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Ted Smith: Good morning, and good afternoon. I'm Ted Smith, Head of Global Consultant Relations and a member of the Institutional Development team at Ashmore. We hope you're all well. Welcome, and thank you for joining us for today's Ashmore webinar, titled 'EM Local Currency Bonds: Are they still undervalued? And are they still under-owned?'

Today's speakers are Cemil Urganci, our Head of Local Currency Debt, and Gustavo Medeiros, who you've probably seen on these webinars before. He's our Global Head of Research. If you have any questions that are not answered in our webinar or like any follow-up information, please contact your Ashmore representative. We'll be sending out a follow-up email with a webinar replay for your convenience. Feel free to share it with your colleagues who might find it valuable. Gustavo, please proceed.

Gustavo Medeiros: Well thank you very much, Ted. And it's a pleasure to have you, Cemil, finally.

Cemil Urganci: Thank you, Gustavo. 

Gustavo Medeiros: Last year, we tried to make it, but had a little bike accident on the way.

Cemil Urganci: I broke my clavicle on the way.

Gustavo Medeiros: Happy to have you back in the saddle, both in Richmond Park and here on the trading floor. So, good to have you. 

We're going to talk obviously about local currency bonds. It's been an asset class that has been performing quite well since the COVID shock. But year-to-date, has had some headwinds. So just for a backdrop, year-to-date, the GBI-EM GD local currency bond benchmark is down about 4%, 4.3%. And that contrasts with hard currency debt, which is up 2.4%, mostly led by high yield, as the investment grade part of the asset class is down 0.3%. Most of this underperformance is coming from EM FX, which is down about 5%. EM local rates are also on the back foot but to a lesser extent, down 1.6%. And carry is obviously up 2.5%, just clipping its usual coupons. Interesting that we had some quite wide dispersion across asset classes. Latin America, which has been a darling over the last two or three years, is underperforming so far year-to-date, down 8%. We're going to talk a little bit about that. Eastern Europe on the back of the weaker, weak-ish Euro, is down 3.5%, but Asia also down 3% and Middle East and Africa, up 2%. So that's a bit of a surprise and some stories there for us to talk about as well. 

The interesting element, which is a bit of the silver lining, is that, over the last two years, global currency bonds have been outperforming other investment grade fixed income asset classes. So the question here is, is it a good opportunity to add exposure to an asset class that has actually been doing quite well? Or is something more sinister about to happen?

Cemil Urganci: Well, we like to think it's an opportunity, right? It is, you know, we have a strong risk backdrop. We have equity markets at all-time highs in the United States, healthy balance sheets in Emerging Markets (EM) and sound financial systems, basically, both in the global markets and EM too. But what are the main factors, do you think, for explaining this underperformance in the first few months of the year?

Gustavo Medeiros: Yes, I think that, as we know, the main issue for both EM currencies and rates has been the fact that, at the beginning of the year, the market was pricing almost one cut per meeting at some point, in mid-January by the US Federal Reserve (Fed). And now we're close to pricing two cuts only. We were just discussing, the median dot plot, if it's worth anything, is between one and two cuts. And that obviously forced EM central banks to turn more cautious because higher interest rates in the US put pressure on EM foreign exchange (FX) as the dollar was rallying against the Euro and the Japanese Yen. As you know, a weaker Yen leads to fear of inflationary pressure via the FX pass-through. But also you have the widening... The interest rate differential that was starting to narrow, started to matter again, and the US rates widening turned into a headwind. We also had recently some elections that brought volatility to the asset class in Mexico, India, and South Africa. There was quite a lot of volatility across these events. India and South Africa have since stabilised.

Cemil Urganci: South Africa turned for the better, actually.

Gustavo Medeiros: South Africa turned for the better, which is a pleasant surprise. It was a little bit of my base case scenario, as we've been discussing, that the African National Congress (ANC) would get to form an alliance with the Democratic Alliance (DA) and the sensible parties. We'll see how it turns out.

Cemil Urganci: Correct. I mean, there will be long-term worries about sustaining the coalition and how ANC will be able to hold itself together, given the historical context of it. But we are positive, at least in the short run as well basically. I think it is what the country needs. It was a smart way of resolving the issue itself, calling it a Government of National Unity, referring back to 1994. So, we will see. And as you say, India also resolved, I think. It should be a stable coalition. It was highlighted today, actually, that one of the main coalition partners has an election in September 2025, basically. So they will have to help the coalition because they need him, and he needs the BJP as well.

Gustavo Medeiros: So this smaller party needs the BJP…to be able to keep their presence in the coalition.

Cemil Urganci: Exactly.

Gustavo Medeiros: Makes sense, makes sense. Oh, but nevertheless, we still have a few events that will keep the volatility elevated. The French elections.

Cemil Urganci: That came out of the blue.

Gustavo Medeiros: That came out of the blue, with no pun intended, I suppose. We also have the British election, the 4th of July, and then on the 7th of July, the second round of the French elections. And then, obviously, the US elections, right? But again, if we do have increased volatility, it’s an asset class that probably it creates an opportunity for clients that have been monitoring the asset class and actually feeling a little bit behind the curve because they didn't invest post-COVID shock to actually add exposure to the asset class. So hopefully we're going to be able to talk a little bit about that. So what are the risks for 2024, apart from those that I've highlighted, Cemil?

Cemil Urganci: Well, I mean, data is quite slow basically. Recent inflation data was highlighting major slowdown in the US. The jobs market is a little bit more tricky. You have high non-farm payrolls. However, the interesting point there is, I guess, that it is mostly driven by immigration.And also, one peculiarity in the way that non-farm payrolls are forecast basically, which is the birth-death model of the small and medium enterprises. I remember back in 2008, you were waiting for non-farm payrolls to come up, but it didn't. It took a while for the numbers to print or be revised lower. So those two factors, I think, hide the fact that there are some underlying weakness in the jobs data, which you were talking about JOLTS, and of wage growth as well. But the market is quite bipolar. We quickly go from fearing hikes to recession fears, basically. So we have to navigate through that, which is the main risk, I suppose. A market may move very quickly from one extreme to the other. But I think, for data to confirm it, it will take multiple quarters. So, the slowdown that you're in now, there’s a risk that more recession fears get triggered then, basically. And something breaks...

Gustavo Medeiros: It feels like a soft landing at the moment, but then the question mark will come eventually, if that could lead... There's always a path. Before a hard landing, there's always a soft landing path, right?

Cemil Urganci: Correct, correct. I mean, in terms of our positioning of the portfolios, our strategic positioning is more in rates at this point. We feel that this should benefit us in both of those scenarios in that trajectory too. FX should behave well in a soft landing scenario, but it would also have significant headwinds if we are fearing a recession basically in the world markets. So there, we are more tactical in high beta currencies. And we do try to have some relative value to trade ideas. But our main drive in the FX is trying to identify idiosyncratic opportunities basically.

Gustavo Medeiros: Makes sense, so we basically used this opportunity when there was a repricing from seven rate cuts to only... Like, when we were starting to price three to four rate cuts, we started to add exposure to rates, right?

Cemil Urganci: We did, in hindsight a little bit too early, to be perfectly honest.

Gustavo Medeiros: Yes, yes. But it is almost nearly impossible, right? But it's interesting because, in our 2024 outlooks, we did highlight that it was likely to be the year of the tails, the scenario for interest rates, to the extent that it would price, or that we would trade both sides of few cuts or a very large number of cuts. And probably that'll be an opportunity, which is exactly the way we've been positioning for. So I wouldn't be surprised if we go back to the tail of pricing much more cuts. And we were just discussing, you know, perhaps, there is a scenario in which the Fed may cut in July, or may cut in September, with subsequent call of cuts, right?

Cemil Urganci: Right.

Gustavo Medeiros: So, it's going to be path-dependent. But I think that the portfolio is well positioned for that today, as you highlighted. Now enough of bearishness. We're fixed income, glass-half-empty kind of guys. But let's talk a little bit about opportunities.

Cemil Urganci: Sure, I mean, one thing that is not really highlighted enough, I guess, is EM Asia actually. The manufacturing cycle is in full swing. I mean, the trade cycle is now stronger than pre-COVID times, basically. If you look at the real exports growth since 2009, it's growing 4.6% per annum whereas in 2018, 2019, it was 3.5% only. So there is more volatility of course, but there is decent pickup. And if you look at it from a more thematic or a more anecdotal perspective, you see that in countries like Korea, for instance, benefiting massively from the artificial intelligence (AI) boom. But in assets, I guess, it's more effective. There are easier trades than the United States. Investors are not really focused on the portion that is Emerging Markets, I think, and the high interest rates also is a bit of a headwind for emerging Asia. But we are positive, and I think it will be a good, good tailwind for Emerging Markets.

Gustavo Medeiros: It's a theme that our equity colleagues have been highlighting obviously it is a big opportunity for them there. Korea, for local currency bonds, is an off-benchmark position. But I do think it's an interesting element because it's almost like the cycle's inverted, right? We avoided the recession in 2023. And because of the service sector that has been outperforming. But now the service sector is cooling down quickly, which is what we're seeing in the data. And the manufacturing sector has been picking up since the fourth quarter last year, which provides some opportunities. And there's other interesting elements in Asia as well, right?

Cemil Urganci: Correct. And the usual stories, maybe focus on a couple more of them. And one of them is India. India, obviously after the elections I think the tail risks are out of the picture. So they have been going through a good, you know, infrastructure capex-led boom, driven by the central government. Their growth last year was 8%. We do expect some slowdown. But I think the conclusion of growth can be more friendly for the markets in the sense that it will hopefully turn into a private sector-led capex boom and will create more jobs. The government has fiscal space due to large dividends from the Reserve Bank of India (RBI) as well. They had another bonus windfall gain there. So they should easily be able to deliver the fiscal consolidation part that they planned without any kind of headwinds to the growth picture. And the RBI has room to cut rates. Inflation is higher than their target of 4%. I guess it's been plus 4.75%, but core inflation is going to get to 3%, and wholesale price index (WPI) inflation is even lower. So, there are some opportunities there. And also, the index inclusion. So it is starting to implement at the end of this month. So India, is finally coming into our bond indices, JPMorgan's GBI-EM GD, with a final rate of 10% with increments of 1% all happening over the course of the next 10 months. That will also provide a positive effect to the country.

Gustavo Medeiros: And as we're discussing, it's obviously a massive opportunity for India, which we like, of bonds and the currency, but is also very good for the asset class because Indian bonds have been very uncorrelated with the rest of EM debt in general. So the benchmark in the entire universe will actually improve in quality. And liquidity in Indian bonds will improve, allowing us over time to have a higher position as well, right?

Cemil Urganci: - Correct.

Gustavo Medeiros:  What about your native country of Türkiye?

Cemil Urganci: So yes, Türkiye is finally back, as I like to say. It has been a good 10 years since we have been challenged by unorthodox macroeconomic policies, which we try to protect our clients by not giving that much exposure into the country. But we have turned bullish after the local elections. There is a quite interesting opportunity we see observed within other Emerging Markets as well, which is the fact that US rates are so much higher makes us believe that the dynamics of the trading or the market performance is more akin to the early 2000s. It's like good, old Emerging Markets that we have observed earlier, not the 0% easy return kind of environment that made emerging markets spoiled. And Türkiye was one of them. So for them, it is very critical and important to maintain FX stability, that is the only way to anchor inflation expectations by the locals, and encourage them to de-dollarise as well. And they have gained enormous credibility by pursuing the right monetary policy choices. But also even the minor tweaks that they do are all tightening the market conditions and improving the monetary policy transmission mechanism too. So what it means is, we can actually make hopefully double-digit returns by investing in Türkish Lira assets, basically until the end of the year. High teens even is possible, in my view.

Gustavo Medeiros: What is the 10-year government bond yielding these days, approximately?

Cemil Urganci: So, about 28%.

Gustavo Medeiros: Not too shabby, specifically considering that we're starting to get into a seasonally very favourable period, which is the summer, where you have a lot of European tourists going to Türkiye, right?

Cemil Urganci: Yes, here is this window where the balance of payments is positive seasonally. And the central bank is determined to keep the currency less volatile than before, so our interests are perfectly aligned, and there's a good window for purchasing. But I think it's probably bigger than that. It could be more structural. The analogy that I make is, initially I was thinking, is it like 2002, when the current government came into power first, and they pursued orthodox policies with a strong International Monetary Fund (IMF)-backed programme and fiscal consolidation. That provided positive returns for over 10 years in Türkish Lira assets. But however, there is this risk also that it could be 1999. If you remember, or if you would remember from reading from the books, just after the Asian Financial Crisis, Türkiye embarked upon an IMF programme, which had a crawling peg regime. So FX was again controlled like now. But it all kind of blew up in 2001 due to political crisis. So I think, for local investors and for foreign direct investment (FDI) to come into the country, you need better political stability, and policy stability as well, in Türkiye’s case., while also avoiding an accident like 2001. But also, I think there should be more political normalisation – meritocracy, and institutional strength as well, just to make sure that you're not in '99, but in 2002. So we are open-minded. We are observing, trying to observe the markets very closely. But it still provides a good investment return nonetheless for this year.

Gustavo Medeiros: It could be both, right? It could be that ahead, until the end of the year, over the next couple of quarters, is a fantastic trading opportunity. And then, depending on how the environment unfolds, both global macro and the local political environment, it changes, because the other thing that happened between 1999 and 2002 was the NASDAQ bubble, right?

Cemil Urganci: Correct.

Gustavo Medeiros: Which basically attracted a lot of capital away from the rest of the world into the US. And that obviously was the peak of the bubble. And following that, nobody wanted to buy the NASDAQ anymore. People forget about that as well.

Cemil Urganci: Correct.

Gustavo Medeiros: So then, that was a massive headwind that became a tailwind from 1999 to 2002 in that asset class, which Türkiye was well-positioned to benefit from. It rhymes a little bit, right? Back in 2001, Argentina was blowing up. And then, the entire Latin America started to improve following the Argentinian default. Argentina's now just turned a corner after a very tough period. So there's quite a lot of things that rhyme.

Cemil Urganci: Exactly. There are a few other Emerging Markets that are in the same part as well, right? In terms of how they are transitioning towards a proper, orthodox market programme.

Gustavo Medeiros: Yes, yes. And what I like about Türkiye is that, for now, it's very uncorrelated. The foreign investor participation in Türkish bonds, they climbed very close to zero within the last 10 years. We've been structurally underweight within the last 10 years, covered the underweight around the presidential elections, and then moved overweight after the local elections, as you mentioned. Quite decisively, which is very good to see. Like a massive, pretty big, active position meriting, you know, in line of the merit of the opportunity as it's at 25%, 28% 10-year government bonds. But there are other uncorrelated opportunities that are not related to the market cycle, right?

Cemil Urganci: Correct, there's a few of them I can highlight. One of them is Egypt, for instance. In Egypt, it started with external finance, but also policy normalisation as well. Basically, they have adjusted the FX, and more importantly, they are determined to have a functioning FX market, which I think is critical for a country as important and as vibrant as Egypt to be in those terms. And it will provide very good trading opportunities I think, as well. And that is uncorrelated too. The other one that is also really interesting is Nigeria. After the new government last year, they have been going through stages of adoption of orthodox macro policies. It has been quite volatile. But again, I think we are looking at a currency which is undervalued at the current levels and high interests rates as well. I think it will be a little bit more volatile than Egypt and Türkiye, probably. But I do believe that it also provides good opportunities.

Gustavo Medeiros: But just to bring you back home, because those are three countries that had a pretty big FX depreciation, and they real effective exchange rate (i.e., their international trade after adjusting for inflation parity), is actually very competitive, right? At very low levels. And they're all offering high interest rates. You said Türkiye, 10 years, 28%, the front end of the curve is even higher. What is Nigeria and Egyptian T-Bills ballpark today?

Cemil Urganci: Well in Nigeria, you do get about 25%. And Egypt, it's more about 19% after tax, yes.

Gustavo Medeiros: Started at 30, 35% gross, and then it started to improve after as a result of the capital inflows, right?

Cemil Urganci: Correct.

Gustavo Medeiros: And all these countries are countries that are getting quite a lot of inflows, right? From both local and foreign investors.

Cemil Urganci: Correct. I think we need to be careful as while Türkiye has been uncorrelated, especially in the old days when there were singularly bad market policies, now, it's a little bit more correlated because of the positioning of foreign investors too. We need to be mindful of that. But I think, in terms of the level of interest rates and the trajectory that they're in, in the medium term, they will be providing quite uncorrelated high returns.

Mentioning another couple of markets, Pakistan is getting interesting. We haven't really dipped our toes yet. But they resolve to pull through uncertainty and they are keen on getting more and more financial support. So it could be an interesting opportunity. But we are acting a little bit more careful to see clear progress there. And Kazakhstan as well. It's a developing market. You know, they deepened their capital markets. They are keen on deepening their bond markets as well, consolidating the number of issues and having benchmark bonds and perhaps getting into the index now that as well. So again, it could be a good, interesting opportunity.

Gustavo Medeiros: Yes, a lot of exciting things happening on the blending there and the access to capital markets. What about the underperforming Latin America?

Cemil Urganci: Your home country.

Gustavo Medeiros: Exactly, let's go to my backyard now, which was the darling of EM local currency for two, three years now. Year-to-date, we're back to the soap opera tragedies. Are we going to have our time in the sun again? What do you think?

Cemil Urganci: Well, correct. I mean, Mexico was a real curveball basically. Actually, we avoid it in our portfolios. We didn't have a long Mexico position. But it's a very crowded and popular position. That's why the market reaction has been what it has been, basically. We do believe this will be a buy at some point. You know, there is decent institution strength in the country. But also, we will have to see how they will go about the reforms that they promised. I think we both agree that when Claudia Sheinbaum eventually gets to power, she will be more orthodox than expected and may be even more market-friendly than the outgoing president. But there's a window until that transition, and there is a possibility of some constitutional changes. And it's potentially damaging, especially damaging local judicial reforms. But we will have to see. The devil will be in the details. But I do believe that it will be a good buying opportunity at some point.

Gustavo Medeiros: Yes, I tend to agree. There is also the constraint of the USMCA, which is a straitjacket that Mexico cannot get out of, and the USMCA have been challenging constitutional reforms that were negative for the energy sector, for example, in Mexico in the past. So I wouldn't be surprised particularly, with the USMCA being reviewed with the Sunset Clause in 2025, that would be leverage in case of a serious institutional meddling there. But yes, I'll tend to agree. Sheinbaum, I think, should have to play ball until... While AMLO was the president, he's very popular within his own Morena party. But she will want to be her own president and mandate her views. And her views as we've seen during the campaign, were much more market-friendly, right? And also, Brazil and Colombia.

Cemil Urganci: Correct. I mean, I think both provide very interesting, very good opportunities for us in the sense that the real rates in Brazil are one of the highest that I've ever seen basically, 8%. And clearly, there's some political noise. Clearly, the inflation expectations have been rising. There are worries about the fiscal backdrop and how much committed they are into this debt consolidation. So without dismissing them, I think it's different to the previous cycles, again in Brazil. I think the macroeconomic backdrop is much sounder. The balance of payments is better. You know, real rates are at 8%. And now you're pricing in hikes in Brazil. So again, it might be a little bit early because even today there are headlines. But we do believe it will be a very good opportunity for our investors to make money.

Gustavo Medeiros: I would tend to agree, yes.

Cemil Urganci: And Colombia also, I think they will address their fiscal plans eventually. And inflation, although lagging behind other peers, is going in the right direction as well. And we have also a more active central bank there as well, so I think they will deliver cuts. So again, there's an opportunity and good yield.

Gustavo Medeiros: They've been patient though, right, the central bank, which is probably good.

Cemil Urganci: Correct, correct.

Gustavo Medeiros: And likely to be very, very prudent in delivering the cuts not ahead of the game. It's also interesting, that Colombia announced a 20 trillion Colombian peso expenditure cut, which is close to 1.5% of GDP. It's a very large expenditure cut to compensate for the lower revenues. So I think it's in line with what you said. 

At the end of the day, it's not going to be the tragedy that the locals are starting to panic about again. You know, the locals are being very, very negatively affected by the leftist current presidents in Latin America. But at the end of the day, their policies have been much more centrist, with quite a lot of noise in the way. And it's one of the problems for both. For Colombia in particular, because the country is running out of growth factors, and that is what ultimately is required for fiscal consolidation. Whereas Brazil has growth, so it's growth is surprising to the upside and potentially growth has improved as a result of reforms from the previous administration. So yes, I'll tend to agree. And if the Fed will have to cut policy rates because of something else, then the countries like Brazil will have a lot more room to cut, right?

Cemil Urganci: Correct, and they have been ahead of the curve. Again, inflation is at 3.9%, and they were earlier in hiking rates. And they are keen on not losing credibility, the current central bank and management.

Gustavo Medeiros: Yes, absolutely. So we should be close to wrapping it up.

Cemil Urganci: So how about the long-term picture then? What are your views? And how do you think about the longer term? 

Gustavo Medeiros: Yes, one question that we get very often – that we partly answered in a piece we published in February – is what is going to drive EM GDP growth in the next five to 10 years? What is the long-term picture? And we have a bit of a novel view. 

We have this world where China has been focusing on increasing and ramping up production of all the new technologies necessary for energy transition, and also the high technology end, and until very recently competing at the forefront of AI. And actually, the fact that US and Europe are now putting a lot of protectionist measures against China means there will be much more Chinese goods to flow somewhere else. And countries that will take advantage of that, by buying cheap solar panels, cheap wind turbines will be able to increase energy generation to a very large extent, at very, very cheap levels. Solar projects today are the cheapest form of energy available. And we're already starting to see that in the data. That idea came when talking to friends in Brazil, where quite a lot of people are investing in solar panel farms across the country. We're already starting to see that the price for companies that are buying energy directly from these solar farms is 30 to 50% lower than what is available on the grid. So that is a competitive advantage that EM countries are building up that will make a big difference in the long term, particularly in a world where we have energy scarcity, and especially as AI becomes this mega trend that will have a much larger demand for energy.

Cemil Urganci: You are familiar with the transition to solar credits, right? The private sector basically found the solution themselves, correcting Eskom’s infrastructure problems. And this is good for the planet too.

Gustavo Medeiros: Exactly, this is also a much more sustainable solution. And getting out of this trade war zone, the south-south trade, as a matter of fact, has been increasing. We've had a de-globalisation era because, overall, global trade started to slow down. But if you break down between south-south and south-north, south-south kept on accelerating. So there is quite a lot to be optimistic about. In particular, when you overlay that with structural reforms that took place in India, Indonesia, Brazil, countries like Saudi Arabia that are remodelling its economy, now more recently Türkiye and Argentina were very large economies that shrunk in size in dollar terms, but can become, you know, they can be very big, and it's a chance to be strategic.

Cemil Urganci: Potential is huge.

Gustavo Medeiros: Right? Massive potential. So I think there's quite a lot of uncorrelated, very different stories, but in the long term, there is a common trend there. I also think that this, again, underneath the noise, a lot of EM institutions are functioning, like the coalition governments we’re seeing in India and South Africa are pretty good examples of that, and have good outcomes. Colombia's fiscal adjustment, despite the challenging picture. 

And I do think that the US exceptionalism is very closely behind us. I think that this pro-cyclical fiscal stimulus that started with Trump’s Tax Cut and Jobs Act, drove the biggest reflexivity trade that we've seen in our generation because, as the US cut taxes and increased expenditure, the return on equity (ROE) for American companies expanded significantly at a time where the second generation of monopolies were allowed to capture quite a lot, the most part, of that. And they have this big, big divergence that just keeps on stretching and stretching. Now you have two ways of trading that. You can jump on the bubble and hope that you're George Soros, that when he sees a bubble, he jumps straight in. But you have to get out at the right moment. Or you can take a long-term approach and say, you know what? This market is very, very frothy. There is a very poor upside/downside scenario. If you buy stocks trading at 35 times price to earnings on a 10-year CAPE (P/E) ratio. Actually, the next 10 years, total returns (in US stocks) are 3 to 5%. Why bother? You can get 6.5% on local currency bonds, plus the currency precision at the end of the US exceptionalism. 

So I do think that... I don't know when exactly we are, but they're very close to a turning point. And you know, perhaps the US election will be one of these catalysts. So we'll see, right?

But let's try to wrap it up and offer a brief summary of some of the points that I made, we made here, before I have some questions in the audience. I think we are in a very, very challenging environment, but yields have been increasing and lower EM FX that we've seen year-to-date presents a little bit of an opportunity. It's hard to say if that’s now or if it's in two or three weeks' time. But this window of the DM elections bringing volatility perhaps it’s an interesting opportunity for investors that have been too concentrated on the dollar to diversify to EM local bonds. We prefer rates rather than FX that basically have been adjusting throughout the year – based on the very high interest rate differential, but also on the scenario now, this is where you can actually have a soft landing becoming something a bit more sinister and actually bringing the Fed to cut much more than it's priced in today. People don't see that, but herein lies an opportunity, right? And that would allow for better outperformance. 

And big picture, the asset class has already turned a page since COVID. EM local bonds have been outperforming. Not a lot of people have been taking note of that. And the fundamental factor behind that (we've been highlighting so many times), but EM real GDP has been surprising to the upside, inflation surprising to the downside. EM's been delivering higher GDP growth with lower inflation. We're going to highlight that also in a piece that we're about to put out, showing how rating agencies are starting to get much more upgrades than downgrades in EM. And that's both the case on Frontier Markets, contrary to some of these uncorrelated stories that we discussed, but also the large EM. 

And policy makers were ahead of the curve. There was much less aggressive fiscal policies particularly during COVID, and EM central banks were much earlier to react. So that allowed for this better fundamental story. And finally, diversification. The GBI is based almost entirely on countries that are neutral in geopolitical scenarios, perhaps excluding China, which is only 10% of the index. And it's going to get more and more uncorrelated and diversified now that India is becoming part of the asset class. So I do think it's a pretty interesting opportunity.

Cemil Urganci: Thank you so much.

Gustavo Medeiros: Ted, that is a bit of a wrap from me. Do you have any questions from the audience?

Cemil Urganci: Sure. Given how long we've taken already and the fact that you addressed several of them that have come in, let me just pose one to you and then we'll wrap things up. The question is whether you have to see dollar weakness in order for local currency bonds to really perform as an asset class.

Gustavo Medeiros: I'll take the first part of it.

Cemil Urganci: Oh, go for it.

Gustavo Medeiros: You don't have to see dollar weakness against G7 necessarily. But EM FX have to be at least relatively stable.

Cemil Urganci: Right.

Gustavo Medeiros: And typically, when the dollar is strengthening against G7, there is a headwind for EM currencies. So, I think that EM can do well with an environment where the dollar is marginally stronger, like has been the case over the last three years or so. But for EM to really take off in dollar terms, obviously the dollar should weaken. And then, this is one a lot of investors will remember, that it's worth having some diversification, because I think most people have most of their assets in dollars today. And nobody's thinking that dollar weakness is ever possible. But it's always cyclical, right?

Cemil Urganci: Right. And I think part of the dollar strength also came with policy uncertainty. So I think that also provided a big headwind for Emerging Markets, local bonds in particular. If that goes away, if the dollar is just merely stable at current valuations, there is a reason to believe it will remain so. That should be enough for EM local bonds to pull from, I think.

Gustavo Medeiros: Which is again more or less the environment. So, the dollar has peaked in September 2022, right?

Cemil Urganci: Correct.

Gustavo Medeiros: Which, if you look back, it was very close to the peak in exchange rate terms that we had in 2002 at the peak of the dot-com bubble, and not very far from the 1985 Plaza Accord. These peaks are about 20 years apart. So I do think that we've seen a major peak already. And then we had the sell-off. But again, for what, 18 months, the dollar has gone nowhere. But you know, people are mostly on the sell side, and most people are trying to trade on the long side, right? Particularly against G7 because of the much lower yield than the Japanese Yen, etc. But yes, I think that, again, the US has big imbalances that people are not paying attention to. And what has been sustaining those imbalances have been hot money flows to the stock market. And if that, for any reason, ceases to take place, then the scenario could change significantly.

Ted Smith: Great, thank you both. Thank you again to our audience for dialling in and participating with us today. We look forward to our next webinar, which will be announced shortly. Thank you.

[Both]: Thank you, Ted.