they're just getting attention only support. This case. Tell me about your fund, Eric, you, you're, you're at VanEck. I have, I have nothing but respect for what Jan VanEck has been able to do with that firm and the, the creativity that he brings to ETF construction. Um, but like, like what you do running, uh, an actively managed emerging market bond, ETF, that's pretty wild. Um, you know, I think most people think of ETFs as just blobs. They're inactive, they're not actively managed. Tell me a little bit about what makes this such a unique fund. Thanks, ed, and thanks for saying that about Jan and the firm and it's, yeah, it's, we agree, uh, completely. And, um, no, it's, it's an amazing place with incredible growth and a really unique footprint that you, that is, is. If someone designed this, you wouldn't believe they'd be able to achieve it, and you also wouldn't believe that they'd imagine wanting it. And yet here we are, right? With this, just this amazing footprint. Um, yeah, we, uh, so I manage, uh, uh, along, you know, me and my team, we manage. The actively managed EM bond funds. Uh, our main fund, our main strategy is a blend strategy, so we invest in all em bonds. Local currency. So Brazilian AI at 15% or, uh, uh, dollar denominated. So Brazil at, you know, one 50 over treasuries. Um, uh, and, um, uh, via, uh, and the, the story version of why we designed the fund that way is. Institutional investors, when they got involved in em, always had a bad go of it because they got the thesis, oh, you have low debt and your yields or carrier or what, however, whatever your return variable is, are superior. Um, and then they said, oh, and we're gonna do it only in local. That's what our C came to us saying 15 years ago. They said, we love em. We get your thesis. We like what you wrote, and we don't like our long only manager. Here's some money start along only, but it has to be local. And we said no. And we told them you don't want that. And we further told them, you're only telling us that because it was up the last three years. And um, and so we started a blend fund and luckily we were not in local. Because local's been a dog, but dollar bonds did well. And actually what I said about local deserves a major footnote, a big apology to the Asians because for the last six years when we had big local exposure, was mostly the Asians investors would call us and say local, which is again a dangerous aggregate concept. Did poorly, you did well, you know? And the answer was, well, we were in the Asians. Right? Everything's country by country. And Asians isn't a country. Right, obviously. And VanEck is an incredible. Asset manager that has a variety of strategies and forms in which it can. Provide solutions to investors, including SMAs, which we manage. But ETFs are the hottest ticket in town in terms of a wrapper, obviously, globally. And we happen to, you know, be a, you know, a top performing EM bond fund. And so we decided, the firm decided, and we're very happy about it, to convert in October, the mutual fund to an ET tf. And the idea is that's the wrapper of the future and it's gonna get us onto different platforms. Em, bonds, by the way, are a very mature, multi-trillion dollar asset class. There are funds with multi-billions. And so when you see that a fund has 5 billion or so, the sma uh, you know, can get it up to much bigger numbers. Um, and, uh, but, um. 'cause the industry's been stagnant in the sense of no inflow, no net inflow. For 10 years now, our strategies have raised assets and our passive, uh, ETFs have also, uh, attracted assets. But in general, there've been no eyeballs on the space. So you have. Underperforming funds with big assets and, and good performing funds with low assets because no one had an eyeball on the space. Um, uh, and so we're very excited about that. We did. For your information launch, the World's first actively traded E Em Bond, ETF, in Australia. It's now six years ago. It's in Australian dollars. VanEck Australia, right? We're a global firm. Many of our viewers may not know that, but we've got fantastic operations in, uh, Australia, Asia, Europe. Um. And, and other regions. And, uh, and this one's an Aussie dollars, right? Which is kind of neat already. Um, and, uh, so em, and, and, uh, and a lot of our competitors can't do this, so it's an incredible competitive advantage. So, um, you know, we're very, we're very excited about that. And, um, uh, yeah, like you kind of introed. Not a lot of firms could or would do that. I like to tell the story and we used to tell the story more. The firm was started in 1955 and the first fund was an emerging market equity fund. Oh, no kidding. It's European. Well, it was European post-war corporates. Right. Europe after World War II was an emerging market. Right? And then of course, John VanEck, uh, Jan's father, uh, who got his PhD under Von Mises at NYU, um, saw, saw, saw inflation coming, and that's when the Gold Equities fund started. Um, they actively manage and then, um. The firm that was an active fund. The firm was comfortable competing with itself and launched a passive version. Um, right. Someone's gonna do it. Why not us? That was the idea. I wasn't around then. That was obviously Yon call and turned this into the firm we are today. He, Yon likes to say it pays for a lot of Bloomberg's. Um, it has been fantastic to be able to be, to be able to, as a firm, to raise assets. You know, for example, in the passive ETF space, because. The industry's just not there yet to do active, most em, bonds are active. When it gets activated, the active will do best, but it's great to, you know, have, you know, yards and assets as a firm, um, when, uh, the, the flow that's normally into active isn't happening. So it's an incredible, it's an incredible setup. Um, and I mentioned the geopolitical or the political or geographic diversity we have, right? Europe. Is very interested in this. Um, Australia, Asia is very interested in, this is not just a US product. In fact, Europe is the natural first go to. That's where we've seen the faster, I wouldn't call 'em easier, but that's where the clearer a UM growth happens. Heading into emerging, you mean? Or just in general? Yeah. Okay. Yeah. Yeah. Europe. That makes sense. Europe was the original multi-trillion dollar market. Morgan Stanley sent me to Europe in the early nineties to be part of the convergence trade. The the, now it worked, so you can talk about it this way, but the simple version of it, and it was kind of this simple step one. Sit in Germany, step two, borrow in euros and, and at or and at bun rates. Um, step three, get rid of it in Poland in slo atlati rates. Step four, sit and wait 15 years and make. You know, trillions, that's, you know, that's what that was. It was actual convergence. Now they had structural policy around that. In some cases, the country's literally agreeing to give up their home currency. In most cases, they would pretend to promise to give up their home currency, but never really intended to. Um, um, but the majors, the core, the west, right. France, Europe, you know, did it without having, they were able, the authorities were able to do it without consulting. Voters. So, you know, that just sort of happened, but it doesn't work that way in Eastern Europe that after the collapse of communism politics is, you know, and democracy are very more, more I guess, forceful and energetic. Um, um, so that was not an option, but yeah, no convergence. Uh, and that's, um, that's a, a a, that's a basic phenomena and, um. Forgot why I mentioned that. Yeah. We were talking about Europe being a Oh, yeah, yeah, yeah. Kind of growth. That's why they, that's why it's a natural place for em. Bonds, it's more ingrained. Um, and you know, they made trillions on it and never really stopped. Whereas in the us you know, I remember when I started, if I. I've always been married in the business, so I didn't, you know, but if I was talking to somebody at a bar, you know, just the proverbial setup and told them, you invest, you know, I invest in Ian Bonds. I remember when that was a cool thing. No one would wanna walk away from me when I said that. Um, and, uh, but for the last 10 or 15 years, it's kind of been like that. That is what it is. That's why, um, you know, you have Carrie and you perform, right? That's, you know, you don't need to talk to people all the time. I think you're gonna be one of the cool kids again, especially after, uh, the performance of last year. So, uh, I would say to viewers, if you see Eric fine in a bar, uh, go up and buy him a beer. Awesome, and I'll buy one back. Thank you and I look forward to buying you one anytime. I look forward to it. Thanks for watching. Be sure to subscribe to the channel, leave us a comment or a question and come see us next week.
The Surprising Reason Emerging Markets Are Now the Most Financially Responsible Nations
Summary
Transcript
Historians will not say about 2025 that Eurodollar rallied 11%, right? Historians are gonna say that the dollar lost 50% against gold. So that's an important big distinction to just get out of the way. Hi, I am Ed D'Agostino from Mauldin Economics, and this week we speak with the top emerging. Bond expert Eric Fine manages emerging market bond portfolios at VanEck. Eric, I had this fancy interview all mapped out for you, and that's pretty much out the window now due to the events in the Middle East. So instead. Tell me what was the impact on your EM portfolio, and was the impact across the board? Or did some emerging markets do better than others? Number one, EM did sell off. And number two, there are clear winners in general EM bonds as opposed to EM. Equities could be described as commodities exporters, and so the countries that are replacing. Russia. Um, as Europe's and the world's energy supplier, our Sub-Saharan Africa and latam, they, we still have an investment process. We're not gonna invest on a thesis or a theme. Right? You know, we have every thing is country by country, bond by bond, but there are real winners and these are oil exporters. And my, just, my benchmark has a lot of, you know, we were active around it. Um, but just my benchmark has a lot of. Exporters which win from this situation. How much would energy normally play into your, to your process? It always has to for, um, well first for the basic reasons that it's arguably the key ingredient, ingredient for growth. And it's also a key, key ingredient figuring. Inflation pressures globally. So that's the basic answer. Number one, it's generally, generally speaking, even for oil exporters like Russia, declining oil prices is positive for growth. It's just adverse potentially for other areas of the economy or if they're in weak shape, you know, it can trigger a crisis if, if, if, uh, depending on which side they are of the equation. Number two, I already told you, but I'll just repeat it, that. Our EM bonds generally have more exporters. Than EM equities. Now that's changing. We're getting more Asians in there, like India, which is, you know, obviously not a commodities exporter. Um, but here's the other thing. I'll change the, uh, uh, uh, so yes, it has a big impact and we have risk limits around that. And we think about it. We want our companies to be cheap under a range of oil price scenarios, though, well, companies and countries, and we do not start with an oil price assumption and then pick things correct, obviously. Right. We, you know, when we're, when we're. Uh, uh, when we find a cheap asset, we do have tests and judgements on, well, are we really making a bet on oil prices? If we're making a bet on oil prices, we generally don't want to do it 'cause we're not the world's leading expert in oil prices. And our investors, I hope, don't want us investing in em bonds. Based on our oil price opinion. But the interesting, so, so that's the answer. You are naturally gonna have exposure there. Um, it does cut both ways. Namely, higher oil for an exporter can be positive. A higher oil, lower oil prices for an exporter can be positive for growth. Right? It's more complicated. That's why we have an investment process. But here I'll change the definition to reflect geopolitics, which is happening, right? We just had an event, we've had many events. Today is, you know, or this, this week is. You know, a noteworthy one. Um, something happened in the last 15 years that went largely ized. No one really put it, but you know, you, you, you, you saw, um, and, and the bottom line of it is the price at which India and China and many countries purchase their oil was not a price that anyone knew. So when I saw 80, I didn't know what in India or or a number of countries. Um, and so. That's called in economics, in this case, massive positive terms of trade shock, right? You're eating ice cream and not gaining weight. Right. It's magic. And so it's, that is a real, that's a real fact. And one that, because we don't know the number, a lot of economists just are reluctant to say, talk about it. They have a model or they have a, um. Uh, but that is a big insulator. Geopolitics can be an insulator. Now they can also get you into trouble, right? You can lose important allies that are energy suppliers. Um, but it's not as, it's, it's not as straightforward as, um. As a super, uh, as a, uh, top down description of it may be, it may be given these big structural changes. I'll put it D I'll, I'll, I'll give you the flip side of it, not just on the commodity side. When you saw similarly over the last 10 years, especially over the last five years, you know, often captured under the bricks concept, you know, can, can be overdone, can be underdone, um, uh. What were the characteristic headlines? UAE. India, Brazil, China, agree to trade in each other's currencies? Well, if you've got a, if you're a central bank and you've got a pile of, you know, um, uh, dnar, you're, you don't want it. Right, and you're gonna buy bonds. Now, you're not maybe gonna do it the first day or the first year, but you're eventually gonna do it, and you're definitely not gonna send a press release, just like you definitely did not send a press release when you were buying gold. And so that dynamic is on, it started after the GFC. It accelerated after sanctions because a central bank can't tolerate this loss, and my bonds are future reserve assets. Malaysian waring bonds and Malaysian waring was what? Exploded unexpectedly to most last year, multiple times upward positive. My countries are up to their next in dollars. So if a tariff discussion says, your currency can't weaken, what do you think you're gonna do? If you're a trader, you're gonna sell dollars. Now they. The evidence that they sold, that this whole story of selling American stocks and selling American bonds, that takes time and there's not clear evidence on that. But the hedging, there's clear evidence. You do that in, you know, one phone call. Um, and that's the real dynamic that's changed. I know we've gone off of energy costs, but the hedging costs for currencies is. Not ignorable. If you're managing, if you're at a lifer in Japan and you're managing bonds and you own treasuries and you hedge, hedge your dollar risk into yen, you're, you're getting lower yields than you are in, in Ggbs. And so that's not, that's not something you can theorize your way around. That's a practical thing every day that's affecting your p and l. So, um. So that's the big story. I think the big story is, and the big categorizations or aggregate concepts, which are the most dangerous thing in the world, I really don't, it's like we, you know, very allergic to themes and all this stuff, but, but the one that's worked for 13 years now has been the highly indebted dms have central banks that have proved that they can't maintain. A sole focus on inflation and that there are winners that the EMS have low levels of debt and they, most of their central banks have proof that they can operate. The Asians are the most advanced of the EMS, and they for six years have seen their local currency yields collapse to the us. They were the first, and for six years, the concern of the market was, oh my gosh, their currencies. These Asian currencies cannot rally because there's no interest rate differential. With the us, the typical G 10 kind of way of looking at the world. Well, they have much lower inflation than the than the US in the first place. Their currencies are all also been under upward pressure, but due to this for years. But practically speaking, I think the simplest answer is the game theory. Their NIIP namely. How far up to your next are RU in dollars is really high across the board in Asia. And you just had a meeting that called a tariff meeting. It was not a tariff meeting in which they were told. 'cause there's always a currency chapter and you never talk about it. Your currency's not, you're obviously not gonna devalue after this discussion. I don't think it was more complicated than that. It's just that nobody looked at em for the last 20 years and realized that they had grown up. And they're some of the best students of our orthodox economics, right, that the IMF imposed on these countries and can't impose on the rich countries because the rich countries are their biggest shareholders. To close the loop. So you and I started talking about this, um, this interview before the attack on Iran by US and, and Israel. So I was going to ask you about energy. Much later in the discussion I was going to start with fx, uh, specifically US dollar and the Chinese, uh, Juan. Let's talk a little bit more about that. You just brought it up. Um, you know, I think everybody, when they think about em, most of our audience, they're Americans. Uh, so the thinking about it from a, a US-centric perspective and wondering the impact of the dollar. You've, you've addressed that some, the dollar is rallying after this, this, this attack. Um, yeah. Is, is that a short term thing for, from your perspective as an EM bond investor and then layer in the renminbi, uh, the, the, the, the Chinese w into this discussion and how it impacts everything? Yeah, that's a, a great question, ed. Um, last year we got a lot of incoming calls due to the concept called de Dollarization. And so we wrote pieces and we more or less said, let's be precise about language. I'm sold at depreciation. That's old fashioned. Namely if your inflation's higher than mine. Your currency should depreciate. That's not a complicated concept, and that's something markets fully understand and this has been happening. So I think the first point is though I welcome the idea and I don't reject it. Um, uh, it. There were a lot of words and they weren't precisely defined, which is why we wrote extensive pieces breaking down the concepts. And the good news is they are only, I was sold at depreciation when we have a normal investment process for that that we've used for 15 years. But these risks only increase the upside, and they are real risks to the upside for my currencies, to the downside for the developed markets. So I'll start with, I'd also make a throwaway comment to your. American viewers, you, you were saying, you know, what do they think about it? I think it's totally fair to say, uh, most Americans wouldn't, or you shouldn't notice a 20% drop in the dollar. Most of our debts in dollars doesn't transmit into inflation. I, I would pay attention to it, but it's my job to invest in currencies and, you know, that, that, that's a, a little different of a question, but an ordinary American shouldn't care. Um. Um, uh, now, uh, there are I think, two ways of looking at this that are important. Last year, I made a comment that's, uh, uh, as follows. Historians will not say about 2025 that Euro dollar rallied 11%. Right. Historians are gonna say that the dollar lost 50% against gold. So that's an important big distinction to just get out of the way. We wrote a deep piece on it that goes, currency by currency can talk about that a lot, but that's probably not what you want right this second. But that's an important thing to put to the side. I'll make it more precise. Brazilian AI rallied at thir 30% at one point last year. So the price of gold went down 30% less in ray eye terms, right? So that's analyzable. You know, it changes the, the topic, which I won't do. But in any case, that's a really important distinction to make, uh, um, uh, now on the dollar and CNY view. So let's put gold to the side. We can talk about it if you want to. Um, our, our. Bumper sticker view on the dollar is the dollar will not lose its status, but it will slowly share its status. And our bumper sticker view on CNY is that it is a rising reserve currency if you had to put timing on it, you know, under 10 years, but probably more than you know, three, four. Um, um, and um. The dollar, uh, the dollar sharing of status is based on deep things that can't change and maybe shouldn't. Maybe if any of us were policymakers, we wouldn't change it. Sta high infl stagflation may be better than deflation. I don't know. Right? It's not my job, it's my job to react to policy. Um, but fiscal dominance says that, you know, debt's too high or central bank more or less loses traction that it tends to generate. Crises like we saw in GFC, and policy makers can either forebear, namely just, you know, keep the thing going, expand the, either reduce the price of money or increase the quantity of it, which we experimented with, um, that, uh, that was reignited in 2020 during COVID, right? All those modalities of, of leverage, um, that's a policy choice. That is apol. Now, I wish it was more discussed and understood by the expert community in the US but whatever, it's mostly em, people who kind of worry about this stuff. Um, but I think it's a choice and I don't see how you reverse it. To give you a precise example of how impossible to reverse it is the US and you know, a lot of developed markets run large twin deficits. And yet, despite this large structural financing requirement, we feel comfortable sanctioning people for lending to us. So complaining about it or saying that it might, is pointless. We, the evidence is that despite this great need, it's something that. You know, policymakers think is, it was worth the risk or didn't think enough about it and decided implicitly that it, you know, that it wasn't. Um, and uh, CNY on the other hand is low inflation undervalued. They want their currency to appreciate. Um, and they are creating financing markets in it. They're creating Borrow and CNY. In fact, in a number of countries, they're exchanging a dollar stack, a dollar pile of debt in a country with CNY debt. At lower rates. Think of this, CNY borrows at lower rates in its own currency than the US and its dollar bonds. Now there's a few reasons trade at lower yields than treasuries. Now they're capital charge reasons for that, but that's still pretty amazing and that's what I think a lot of people don't really appreciate is how, well, I think they might get sticker shock if they haven't looked at em in, in, in 20 years. Um, but I also think that that. They wouldn't get enough sticker shock. 'cause there's a lot more to go on all of this. This is a complete flip. These are future reserve currencies. So, and last point I'll make is. CNY appreciating from seven to six slowly over the next year or so, is incredibly bullish from my currencies because my countries, other than Poland and Mexico, trade way more with China than they do with the us. This is not a theoretical thing, and if my currencies strengthen as a result of this, what do you think happens to the inflation? Inflation expectations and their yield curves? They go down. What's happening in the US Unanchored inflation expectations because of fiscal dominance. So it's a reminder that when 90% of your probably even, you know, your amazing sophisticated guests, they're asked about what their view on duration is. They're gonna give you an answer without asking you which duration. Dollar duration. Yeah. I mean, you know, there's tons of durations. My country's duration is strongly supported by this dynamic. So, um, yeah, dollar won't lose its status. Um, but uh, it will show slowly sta share it. China will probably rise as a reserve currency. Um, that's their intention. Um, we could move into blocks. I did not mention Eurozone. Eurozone kind of gets lost by this. That's, I think. Probably how it, how it goes. Um, um, that's structurally not ready for this environment. Right? Who do I call again? And, you know, and I, I didn't make that, that one up, but who do I call? Right? What bond do you do? Right? What do you buy? What do you sell? I, I don't know, right? I do know what you do if things go wrong. You buy protection on France or Greece or, or whatever it is, right? But that's the structure. Um, and the fiscal and the political aren't, you know, unified. Uh, they can't issue a bond. So, you know, um, nobody really seems to want it, but that seems to be the result. And it's, and it is a big political step, although the currency was the big one, so it's a. Unusual. Um, but uh, yeah, that's our general outlook on, uh, on the major on, you know, on dollar and CNY, which you asked about emerging market bonds in general. You, you said this isn't over yet and kind of implied that we're still in early days. That's, I wanna unpack that a little bit because, um, 2025 was just an incredible year for emerging market bonds. Uh, massive appreciation is the trade moving from. Sort of undervalued bonds into better yield for a US investor, or is there still appreciation out there? You said they're cheap. Are they, are they, are they cheap? Are they, they're not just cheap as they were. Put it that way. Great question. A lot of, a lot of elements to it. Um, first I should emphasize that, uh, we invest in everything in EM bonds. So we invest in local currency bonds. A bond with, you know, a yield in, its in, in the currency of the country, like Brazilian AI or Maxx, peso or tbo. Um, we also invest in their dollar denominated bonds, which would have a spread. Um, and our, uh, so our strongest view is the trade is. To be in EM bonds and not be in DM bonds. Period. Full stop no matter what. That's the biggest conclusion. Any way you slice it, maybe just reduce DM bonds, right? That's not, you know, you don't need to own EM bonds, right? I think you should. It's been wrong not to. Um, but em over DM is the, is the risk for exactly the story I just told you. Their rates are arguably rising and their currencies are weakening. What else do you need to know? Um, so that's the biggest one. You can get detailed and, and, and, and control all the variables and say, well, investment grade, what would you do? Investment grade EM pays a higher spread, but the same rating as a us and that rating is harder for that em to get. You have to have better. Multiple. And you know, the, the net that tbit, DDA has gotta be even better than, you know, than it would for an American company. Same in high yield, higher spread. And so that is, if there's only one point, that's it. And it may be that, you know, you take away the point, oh, I should be more cautious on DM bonds. Right. Put yourself, this is, you know, I, I can only talk about my experience and the metaphor I have or the image I have is the Portuguese investment advisor. During one of the Eurozone crises who was telling his clients, oh, the safest thing in the world is these things the regulators are telling us are these zero capital charge instruments called Portuguese government bonds. Portugal was downgraded to the same below Nigeria's rating. So that's not helping anyone to ignore this stuff. We've had multiple evidences of this dynamic, and you look at jbs, the Yen, look at last year you had all these stories of the yen weakening and their rates going up. I mean, uh, you don't get more basic than that. Same with Sterling. Now, it doesn't happen every year, every month, every quarter. That's why you have an investment process and you're long and um, um, but um, that would be. You know, em over DM is the main thing, and if you take away to be nervous about dm, I don't think that's the full answer, but that's more than what most people get. Given the Portuguese example now on a DM case, it's already done better in these years of it being ignored for 20 years on an outright and on a volatility ba uh, adjusted basis. EM bonds have outperformed DM bonds, so it's already happened. Now the problem is. DM bonds were so crappy, right? The nominal yields were low. So you're not gonna get many eyeballs on the things called bonds, but now you are. And also you mentioned 2025. Um, uh, 2025 was just a big year. That got a lot of attention. That's, you know, how we, the general view, we, and we, you know, it was, it was a terrific year, um, of outperformance relative the benchmark for us. Um, but the way we generally view our portfolio is you will get our carry and there's upside risk on the spreads we have of hitting their targets, namely coming in and us making money and of the currencies rallying. That's essentially how we look and our caries generally around seven. And we were up, you know, you know, our benchmark was we beat our benchmark, but our benchmark was up almost a little shy of 20%, if I'm remembering. Um, and, uh, but we did, we outperformed even that. So there is, there is that risk. Here's the case for em, bonds carries around 6% about double what it is for DM bonds and EM bond volatility and EMFX volatility are now lower. For a few years now. I don't really know what else to say. Double the carry half the, you know, the same lower vol. Uh, you know, that, that's kind of it. So, um, I think the case is very strong, um, and it is not exposure. Investors have, especially the ems, I told you what their position is. They're long dollars. They're not long. Their own assets. And that's always the key technical on it's the most acute phase of a currency move is based on domestics positioning, down and up. It's when ties lose confidence, it's when they lost confidence. 'cause they own always the most M zero or M two of. Any actor in the world, it's when they now. It's very hard to lose confidence, right? You gotta do a lot. And that's why an EM person looking at the US is a little more worried, whereas a US person might say, ah, we've been through worse, right? And you know, the water's fine. Come on in. Right? And maybe they're right. I'm not, I'm much more worried about Europe and Japan and, and UK than I am about the US dollar arguably rallies against Yen, Euro and Sterling. If. The, the general gist of the story I'm saying plays out another example of, it's really, really a couple worlds. There's dollar and CNY, uh, there's gold, and then there are these, you know, I think Japan and UK and maybe Eurozone mostly for structural reasons. They're overall, if they were a country, they would not be that in that data. Their statistics wouldn't look that terrible. They're in a country and it's their structure. I don't really know what's a stronger argument when you have such ratios and when it's worked for decades and when you just need to read a newspaper to kind of hear these kinds of stories about debt mattering, politics, you know, political risk, geopolitical risk. Sure. Um, so yeah, that's, that's how I would look at em. And our carry right now is in the high sixes. I think there's. Upside. You know, we, we do have high cash right this moment, um, but we see potential further downside from recent developments in the region, which have not reacted, but we don't really see that, uh, for the broader market which has reacted. So South Africa sold off a little today on this broader risk wheel. That's what tens of fives of thousands of miles away at least. Um, you know, that's the always our right way of looking. Look at the actual thing. Don't think about, oh, this is gonna, Washington's gonna do this. You know, too many people are, are are doing that. Um. Uh, so I think that's the basic thing. And then, and these are all, all these stories are real stories with unclear timing, but they're all upside risk to our view. We're not depending on it. We've been trading for trading, you know, this fund for 15 years, so you can see how we've done. But, um, um, we're not every day sitting there waiting for any of these big themes. We're waiting every, we have these big themes because they're important questions we get. But, um, uh, so far they've all been. Upside risk. Um, and they've deepened our understanding. But the real risk to our view, the real risk to emerging market bonds is that we wake up one day and US, Japan, UK and Europe have figured out all their problems and got the political will to fix it. So if you're worried about that, then our, the case for em bonds is bad. How much of it is, um, like being really simplistic, right? If you think about. Some of the basic differences between the developed market and emerging markets. Uh, uh, I mean, one layup is demographics. I mean, there's growing middle class in a lot of emerging markets, uh, rapidly growing middle class. Uh, I, I don't hear my friends in the UK or much of Europe, uh, or even the US saying. How excited they are about the future of the middle class for for many reasons. Sadly, you're more or less kind of touching on confidence. But yeah, let's break it down first. The obvious stuff. EMS have about half the government debt, arguably less as a result. Another really key point, they have central banks that maintain high real rates. Inflation is anchored, right? Um, uh, I would also mention politics. We think, you know, there seems to be this general sort of projection that EM countries have, populations that won, wanna vote folks, policy makers into office that will cut interest rates and do a lot of government spending That that's just not the way it works. You can't find Mexican voters. Say you wanna leverage the central bank to harness economic to, to, to, to generate economic outcomes. They remember 1994, right? The banks disappeared and this is key. The left understands it right? Because this kills the poor. Inflation kills the poor. You lose your banks, kill the poor, the rich can, you know, can figure out ways and some will suffer too. Um, but if you're, you know, a left party, that's really, really key. So you don't see a lot of these, um, um, theories. Implemented in EMS because they can't, their voters have been through it. Um, you and you have 70% popularity levels for a lot of these reformist candidates. Shine bomb in Mexico being an obvious, um, um, example. So the politics are the big difference, the single best measure of a country's markets. You probably would agree with this. Prefer strong to good. I prefer strong to good because. Because, uh, strong can make a mistake and say, yeah, I was wrong and, and I'm still strong and I'm gonna fix it. Um, whereas good doesn't can't, and so, um, having 70% support is a real strength. Um, you saw that in, you saw that in India, a country where we're bullish on the local market, but you can't. Deny that there has been incredible, incredible and wide and deep structural reform in the country. Um, uh, and that's due to politics and that's based on extremely popular politicians. And look at the dms. The most popular politicians in Europe are like 17, 15, 20% support levels, right? So now Japan just flipped it, right? They've maybe gotten out of it. And what are they choosing? High spending low rates, right. Or whatever the mix that they come up with, which may be understandable. It may even be the least bad outcome. I'm, you know, I'm not getting into that. I'm not a policymaker there. Um, uh, um, but I do know that that's good for. The currencies on the opposite side. I do know if I'm Mrs. Watanabe, I like South Africa a lot more. If I think Japanese FX and rates FX is down and rates are higher. Um, and um, I'd also mention banking systems. I. EMS because they are the tough kids on the block. They're the kid, you know, they're the one that had to study harder, that didn't have a trust fund, basically. Right. And, and when things got a little rough, they had to, you know, they had to suffer 50% GDP declines. They had to, uh, uh, they had to tolerate inflation. They had to have, they had to tolerate changes in prime ministers and presidents. And um, and they learned and they're good students. And one of the things they learned is. You know, I was a banks analyst for some of my country's, uh, long time at Morgan Stanley. And the main conclusion I came was, you can never came to was, you never really know what's going on in a bank. But, um, uh, and I, I've never unlearned that. I don't see how that's different. Um, uh, what did the Asians do during their crisis Finance? One was the biggest financial institution of Thailand. They let it go. What did we do? We forebear. Now that may have been good policy. If you had moral hazard, if you, if you said, well, look, we're gonna cut you a break, but you're, you're in jail or whatever, there's moral hazard, right? You, you pay a price and therefore you're credibly saying, we're not doing it again, but. You know, we didn't invoke the middle laws and then 2020 happened and we used all the exact same policy tools on the quantity of money. And you mentioned demographics. Yeah, that's, uh, that's a, that's a clear one. The only reason I didn't mention that, that I, I would say that's hopeful and a reflection of something good when you have growth, uh, when you have a growing population. Because as you know, in markets, confidence is them. Main thing in everything and populations are growing are generally confident populations. The only issue I would say though is for bond investors, that's much more of an may not be as awesome. You know, it, it, it, it, I get it from an equity lens. And that's another issue with em. You talk to 90% of investors in the us you say em, they're gonna think em equities and you say em, bonds are gonna say, oh, I don't know where to put it. Where do I put it? And I, you know, and I, when I'm in a large group, I always say, not my problem. You wanna continue out underperforming, you know, you know, but I tell 'em about the Portuguese. Manager and then they, you know, start to um, um, but that's what was interesting about 2025 to bring it back to your kind of one of your. It's sort of, uh, crystallizing questions is that's when a lot of people were forced to really look at it. And, uh, um, and I think it's gonna, I think the interest is gonna happen, not because anyone consciously chooses to do it. It's gonna be the old fashioned way. It just keeps doing better and they can't ignore it. Um, and maybe equities do a little less well than they have in the past. Nothing to do with us, me, em, anything. But if, you know, I'm in a room and somebody's saying, oh, you know, the stock's gonna go 40%, you know, no one's gonna want to talk to me. It does not matter that it's their job to have bonds. Um, that you know. And, um, and if that's down to 12. We can generate, you know, 27, you know, depending, you know, have a year of that, you know, uh, then, then it's a very different conversation. But, um, uh, I'm not worried about that. I think that happens by itself. Um, markets solve that. I don't see how you can have six and a half percent carry and, and lower vol, um, and, and not get it. I can see how that can be slow, confusing, might need new personnel. Um, but that just makes me like it more. Oh, and here's the real reason. I don't care. I care as a business that's, we're very focused on raising assets, but there are other actors, central banks, you know, you can wait a couple years. Where do you think CNY is gonna be then? What do you think their interest rates are gonna be? What do you think Thailand and Philippines are gonna have ignored that. It's gonna be, lots gonna have changed by then. You may wanna show, I don't know. You may wanna be out by then. I don't. Um, so, uh, um. Um, yeah. And again, if the point is well, it's risky, well, you're getting the carry and the balls lower. So it really, you know, I think it's an airtight argument and it's really gonna, it's about people mis, you know, it, it, nor normal incent, human incentives will force this. Maybe that gets us nervous the year everybody gets activated. I don't know. Right. You know, people are, you know, and, and, uh, they get beaten up the first time. I don't know. Um, but it has, it didn't happen. So far this year. Um, and last year was quite a juggernaut year. Again, because locals don't own this. No one owns it. Who's gonna sell it? I can tell. I can, you know, we we're, we're bullish on gold, but I can tell you who will sell that. I mean, something is up that much. Of course, there's someone who can sell, but. Things that people don't own, including their own issuer. The, the citizens in their own countries that don't own it, their own pensions, and they have sophisticated big pension funds, um, that are long dollars. Right? And, uh, and so, um, it's a pretty, there are a lot of things. Uh, that create upside risk beyond the more normal, hey, the caries higher and fall lower. The, those risks, all these risks that, you know, we hear, um, that are considered new, which we've been viewing as long in train and now they're just getting attention only support. This case. Tell me about your fund, Eric, you, you're, you're at VanEck. I have, I have nothing but respect for what Jan VanEck has been able to do with that firm and the, the creativity that he brings to ETF construction. Um, but like, like what you do running, uh, an actively managed emerging market bond, ETF, that's pretty wild. Um, you know, I think most people think of ETFs as just blobs. They're inactive, they're not actively managed. Tell me a little bit about what makes this such a unique fund. Thanks, ed, and thanks for saying that about Jan and the firm and it's, yeah, it's, we agree, uh, completely. And, um, no, it's, it's an amazing place with incredible growth and a really unique footprint that you, that is, is. If someone designed this, you wouldn't believe they'd be able to achieve it, and you also wouldn't believe that they'd imagine wanting it. And yet here we are, right? With this, just this amazing footprint. Um, yeah, we, uh, so I manage, uh, uh, along, you know, me and my team, we manage. The actively managed EM bond funds. Uh, our main fund, our main strategy is a blend strategy, so we invest in all em bonds. Local currency. So Brazilian AI at 15% or, uh, uh, dollar denominated. So Brazil at, you know, one 50 over treasuries. Um, uh, and, um, uh, via, uh, and the, the story version of why we designed the fund that way is. Institutional investors, when they got involved in em, always had a bad go of it because they got the thesis, oh, you have low debt and your yields or carrier or what, however, whatever your return variable is, are superior. Um, and then they said, oh, and we're gonna do it only in local. That's what our C came to us saying 15 years ago. They said, we love em. We get your thesis. We like what you wrote, and we don't like our long only manager. Here's some money start along only, but it has to be local. And we said no. And we told them you don't want that. And we further told them, you're only telling us that because it was up the last three years. And um, and so we started a blend fund and luckily we were not in local. Because local's been a dog, but dollar bonds did well. And actually what I said about local deserves a major footnote, a big apology to the Asians because for the last six years when we had big local exposure, was mostly the Asians investors would call us and say local, which is again a dangerous aggregate concept. Did poorly, you did well, you know? And the answer was, well, we were in the Asians. Right? Everything's country by country. And Asians isn't a country. Right, obviously. And VanEck is an incredible. Asset manager that has a variety of strategies and forms in which it can. Provide solutions to investors, including SMAs, which we manage. But ETFs are the hottest ticket in town in terms of a wrapper, obviously, globally. And we happen to, you know, be a, you know, a top performing EM bond fund. And so we decided, the firm decided, and we're very happy about it, to convert in October, the mutual fund to an ET tf. And the idea is that's the wrapper of the future and it's gonna get us onto different platforms. Em, bonds, by the way, are a very mature, multi-trillion dollar asset class. There are funds with multi-billions. And so when you see that a fund has 5 billion or so, the sma uh, you know, can get it up to much bigger numbers. Um, and, uh, but, um. 'cause the industry's been stagnant in the sense of no inflow, no net inflow. For 10 years now, our strategies have raised assets and our passive, uh, ETFs have also, uh, attracted assets. But in general, there've been no eyeballs on the space. So you have. Underperforming funds with big assets and, and good performing funds with low assets because no one had an eyeball on the space. Um, uh, and so we're very excited about that. We did. For your information launch, the World's first actively traded E Em Bond, ETF, in Australia. It's now six years ago. It's in Australian dollars. VanEck Australia, right? We're a global firm. Many of our viewers may not know that, but we've got fantastic operations in, uh, Australia, Asia, Europe. Um. And, and other regions. And, uh, and this one's an Aussie dollars, right? Which is kind of neat already. Um, and, uh, so em, and, and, uh, and a lot of our competitors can't do this, so it's an incredible competitive advantage. So, um, you know, we're very, we're very excited about that. And, um, uh, yeah, like you kind of introed. Not a lot of firms could or would do that. I like to tell the story and we used to tell the story more. The firm was started in 1955 and the first fund was an emerging market equity fund. Oh, no kidding. It's European. Well, it was European post-war corporates. Right. Europe after World War II was an emerging market. Right? And then of course, John VanEck, uh, Jan's father, uh, who got his PhD under Von Mises at NYU, um, saw, saw, saw inflation coming, and that's when the Gold Equities fund started. Um, they actively manage and then, um. The firm that was an active fund. The firm was comfortable competing with itself and launched a passive version. Um, right. Someone's gonna do it. Why not us? That was the idea. I wasn't around then. That was obviously Yon call and turned this into the firm we are today. He, Yon likes to say it pays for a lot of Bloomberg's. Um, it has been fantastic to be able to be, to be able to, as a firm, to raise assets. You know, for example, in the passive ETF space, because. The industry's just not there yet to do active, most em, bonds are active. When it gets activated, the active will do best, but it's great to, you know, have, you know, yards and assets as a firm, um, when, uh, the, the flow that's normally into active isn't happening. So it's an incredible, it's an incredible setup. Um, and I mentioned the geopolitical or the political or geographic diversity we have, right? Europe. Is very interested in this. Um, Australia, Asia is very interested in, this is not just a US product. In fact, Europe is the natural first go to. That's where we've seen the faster, I wouldn't call 'em easier, but that's where the clearer a UM growth happens. Heading into emerging, you mean? Or just in general? Yeah. Okay. Yeah. Yeah. Europe. That makes sense. Europe was the original multi-trillion dollar market. Morgan Stanley sent me to Europe in the early nineties to be part of the convergence trade. The the, now it worked, so you can talk about it this way, but the simple version of it, and it was kind of this simple step one. Sit in Germany, step two, borrow in euros and, and at or and at bun rates. Um, step three, get rid of it in Poland in slo atlati rates. Step four, sit and wait 15 years and make. You know, trillions, that's, you know, that's what that was. It was actual convergence. Now they had structural policy around that. In some cases, the country's literally agreeing to give up their home currency. In most cases, they would pretend to promise to give up their home currency, but never really intended to. Um, um, but the majors, the core, the west, right. France, Europe, you know, did it without having, they were able, the authorities were able to do it without consulting. Voters. So, you know, that just sort of happened, but it doesn't work that way in Eastern Europe that after the collapse of communism politics is, you know, and democracy are very more, more I guess, forceful and energetic. Um, um, so that was not an option, but yeah, no convergence. Uh, and that's, um, that's a, a a, that's a basic phenomena and, um. Forgot why I mentioned that. Yeah. We were talking about Europe being a Oh, yeah, yeah, yeah. Kind of growth. That's why they, that's why it's a natural place for em. Bonds, it's more ingrained. Um, and you know, they made trillions on it and never really stopped. Whereas in the us you know, I remember when I started, if I. I've always been married in the business, so I didn't, you know, but if I was talking to somebody at a bar, you know, just the proverbial setup and told them, you invest, you know, I invest in Ian Bonds. I remember when that was a cool thing. No one would wanna walk away from me when I said that. Um, and, uh, but for the last 10 or 15 years, it's kind of been like that. That is what it is. That's why, um, you know, you have Carrie and you perform, right? That's, you know, you don't need to talk to people all the time. I think you're gonna be one of the cool kids again, especially after, uh, the performance of last year. So, uh, I would say to viewers, if you see Eric fine in a bar, uh, go up and buy him a beer. Awesome, and I'll buy one back. Thank you and I look forward to buying you one anytime. I look forward to it. Thanks for watching. Be sure to subscribe to the channel, leave us a comment or a question and come see us next week.