Public Fixed Income
EM Debt: Still Undervalued?
Head of Global Sovereign Debt & Currencies, Cem Karacadag shares insight into the broad EM Debt universe and explains why spreads may be overcompensating for default risk.
Transcript
Greg: Welcome, everyone, to the latest episode of Streaming Income, a podcast from Barings. I'm your host, Greg Campion, and I am excited to be joined today by my colleague, Cem Karacadağ. Cem is, of course, our head of global sovereign debt and currencies, and we're gonna be diving into all things emerging markets debt in this conversation.
Before we jump into that, let me just, remind you that you can, subscribe and follow Streaming Income on, Apple Podcasts, Spotify, YouTube, or wherever you get your podcasts. And if you like Streaming Income, you will love our LinkedIn newsletter, Where Credit Is Due, so go check that out. Links in the show notes.
All right, enough intro. Cem, welcome. How are you?
Cem: I'm good. Happy to be here.
Greg: Good. Yeah. I'm psyched to have you here in, Charlotte. You're usually, Boston-based, but it's nice to have you here in person.
Cem: Yes, it is, and especially in this, this awesome room.
Greg: Yeah, awesome. Well, good stuff. I'm, I'm excited to, to dive into the conversation.
You've been, on the podcast before. I know you were on our outlook, but for investors who don't know you, remind us your role at the firm and, and maybe a little bit about the group that you manage.
Cem: Sure. I've been at Barings for 12 years, most of the several years doing emerging market debt.
Primarily as lead portfolio manager for sovereign hard currency debt. For the past year I've been head of the global sovereign debt and currencies group. I've had a 30-plus year career in emerging markets in general, mostly as an economist and analyst. And the past 12-plus years as a portfolio manager.
Greg: Awesome. Awesome. And you, you lead a great team. How many languages are spoken on your team? Not to put you on the spot. I think it's a lot, isn't it?
Cem: No, that’s a really good question. Yeah. It wasn't by design, but we've ended up with all over the world. So we have- Chinese, Arabic, French, I probably...
Japanese, of course. A few local African languages. Yeah, so we have quite a few.
Greg: Cool. Yeah. Yeah. A very, very diverse team. Yeah. Yeah. Yeah. And I guess that comes in really handy when you're looking at this broad universe. And that's actually the, the place where I wanted to start, because, you know, I wanna talk about this EM label maybe to start.
I've heard you on another podcast describe EM as sort of one minus developed markets, and I kind of like that framing, because it just gives you a sense of the breadth of the space that we're looking at. But, you know, tell me a little bit about the breadth and depth of the asset class these days.
And, you know, I don't even know if we should be considering it as one asset class or I guess what I'm wondering is, are investors kind of viewing EM through kind of an outdated lens?
Cem: So I struggle with that question as an emerging market sort of economist and portfolio manager for the past several years.
On the one hand it's a little cheap to say one minus DM equals EM, so what else is left on planet Earth? On the other hand, I like that formulation because what it aims to convey is that it's so large, it's such a big part of the world, that you almost shouldn't avoid it, period. Not because it's great, but because it's just there, right?
So now, but if we focus just on that one minus DM part, the emerging, what we call emerging markets, it's got an incredible range in all ways. One is, let's use the ratings. Double A rated to all the way to triple C. Or in income. You have
$1,000 per capita income emerging market countries, some of which are investable.
And you have countries that have 20, 30 plus thousand- you know, per capita GDP. So it's a tremendously large space in terms of, the depth of the markets-
the size of the economies, et cetera. So that's why it's maybe a label that has many, many, possibly too many things in it, but it is what it is.
Greg: Now, what do you think some of the biggest myths are these days about EM?
Cem: It's, riskier- less liquid, high yield. In fact, it's not any of those things. Take credit quality. One half of the sovereign hard currency index is investment grade. 60% of the EM corporate debt index is investment grade.
Two-thirds of the local currency debt index is investment grade. if you pivot to the size of the economies, you have, Mexico, almost $2 trillion economy, Brazil, two and a half, India, $4 trillion, Turkey- trillion and a half- South Africa, $440 billion. Even the small open economies at least, you know, I've been in this business for a long time, Where these economies were small, but even Malaysia today is $480 billion economy. Singapore, $600 billion- tiny island country. Now, Singapore is maybe more DM than EM, but you get the flavor. There's this incredible size, and so the local markets are gigantic.
Cem: They're deep, and therefore, they're liquid. In the hard currency space, most bonds are liquid. And then when you start talking about frontier markets, right, the Zambias, the Ugandas, other sort of, especially local markets that can be less liquid, fine, that's, there's some less liquid pockets. but in general, this is a liquid, large, very diversified space with all kinds of opportunity across sort of the fixed income, spectrum.
Greg: I think looking back at last year, the EM space is, it was incredible. Well, great performance, I guess, in 2025.
Cem: Yeah,
Greg: Incredibly resilient in 2026 thus far, especially considering a lot of what we're seeing, kinda going on in the world, and we can talk about trade, and we can talk about geopolitics, and we can get to that stuff.
But, but I guess one question would be for you is kinda what do you think is behind that resilience that we've seen over the last, like, couple of years in EM?
Cem: So it's been a long five, six years, right? If we start with COVID, that hit the world hard, and then Russia's invasion of Ukraine, which, hit some of the emerging markets space directly, but also commodity prices, et cetera.
We had, so we, that was a major shock to budgets, to growth, et cetera. And since then, most emerging markets have done a lot of adjustment. So what we call the twin balances, the fiscal and the cur- external imbalances, they have narrowed them. They are financially in a substantially stronger position today on a flow basis, think income statement, if you will, than they were back then.
And, also frankly, their external liquidity. So their, you know, their current account balances in general, I would say are stronger today than they were back after those two shocks. So emerging market countries have adjusted.
They have done some fiscal consolidation. They have pursued credible monetary policies, so they have kept domestic demand in check enough to improve their financial position. That's how sort of... That's in fact what has happened.
Cem: Um, so, and also FX reserves are higher, substantially higher today than they were.
Several of them are pursuing IMF programs. you know, and the, and the last thing I would say, sort of with this long view is we did experience a wave of defaults by the weakest, not by countries that were, it was un- unimaginable to default. Ones that you could see they might default.
We had a wave of them, 2019, 2020, 2022, and they've all come out of it pretty well. They're now stronger. They're now better. Many of them have IMF programs, and so I see default risk is substantially less today than it was back then because of those improvements, the structural sort of improvements that have happened in the past five years.
Greg: Okay. That's, that's interesting to hear. So it sounds like you think the resilience that we've seen in the asset class is warranted because of some of the structural changes that you've mentioned. I guess one question for you would be, does that resilience get tested again now with what's going on with, the Iran war and disruptions to the oil ch- you know, the oil supply chain, so much going on, you know, in terms of trade and tariffs?
Are, are we... Is it getting tested again?
Cem: Well, it has been, right? It has. Last year with the tariffs, this year with the Iran war and the oil price shock. Both negative shocks, right? And in fact, emerging markets have been tested. And if you look at the way-- Let's take the, the oil price shock.
It's pretty commendable what has happened. In general, it's commendable what has happened. Many countries have allowed pass-through of those higher prices. They've let it pass through so that demand falls and, and they deal with it that way. Some of them have let their currencies depreciate.
That's what's supposed to happen. You have a negative terms of trade shock, the currency's supposed to be the first line of defense. Let it float. Let it, do the adjustment. Some of them have chosen to use quantitative measures to constrict demand for oil instead of price, so they've used a little bit of both, but they've done it.
Some of them have chosen to subsidize a little bit, but, those, one recent example is the Dominican Republic, that is not fully transmitting the prices, the higher prices to retail fuel prices, but that fiscal cost is being offset by raising more revenues.
Cem: So I've seen a responsible reaction to this crisis.
So frankly- It hasn't moved the needle on fundamental credit worthiness for any of the sovereigns that we, invest in.
Greg: Okay.
Cem: They've stayed stronger and the valuations, certainly on the credit side are tighter and better or, you know, today than they were pre-war, or you know, at the beginning of the year.
Greg: Okay. Sounds like they're, they're figuring out ways to manage it. On the Dominican point, since I'm going on vacation there next week, and I'm kinda happy to hear that those gas prices have not been passed along to consumers.
That means my airport transfer is a little cheaper perhaps, but, that's interesting to hear.
Certainly there must be some areas where complacency is kind of eeking into the market here though, right? So like, I think what you're, what you're telling is a very positive story, a resilient asset class, governments who have responded to the shocks in a pretty responsible way. Are there places where that's not the case?
Cem: On the one hand, the market has got... understood that there is less propensity to default and a higher propensity to adjust and avoid default, right? And that has made investors seek higher yield or basically open the market to
weaker issuers. So we have seen countries like, the two Congos come and issue or Laos issue, and one of the two Congos we happen to invest in.
But, the point is the market has been very wide open to all issuers. You know, Angola tapped its bond again, Kenya did. And I do think there is a balance to be struck. So, the short answer is, on complacency, yes, I do think there has been a bit of complacency, possibly on the market side, but also on the issuer side.
I don't like it when an issuer puts that high a coupon on its debt and is not cognizant of the debt costs it's incurring when it perhaps can pursue cheaper concessional financing at a lower interest rate. So it's not just... When I say complacency, it's both ways.
Complacency on the part of investors- And complacency on the part of issuers-that come to issue just because there's demand for debt- I see ... if you will. So I do think there's a little bit of that. The way we get around it is make sure, you know, we do a good job of analyzing and making sure that we're buying, you know, issuers are doing the right things for themselves and for their long-term debt repayment capacity.
And if they're doing that, we're likely gonna see it as a positive thing and invest. Conversely, if we think they're acting against their own interests and potentially against ours as investors, then, you know, we are, we don't have to participate in that. And I do think, I've said this many, many times before, this is a space you have to engage in with, you know, an active management, not passively.
You wanna make sure you buy the right things and try to avoid the wrong things as opposed to be driven by what the index will give you.
Greg: Yes. What you, what you don't buy can be just as important as what you do buy.
Cem: Correct. Yep.
Greg: Yeah. Well, let's talk about how you and the team are doing that. I wanna talk about, you know, as we mentioned upfront, obviously, very broad universe and we're, you know, you can, depending on how you slice and dice it, you can be looking across sovereign, hard currency debt, local currency debt.
You can be looking at corporate debt, et cetera. So let me ask you, as you look across that very broad and deep universe today, kind of where, what's sticking
out to you in terms of where there's opportunities? What do you like out there today?
Cem: So we get that question often.
You know, and the wish is for, you know, a single answer.
You know, love local currency debt, or love hard, you know. And if you pin me down to it, I'd probably steer you towards sovereign local currency debt, which includes the frontier component, which we exploit a lot, fruitfully for. But I think the true, my true sort of answer, if you will, if I can get away from that one answer is there are a few opportunities- what I think are great opportunities.
One is I do think spreads, and even though they look tight historically, and they are tight historically, they still very substantially overcompensate for default risk. Especially for, and this is a key point, many BB-rated sovereigns I believe are actually investment-grade risk. So the BB space, which we find the most opportunity on the sovereign hard currency side, actually to me is investment-grade risk.
Therefore, by BB standards, the tight-looking spreads in fact are still quite a good opportunity. So that's one area, that's one pocket if you will. Conversely, there are many countries that offer, that have credible central banks, good macro policy frameworks, where real yields, local currency debt real yields are high, and, there's an opportunity to exploit there.
So there's that sort of universe. Then there's the whole question of, you know, emerging market currencies, and maybe we can get into that later. But again, there’s, depending on the country, there's opportunity for capital appreciation through spot appreciation of their currencies, depending on the balance of payments dynamics.
And then on the corporate side, again, you know, the sovereign universe by definition is limited by the number of countries that exist in the world, right? About, give or take, a hundred sovereign hard currency debt issuers, call it 30-ish plus, local currency debt issuers that we can invest in, maybe more with the frontiers, well, I'm sure more with the frontiers now that it's growing.
But in the corporate side you have thousands. You have a few thousand that we actually underwrite and look at. And you can invest across the capital structure. So that creates its own opportunities where you're taking less duration risk and more, idiosyncratic corporate risk.
And within corporate risk, you know, you can go down the capital structure a little bit to get more return. So to me, there's the pockets, which is why one of the strategies we have, and there's no one out there, is the im- you know, the blend of total return type of... you know, a blended product that tries to look at, you know, exploit all opportunities in one bucket.
Greg: Yeah. I want to follow up on the, one interesting thing you said there is you said there's examples of issuers where, you know, they may be rated BB, but when your team does the analysis, it looks more like investment-grade risk.
Say a little bit more about that. I don't know if there's an example that would bring that to life or not.
Cem: I think Brazil falls into that category. I think South Africa falls into that category. Dominican Republic, Guatemala, Serbia, Morocco. So there, I can rattle off more, but there's a ton of names, BB-rated, some of them low BB, some of them a little stronger BB, where default risk is just very low.
I mean, let me give you Morocco as an example. Their local currency debt yields are 3%. They're less than US Treasury yields. It’s in their own currency-right? But if that's the market clearing nominal interest rate for government debt in Morocco, what does that tell you about the savings and investment balance in Morocco such that the government can borrow in its own currency at that rate?
What are the chances of it actually defaulting on the dollar-denominated bonds that it issues or the euro-denominated?
Very, very, very small.
Greg: Right.
Cem: Guatemala, another example, again, I can rattle off the details, their nominal yields are pretty low too, by the way, in their own currency, but their balance payment is very strong. The current account, the remittances are very strong. The FX reserves are off the charts.
So- And I can, and this what I've just described, describes many IG issuers in emerging markets, but also double B ratings reflect default probabilities. In the corporate world, we have a rich history of defaults with statistically large samples, and you have default statistics. And frankly, in sovereign, universe, you don't have that.
You don't have the same statistically robust default statistics, just doesn't exist. So you're shooting a little blind when you, when you assign a double B to, say, a Guatemala or Morocco. Does that really mean the same probably default as implied by the corporate debt default statistics? That's what it's supposed to mean. But in fact, I would argue to you that these countries default risk, that risk is much less- IE triple B equivalent at most, such that what looks like high spreads at a hundred and fifty, sometimes two hundred, you know, is thirty, fifty basis points too high, and it could come in more.
So that's, that, that's sort of one example.
Greg: I mean, that's interesting, and it almost reminds me kind of back to the beginning of this conversation of the EM label. And, you almost, you almost wonder if there's a discount applied to the rating because it's considered EM. Like, if you put the same characteristics of a country on a developed market, would that rating look different?
Cem: There's, that, that's a good point, 100%. And what we also assume, frankly, I as an economist have made this mistake, as well. Sometimes you assume the richer the country, the less the probability of default. And that's about right, but not always. Sometimes the, you know, poorer countries will run financially responsible, you know, policies and, be, have a very strong and high willingness to pay, repay debt.
So it's not always the case that just because you're rich, I mean, Argentina has been richer than many countries, but also defaulted more. Same with Ecuador. So there are countries that are, enjoy higher income levels, but default.
One of, one thing I wanted to mention is also it's a tipsy top world if you were. Malaysia, I'll give you the example of Malaysia, it is pretty sure single A-rated. They just issued a ten-year Sukuk, dollar-denominated Sukuk, at twenty-five basis points over US Treasuries. Twenty-five.
China issues dollar-denominated debt. It's actually sixty basis points inside. This is dollar. Where strictly speaking, the US Treasury is the riskless rate. Right. I was gonna say it's- We're sitting inside ... less than risk-free So there's a bit of market segmentation going on.
That's one. No doubt. How else do you explain? But the, the point that I'm trying to make is that Malaysia's actually twenty-five basis points is about right in terms of default risk. That is about what Malaysia's probably default is, the implied. And so I think there's a long way, there's a lot of overcompensation.
Let me put it another way. Analytically, I would find it easier to justify lower spreads than I would find it to justify higher spreads. In-- for most of the sovereigns in, in emerging markets, and certainly the ones that we own.
If that makes sense.
Greg: Okay. Okay. Yeah, that's a pretty interesting statement.
Okay, let me ask you this. The dollar is obviously a big factor in terms of analyzing emerging markets, and EM countries being able to satisfy their obligations, et cetera, et cetera. How is the dollar outlook today kind of affecting your view kind of holistically on the opportunity that you're seeing?
Cem: So that's a tough question. It's a loaded question. It's a question that we heavily debate in the global sovereign debt team, the macro research team that helps the global sovereign debt team. So this is my take, my sort of very narrow sliver of a take, if you will, on it. There's two sides to that question, obviously.
One is the dollar itself. And then against the dollar, the emerging market currencies. So on the dollar, um, I think the policy setup in the US has been negative in the past few years. The fiscal policy is off the rails. There's no willingness, to adjust what is still a very high fiscal deficit.
On the other hand, the private sector is strong and still attracting quite a bit of flow. So we have that mix, if you will. Coming back to policy, the fiscal is the wrong way. In monetary policy, the jury is still out, meaning we have a Fed that has-- This will be the sixth year, I think, in a row. Next year will likely be the seventh year in a row that it, it misses its inflation target.
Now, unless the Fed regains credibility by tightening monetary policy and bringing back price stability, that is dollar negative in my view as an emerging market economist. And I say emerging market economist because one of the biggest challenges I think in the, in the US framework is the dual mandate, growth and inflation.
And I am gratified that, Chairman Warsh has appointed five task forces, one of which will look at the dual mandate, whether it should exist. Now, if you put your emerging market hat on, there's no such thing, no, I don't care what it says in their legislation. An emerging market central bank, a credible one, cannot target both at once.
They can-- You just stick with inflation. Without price stability, you have nothing. You need price stability for people to save in your currency.
Greg: That's a lesson EMs have learned many times.
Cem: Correct. Yeah. Exactly right. So when I sit just as-- No emerging market eco- country can get away with thinking about these things as equals.
You need price stability for people to save in your currency, to save long-term in your currency, to then invest in your cur- you know, i- i- you know, be able to invest with the benefit of those savings at an affordable cost, then you can get growth, and then you can get jobs. That's to me the chain of causality.
So I'm hopeful that price stability de facto becomes the primary goal in the United States. And if the Fed gains credibility, that would be dollar, of course, positive. So it really is gonna be about whether the Fed attempts to regain its credibility, and if it does, in that environment, we, we can see a strong dollar.
But so far, the actions and the evidence suggest that there hasn't been the willingness to sacrifice enough growth or to tighten it. Now, secondly, our micro research team has done a lot of work, and they have consistently signaled, and I'm sure on your podcasts and in other ways, that the US economy is still very strong.
There's still inflationary pressure.
And then they've done some interesting work, which I know we were talking about yesterday about the build-out- the AI build-out and its effects- and how that will transmit to inflation in the near term and the long term. And I won't give away their conclusions other than to say that that's another factor that will go into the mix as we think about, EM, you know, sort of the dollar versus other currencies. So gun to my head, I'm dollar negative unless I see a turn for the better in US monetary policy
Greg: Okay. And that would be a tailwind for-
Cem: That'll be a tailwind, yes. That'll be a tailwind for emerging market currencies. Yeah. That'll be a tailwind. The way we deal with that, even now, with that possibility, A, it's not a base case, but that's, it doesn't really matter because at the end of the day, that's a true, that's a known unknown, and we'll see how things play out, is when we're investing in emerging market currencies, we're really doing a lot of bottom-up work on the balance of payments, on the
competitiveness of the economy, on the capital flows, both in and out of the countries.
So we're investing in things that, A, have currency support, and we think the balance of payments justifies the currency being stable or stronger, but B, there's enough cushion in the carry. I mean, we were talking about Brazil earlier this morning in an investment process meeting, and real yields in Brazil today are more than 10%.
Nominal yields are 15-plus percent. That gives you quite a bit of room, if you will, to work with. So you can take a 5% hit and still get 10% if you will. So that, that's what we're dealing with. I'll give you one other example, one of my favorites. It's in the frontier world, but there are pockets of frontiers like Uganda.
4% inflation. Poor country, but has 30-year bonds outstanding. We invest in the 10-year part of the curve that has 15, 16% nominal yields. Hmm. 10 percent.
And that's a, that's a currency that we think can, can stay stable.
There, of course, you are constrained by liquidity. So... And we have anything in between. And then we have some, some countries like Malaysia, Thailand, et cetera, that have yield-- China, that have yields substantially lower than the US, and we don't find a lot of opportunity there.
So... And that gives you a, a sense of the range. We have Brazil at 15- You have China at less than two. And that's another way to describe the, the, the descri-you know, so the, the-
Greg: Yeah. It's interesting that with some of those higher yielders, you have that buffer for currency appreciation if you- if that happens. Another factor I wanted to ask you about that, that's a big driver for, emerging markets traditionally is trade, right? And I think we've been... Last few years, it seems like we've been going through this period where you're seeing a rise of nationalism, you're seeing a rise of protectionism.
We mentioned the, the war in Iran. We've seen a lot of rhetoric and a lot of... And some action around tariffs as well. So I guess my question for you would be, what are you actually seeing from a trade perspective? Are countries looking more inward, and if so, is it-- does that put pressure on emerging markets?
Cem: So that's a, that's a good question, and that would've been a legitimate fear. I have been very surprised. When you look at... First of all, we have some
global high-level data on trade volumes that we can see, and global trade has actually been growing, has been going up, not down. So just to name that, you would think that trade, with all the barriers, right?
We ha- we put more barriers. That should sort of, you know, reduce trade. The opposite has happened. Secondly, when I look at country-by-country trade data, when we look at export growth, import growth, et cetera- The numbers are generally strong. Now, it depends. Some exports are down because of the cyclical slowdown, let's say, in Europe or, you know, things like that, or in China.
But in general, if I had to generalize, and I think I can generalize, trade is going up. The performance, the external performance is pretty good, for lack of a better word. So, we're not seeing trade balances under pressure or where, or where they are, where there is some deterioration in the trade in goods, emerging markets are getting it back in services.
So again, this morning we talked about India. It was a perfect example. The trade deficit in India has been going up, so that's going in the wrong direction, but trade and services has been moving in the right direction. So on balance, the combination of the two, trade in goods and services, in fact, has not been changing much in India just the composition is changing. so that's one pleasant surprise that I would simply submit, that we haven't seen that kind of, um, negative impact.
So absolute levels of trade are still strong. Strong and growing. But, well, I think the composition is changing. So with the US, it's... So the US' trade deficit has gone down.
That has happened. And I think, and China, I think, is trading less with the US and more with other emerging markets. That's one, one
Greg: So there's been kind of a reshuffling of the deck.
Cem: There has been a change in the composition- Yeah of global trade. That, for sure.
And I think, I don't have the expertise, I'm sure those with specialties and sectors would maybe be able to tell us about how sectors are rewiring themselves in terms of the supply change and the supply chains and the dependencies. but that's what I suspect is going on, you know, from what we see globally.
Greg: Okay, cool. All right. Um, I just want to ask you how your team kind of translates all this. So if you think about, there's so many different factors to think about, right? I mean, there's so many moving pieces, and I know you guys are very sophisticated in how you think about all this. But I guess, like, one, one way to think about this, I guess, would be, you know, I'm curious how your team- determines what's a, what's an attractive opportunity versus, you know, or, you know, something that's maybe too risky, or how do you determine that something is not adequately priced?
Like, what's the process that the team goes through, for that?
Cem: I mean, it's the good old we're very bottom up. We're very detail oriented. We really look at every number we can, and so forth. So, and that pursuit, that relentless pursuit of, to use a fancy word, the truth, if you will, allows us to get as far as we can.
And then when we can't go further, we know our distance. We know sort of how much we don't know. How much we can't know. How much information risk we're running.
Greg: Yeah, I mean, you're never gonna have perfect information, right?
Cem: Right. Correct. Yeah. We're never gonna have the perfect... But in some places it's highly imperfect.
And then in some places we have to guess about the direction of policy. So we'll have a view on policy, but we can then check on how things are going through high-frequency data. So we do that in a very relentless way. And the second thing, and I think, you know, what I think is our magic, for lack of a better word, and I know this is a little, you know, maybe too cute to say, but it's our team process where all the entire team is very heavily vested in challenging each other, poking holes in each other's analysis- reading the footnote- looking at every row, to find the flaws in the, whatever. And that process inches us towards conviction. And ultimately what we're looking for is, A, we're trying to protect our downside. We're trying to make sure we can't lose a lot of capital in any investment. and secondly, I mean, again, easier said than done, or there's not that many out there, but we're looking for positive trending. We're looking for countries that are doing the right things.
And it doesn't mean they're doing everything right at the same time, but they're doing some things. And, and I forgot to mention earlier, many countries have
IMF programs. Within their IMF programs they're doing some things better than others. They're gradually making progress on their state-owned enterprise.
Pemex has been a weak link for Mexico for years, but it's gradually maybe improving. Eskom in South Africa the same. Gradually becoming less relevant because the private sector's you know, allowed to grow in the energy sector. So-They're inching.
You know, the weakest, the Pakistans, the Egypt, so many problems, but they're inching in the right direction. And if we find that right trend, it's telling us two things. There's a willingness to move in the right direction, but there's also a willingness to avoid a default situation. Right? So that combination is what we're looking for and we're finding.
Greg: Okay. I love that about your team, the constant debate.
Kind of poking holes in each other's thesis and things like that. It's kind of like makes everybody so much stronger. I mean, just anecdotally, like once in a while, I’ll get CC'd on an email about, you know, the team's debating such and such. They're long. And I'll look back and I'll be like, "Oh my gosh, this has been going on for days," and there's like 20 people are weighing in and it's really interesting to see, just like- That's, that's what we're doing ... the level of detail that is thought about really. And so I guess you, you need that.
Cem: We think we do.
I mean, that's what our investment process is. Everybody has a different investment process. Some have, you know, maybe better machines, better models. The one thing I say when we talk about models is that we do use models. We do all the quantitative work that you can possibly do.
But at least in our view, that only gets you so far because even some, some n- a, a number as trivial as debt to GDP. Well, it really depends. Two, two debts of 50% of GDP don't equal. It depends on the maturity structure. It depends on the cost. If it depends on the currency composition. It depends on the creditor composition.
It, there's all kinds of things there. It depends on whether they have market access and they can easily roll over or not. I mean, it's something that looks easy actually isn't. And so that's why we have this relentless we, we go, we go, we go, and that's how we get to some high level competence if you will.
Greg: Yeah. The human judgment, the experience, the hope that maybe there's still a role for us humans in this world of finance, I think, for some time to come.
Cem: I think so.
Greg: All right, last question for you, Cem. Is there a, if I asked you to kind of boil it down to one message that you wanted to leave investors with today, what would that be?
Cem: Still undervalued. Two components to that. One is everybody's saying our spread's too tight, they're tighter versus yesterday. I think they very substantially still overcompensate for default risk. So spreads, I think, can move lower.
Incidentally, you... I think it was a podcast that we did together, I think in December- where we were asked to make up bold predictions.
Greg: That's right.
Cem: And my bold prediction was spreads will even be lower. And, call it luck, well, they are lower today than when we spoke in December. So I do think there's... that's one element of the still undervalued. The second is there's the high real yield space, where there are many pockets of very high real yields, which we don't think will stay that high. So if we're good enough to find the right ones, we can deliver value. So I do think still undervalued is a valid, a very valid statement.
Greg: Okay. I love it. I think that's a great place to leave it.
You've given us a lot to think about. Thanks for taking us on this tour of what we all understand to be a very big and substantial part of the world, today. So I would thank you. Thank you. I want to thank our listeners and viewers for sticking with us through this conversation. Remember, you can follow Streaming Income wherever you get your podcasts.
That's Apple, Spotify, YouTube, et cetera. And go check out our LinkedIn newsletter, Where Credit Is Due, where we share thoughts from great investors like Cem, across fixed income markets, and beyond. So thanks a lot for watching, and we'll see you next time.
Before we jump into that, let me just, remind you that you can, subscribe and follow Streaming Income on, Apple Podcasts, Spotify, YouTube, or wherever you get your podcasts. And if you like Streaming Income, you will love our LinkedIn newsletter, Where Credit Is Due, so go check that out. Links in the show notes.
All right, enough intro. Cem, welcome. How are you?
Cem: I'm good. Happy to be here.
Greg: Good. Yeah. I'm psyched to have you here in, Charlotte. You're usually, Boston-based, but it's nice to have you here in person.
Cem: Yes, it is, and especially in this, this awesome room.
Greg: Yeah, awesome. Well, good stuff. I'm, I'm excited to, to dive into the conversation.
You've been, on the podcast before. I know you were on our outlook, but for investors who don't know you, remind us your role at the firm and, and maybe a little bit about the group that you manage.
Cem: Sure. I've been at Barings for 12 years, most of the several years doing emerging market debt.
Primarily as lead portfolio manager for sovereign hard currency debt. For the past year I've been head of the global sovereign debt and currencies group. I've had a 30-plus year career in emerging markets in general, mostly as an economist and analyst. And the past 12-plus years as a portfolio manager.
Greg: Awesome. Awesome. And you, you lead a great team. How many languages are spoken on your team? Not to put you on the spot. I think it's a lot, isn't it?
Cem: No, that’s a really good question. Yeah. It wasn't by design, but we've ended up with all over the world. So we have- Chinese, Arabic, French, I probably...
Japanese, of course. A few local African languages. Yeah, so we have quite a few.
Greg: Cool. Yeah. Yeah. A very, very diverse team. Yeah. Yeah. Yeah. And I guess that comes in really handy when you're looking at this broad universe. And that's actually the, the place where I wanted to start, because, you know, I wanna talk about this EM label maybe to start.
I've heard you on another podcast describe EM as sort of one minus developed markets, and I kind of like that framing, because it just gives you a sense of the breadth of the space that we're looking at. But, you know, tell me a little bit about the breadth and depth of the asset class these days.
And, you know, I don't even know if we should be considering it as one asset class or I guess what I'm wondering is, are investors kind of viewing EM through kind of an outdated lens?
Cem: So I struggle with that question as an emerging market sort of economist and portfolio manager for the past several years.
On the one hand it's a little cheap to say one minus DM equals EM, so what else is left on planet Earth? On the other hand, I like that formulation because what it aims to convey is that it's so large, it's such a big part of the world, that you almost shouldn't avoid it, period. Not because it's great, but because it's just there, right?
So now, but if we focus just on that one minus DM part, the emerging, what we call emerging markets, it's got an incredible range in all ways. One is, let's use the ratings. Double A rated to all the way to triple C. Or in income. You have
$1,000 per capita income emerging market countries, some of which are investable.
And you have countries that have 20, 30 plus thousand- you know, per capita GDP. So it's a tremendously large space in terms of, the depth of the markets-
the size of the economies, et cetera. So that's why it's maybe a label that has many, many, possibly too many things in it, but it is what it is.
Greg: Now, what do you think some of the biggest myths are these days about EM?
Cem: It's, riskier- less liquid, high yield. In fact, it's not any of those things. Take credit quality. One half of the sovereign hard currency index is investment grade. 60% of the EM corporate debt index is investment grade.
Two-thirds of the local currency debt index is investment grade. if you pivot to the size of the economies, you have, Mexico, almost $2 trillion economy, Brazil, two and a half, India, $4 trillion, Turkey- trillion and a half- South Africa, $440 billion. Even the small open economies at least, you know, I've been in this business for a long time, Where these economies were small, but even Malaysia today is $480 billion economy. Singapore, $600 billion- tiny island country. Now, Singapore is maybe more DM than EM, but you get the flavor. There's this incredible size, and so the local markets are gigantic.
Cem: They're deep, and therefore, they're liquid. In the hard currency space, most bonds are liquid. And then when you start talking about frontier markets, right, the Zambias, the Ugandas, other sort of, especially local markets that can be less liquid, fine, that's, there's some less liquid pockets. but in general, this is a liquid, large, very diversified space with all kinds of opportunity across sort of the fixed income, spectrum.
Greg: I think looking back at last year, the EM space is, it was incredible. Well, great performance, I guess, in 2025.
Cem: Yeah,
Greg: Incredibly resilient in 2026 thus far, especially considering a lot of what we're seeing, kinda going on in the world, and we can talk about trade, and we can talk about geopolitics, and we can get to that stuff.
But, but I guess one question would be for you is kinda what do you think is behind that resilience that we've seen over the last, like, couple of years in EM?
Cem: So it's been a long five, six years, right? If we start with COVID, that hit the world hard, and then Russia's invasion of Ukraine, which, hit some of the emerging markets space directly, but also commodity prices, et cetera.
We had, so we, that was a major shock to budgets, to growth, et cetera. And since then, most emerging markets have done a lot of adjustment. So what we call the twin balances, the fiscal and the cur- external imbalances, they have narrowed them. They are financially in a substantially stronger position today on a flow basis, think income statement, if you will, than they were back then.
And, also frankly, their external liquidity. So their, you know, their current account balances in general, I would say are stronger today than they were back after those two shocks. So emerging market countries have adjusted.
They have done some fiscal consolidation. They have pursued credible monetary policies, so they have kept domestic demand in check enough to improve their financial position. That's how sort of... That's in fact what has happened.
Cem: Um, so, and also FX reserves are higher, substantially higher today than they were.
Several of them are pursuing IMF programs. you know, and the, and the last thing I would say, sort of with this long view is we did experience a wave of defaults by the weakest, not by countries that were, it was un- unimaginable to default. Ones that you could see they might default.
We had a wave of them, 2019, 2020, 2022, and they've all come out of it pretty well. They're now stronger. They're now better. Many of them have IMF programs, and so I see default risk is substantially less today than it was back then because of those improvements, the structural sort of improvements that have happened in the past five years.
Greg: Okay. That's, that's interesting to hear. So it sounds like you think the resilience that we've seen in the asset class is warranted because of some of the structural changes that you've mentioned. I guess one question for you would be, does that resilience get tested again now with what's going on with, the Iran war and disruptions to the oil ch- you know, the oil supply chain, so much going on, you know, in terms of trade and tariffs?
Are, are we... Is it getting tested again?
Cem: Well, it has been, right? It has. Last year with the tariffs, this year with the Iran war and the oil price shock. Both negative shocks, right? And in fact, emerging markets have been tested. And if you look at the way-- Let's take the, the oil price shock.
It's pretty commendable what has happened. In general, it's commendable what has happened. Many countries have allowed pass-through of those higher prices. They've let it pass through so that demand falls and, and they deal with it that way. Some of them have let their currencies depreciate.
That's what's supposed to happen. You have a negative terms of trade shock, the currency's supposed to be the first line of defense. Let it float. Let it, do the adjustment. Some of them have chosen to use quantitative measures to constrict demand for oil instead of price, so they've used a little bit of both, but they've done it.
Some of them have chosen to subsidize a little bit, but, those, one recent example is the Dominican Republic, that is not fully transmitting the prices, the higher prices to retail fuel prices, but that fiscal cost is being offset by raising more revenues.
Cem: So I've seen a responsible reaction to this crisis.
So frankly- It hasn't moved the needle on fundamental credit worthiness for any of the sovereigns that we, invest in.
Greg: Okay.
Cem: They've stayed stronger and the valuations, certainly on the credit side are tighter and better or, you know, today than they were pre-war, or you know, at the beginning of the year.
Greg: Okay. Sounds like they're, they're figuring out ways to manage it. On the Dominican point, since I'm going on vacation there next week, and I'm kinda happy to hear that those gas prices have not been passed along to consumers.
That means my airport transfer is a little cheaper perhaps, but, that's interesting to hear.
Certainly there must be some areas where complacency is kind of eeking into the market here though, right? So like, I think what you're, what you're telling is a very positive story, a resilient asset class, governments who have responded to the shocks in a pretty responsible way. Are there places where that's not the case?
Cem: On the one hand, the market has got... understood that there is less propensity to default and a higher propensity to adjust and avoid default, right? And that has made investors seek higher yield or basically open the market to
weaker issuers. So we have seen countries like, the two Congos come and issue or Laos issue, and one of the two Congos we happen to invest in.
But, the point is the market has been very wide open to all issuers. You know, Angola tapped its bond again, Kenya did. And I do think there is a balance to be struck. So, the short answer is, on complacency, yes, I do think there has been a bit of complacency, possibly on the market side, but also on the issuer side.
I don't like it when an issuer puts that high a coupon on its debt and is not cognizant of the debt costs it's incurring when it perhaps can pursue cheaper concessional financing at a lower interest rate. So it's not just... When I say complacency, it's both ways.
Complacency on the part of investors- And complacency on the part of issuers-that come to issue just because there's demand for debt- I see ... if you will. So I do think there's a little bit of that. The way we get around it is make sure, you know, we do a good job of analyzing and making sure that we're buying, you know, issuers are doing the right things for themselves and for their long-term debt repayment capacity.
And if they're doing that, we're likely gonna see it as a positive thing and invest. Conversely, if we think they're acting against their own interests and potentially against ours as investors, then, you know, we are, we don't have to participate in that. And I do think, I've said this many, many times before, this is a space you have to engage in with, you know, an active management, not passively.
You wanna make sure you buy the right things and try to avoid the wrong things as opposed to be driven by what the index will give you.
Greg: Yes. What you, what you don't buy can be just as important as what you do buy.
Cem: Correct. Yep.
Greg: Yeah. Well, let's talk about how you and the team are doing that. I wanna talk about, you know, as we mentioned upfront, obviously, very broad universe and we're, you know, you can, depending on how you slice and dice it, you can be looking across sovereign, hard currency debt, local currency debt.
You can be looking at corporate debt, et cetera. So let me ask you, as you look across that very broad and deep universe today, kind of where, what's sticking
out to you in terms of where there's opportunities? What do you like out there today?
Cem: So we get that question often.
You know, and the wish is for, you know, a single answer.
You know, love local currency debt, or love hard, you know. And if you pin me down to it, I'd probably steer you towards sovereign local currency debt, which includes the frontier component, which we exploit a lot, fruitfully for. But I think the true, my true sort of answer, if you will, if I can get away from that one answer is there are a few opportunities- what I think are great opportunities.
One is I do think spreads, and even though they look tight historically, and they are tight historically, they still very substantially overcompensate for default risk. Especially for, and this is a key point, many BB-rated sovereigns I believe are actually investment-grade risk. So the BB space, which we find the most opportunity on the sovereign hard currency side, actually to me is investment-grade risk.
Therefore, by BB standards, the tight-looking spreads in fact are still quite a good opportunity. So that's one area, that's one pocket if you will. Conversely, there are many countries that offer, that have credible central banks, good macro policy frameworks, where real yields, local currency debt real yields are high, and, there's an opportunity to exploit there.
So there's that sort of universe. Then there's the whole question of, you know, emerging market currencies, and maybe we can get into that later. But again, there’s, depending on the country, there's opportunity for capital appreciation through spot appreciation of their currencies, depending on the balance of payments dynamics.
And then on the corporate side, again, you know, the sovereign universe by definition is limited by the number of countries that exist in the world, right? About, give or take, a hundred sovereign hard currency debt issuers, call it 30-ish plus, local currency debt issuers that we can invest in, maybe more with the frontiers, well, I'm sure more with the frontiers now that it's growing.
But in the corporate side you have thousands. You have a few thousand that we actually underwrite and look at. And you can invest across the capital structure. So that creates its own opportunities where you're taking less duration risk and more, idiosyncratic corporate risk.
And within corporate risk, you know, you can go down the capital structure a little bit to get more return. So to me, there's the pockets, which is why one of the strategies we have, and there's no one out there, is the im- you know, the blend of total return type of... you know, a blended product that tries to look at, you know, exploit all opportunities in one bucket.
Greg: Yeah. I want to follow up on the, one interesting thing you said there is you said there's examples of issuers where, you know, they may be rated BB, but when your team does the analysis, it looks more like investment-grade risk.
Say a little bit more about that. I don't know if there's an example that would bring that to life or not.
Cem: I think Brazil falls into that category. I think South Africa falls into that category. Dominican Republic, Guatemala, Serbia, Morocco. So there, I can rattle off more, but there's a ton of names, BB-rated, some of them low BB, some of them a little stronger BB, where default risk is just very low.
I mean, let me give you Morocco as an example. Their local currency debt yields are 3%. They're less than US Treasury yields. It’s in their own currency-right? But if that's the market clearing nominal interest rate for government debt in Morocco, what does that tell you about the savings and investment balance in Morocco such that the government can borrow in its own currency at that rate?
What are the chances of it actually defaulting on the dollar-denominated bonds that it issues or the euro-denominated?
Very, very, very small.
Greg: Right.
Cem: Guatemala, another example, again, I can rattle off the details, their nominal yields are pretty low too, by the way, in their own currency, but their balance payment is very strong. The current account, the remittances are very strong. The FX reserves are off the charts.
So- And I can, and this what I've just described, describes many IG issuers in emerging markets, but also double B ratings reflect default probabilities. In the corporate world, we have a rich history of defaults with statistically large samples, and you have default statistics. And frankly, in sovereign, universe, you don't have that.
You don't have the same statistically robust default statistics, just doesn't exist. So you're shooting a little blind when you, when you assign a double B to, say, a Guatemala or Morocco. Does that really mean the same probably default as implied by the corporate debt default statistics? That's what it's supposed to mean. But in fact, I would argue to you that these countries default risk, that risk is much less- IE triple B equivalent at most, such that what looks like high spreads at a hundred and fifty, sometimes two hundred, you know, is thirty, fifty basis points too high, and it could come in more.
So that's, that, that's sort of one example.
Greg: I mean, that's interesting, and it almost reminds me kind of back to the beginning of this conversation of the EM label. And, you almost, you almost wonder if there's a discount applied to the rating because it's considered EM. Like, if you put the same characteristics of a country on a developed market, would that rating look different?
Cem: There's, that, that's a good point, 100%. And what we also assume, frankly, I as an economist have made this mistake, as well. Sometimes you assume the richer the country, the less the probability of default. And that's about right, but not always. Sometimes the, you know, poorer countries will run financially responsible, you know, policies and, be, have a very strong and high willingness to pay, repay debt.
So it's not always the case that just because you're rich, I mean, Argentina has been richer than many countries, but also defaulted more. Same with Ecuador. So there are countries that are, enjoy higher income levels, but default.
One of, one thing I wanted to mention is also it's a tipsy top world if you were. Malaysia, I'll give you the example of Malaysia, it is pretty sure single A-rated. They just issued a ten-year Sukuk, dollar-denominated Sukuk, at twenty-five basis points over US Treasuries. Twenty-five.
China issues dollar-denominated debt. It's actually sixty basis points inside. This is dollar. Where strictly speaking, the US Treasury is the riskless rate. Right. I was gonna say it's- We're sitting inside ... less than risk-free So there's a bit of market segmentation going on.
That's one. No doubt. How else do you explain? But the, the point that I'm trying to make is that Malaysia's actually twenty-five basis points is about right in terms of default risk. That is about what Malaysia's probably default is, the implied. And so I think there's a long way, there's a lot of overcompensation.
Let me put it another way. Analytically, I would find it easier to justify lower spreads than I would find it to justify higher spreads. In-- for most of the sovereigns in, in emerging markets, and certainly the ones that we own.
If that makes sense.
Greg: Okay. Okay. Yeah, that's a pretty interesting statement.
Okay, let me ask you this. The dollar is obviously a big factor in terms of analyzing emerging markets, and EM countries being able to satisfy their obligations, et cetera, et cetera. How is the dollar outlook today kind of affecting your view kind of holistically on the opportunity that you're seeing?
Cem: So that's a tough question. It's a loaded question. It's a question that we heavily debate in the global sovereign debt team, the macro research team that helps the global sovereign debt team. So this is my take, my sort of very narrow sliver of a take, if you will, on it. There's two sides to that question, obviously.
One is the dollar itself. And then against the dollar, the emerging market currencies. So on the dollar, um, I think the policy setup in the US has been negative in the past few years. The fiscal policy is off the rails. There's no willingness, to adjust what is still a very high fiscal deficit.
On the other hand, the private sector is strong and still attracting quite a bit of flow. So we have that mix, if you will. Coming back to policy, the fiscal is the wrong way. In monetary policy, the jury is still out, meaning we have a Fed that has-- This will be the sixth year, I think, in a row. Next year will likely be the seventh year in a row that it, it misses its inflation target.
Now, unless the Fed regains credibility by tightening monetary policy and bringing back price stability, that is dollar negative in my view as an emerging market economist. And I say emerging market economist because one of the biggest challenges I think in the, in the US framework is the dual mandate, growth and inflation.
And I am gratified that, Chairman Warsh has appointed five task forces, one of which will look at the dual mandate, whether it should exist. Now, if you put your emerging market hat on, there's no such thing, no, I don't care what it says in their legislation. An emerging market central bank, a credible one, cannot target both at once.
They can-- You just stick with inflation. Without price stability, you have nothing. You need price stability for people to save in your currency.
Greg: That's a lesson EMs have learned many times.
Cem: Correct. Yeah. Exactly right. So when I sit just as-- No emerging market eco- country can get away with thinking about these things as equals.
You need price stability for people to save in your currency, to save long-term in your currency, to then invest in your cur- you know, i- i- you know, be able to invest with the benefit of those savings at an affordable cost, then you can get growth, and then you can get jobs. That's to me the chain of causality.
So I'm hopeful that price stability de facto becomes the primary goal in the United States. And if the Fed gains credibility, that would be dollar, of course, positive. So it really is gonna be about whether the Fed attempts to regain its credibility, and if it does, in that environment, we, we can see a strong dollar.
But so far, the actions and the evidence suggest that there hasn't been the willingness to sacrifice enough growth or to tighten it. Now, secondly, our micro research team has done a lot of work, and they have consistently signaled, and I'm sure on your podcasts and in other ways, that the US economy is still very strong.
There's still inflationary pressure.
And then they've done some interesting work, which I know we were talking about yesterday about the build-out- the AI build-out and its effects- and how that will transmit to inflation in the near term and the long term. And I won't give away their conclusions other than to say that that's another factor that will go into the mix as we think about, EM, you know, sort of the dollar versus other currencies. So gun to my head, I'm dollar negative unless I see a turn for the better in US monetary policy
Greg: Okay. And that would be a tailwind for-
Cem: That'll be a tailwind, yes. That'll be a tailwind for emerging market currencies. Yeah. That'll be a tailwind. The way we deal with that, even now, with that possibility, A, it's not a base case, but that's, it doesn't really matter because at the end of the day, that's a true, that's a known unknown, and we'll see how things play out, is when we're investing in emerging market currencies, we're really doing a lot of bottom-up work on the balance of payments, on the
competitiveness of the economy, on the capital flows, both in and out of the countries.
So we're investing in things that, A, have currency support, and we think the balance of payments justifies the currency being stable or stronger, but B, there's enough cushion in the carry. I mean, we were talking about Brazil earlier this morning in an investment process meeting, and real yields in Brazil today are more than 10%.
Nominal yields are 15-plus percent. That gives you quite a bit of room, if you will, to work with. So you can take a 5% hit and still get 10% if you will. So that, that's what we're dealing with. I'll give you one other example, one of my favorites. It's in the frontier world, but there are pockets of frontiers like Uganda.
4% inflation. Poor country, but has 30-year bonds outstanding. We invest in the 10-year part of the curve that has 15, 16% nominal yields. Hmm. 10 percent.
And that's a, that's a currency that we think can, can stay stable.
There, of course, you are constrained by liquidity. So... And we have anything in between. And then we have some, some countries like Malaysia, Thailand, et cetera, that have yield-- China, that have yields substantially lower than the US, and we don't find a lot of opportunity there.
So... And that gives you a, a sense of the range. We have Brazil at 15- You have China at less than two. And that's another way to describe the, the, the descri-you know, so the, the-
Greg: Yeah. It's interesting that with some of those higher yielders, you have that buffer for currency appreciation if you- if that happens. Another factor I wanted to ask you about that, that's a big driver for, emerging markets traditionally is trade, right? And I think we've been... Last few years, it seems like we've been going through this period where you're seeing a rise of nationalism, you're seeing a rise of protectionism.
We mentioned the, the war in Iran. We've seen a lot of rhetoric and a lot of... And some action around tariffs as well. So I guess my question for you would be, what are you actually seeing from a trade perspective? Are countries looking more inward, and if so, is it-- does that put pressure on emerging markets?
Cem: So that's a, that's a good question, and that would've been a legitimate fear. I have been very surprised. When you look at... First of all, we have some
global high-level data on trade volumes that we can see, and global trade has actually been growing, has been going up, not down. So just to name that, you would think that trade, with all the barriers, right?
We ha- we put more barriers. That should sort of, you know, reduce trade. The opposite has happened. Secondly, when I look at country-by-country trade data, when we look at export growth, import growth, et cetera- The numbers are generally strong. Now, it depends. Some exports are down because of the cyclical slowdown, let's say, in Europe or, you know, things like that, or in China.
But in general, if I had to generalize, and I think I can generalize, trade is going up. The performance, the external performance is pretty good, for lack of a better word. So, we're not seeing trade balances under pressure or where, or where they are, where there is some deterioration in the trade in goods, emerging markets are getting it back in services.
So again, this morning we talked about India. It was a perfect example. The trade deficit in India has been going up, so that's going in the wrong direction, but trade and services has been moving in the right direction. So on balance, the combination of the two, trade in goods and services, in fact, has not been changing much in India just the composition is changing. so that's one pleasant surprise that I would simply submit, that we haven't seen that kind of, um, negative impact.
So absolute levels of trade are still strong. Strong and growing. But, well, I think the composition is changing. So with the US, it's... So the US' trade deficit has gone down.
That has happened. And I think, and China, I think, is trading less with the US and more with other emerging markets. That's one, one
Greg: So there's been kind of a reshuffling of the deck.
Cem: There has been a change in the composition- Yeah of global trade. That, for sure.
And I think, I don't have the expertise, I'm sure those with specialties and sectors would maybe be able to tell us about how sectors are rewiring themselves in terms of the supply change and the supply chains and the dependencies. but that's what I suspect is going on, you know, from what we see globally.
Greg: Okay, cool. All right. Um, I just want to ask you how your team kind of translates all this. So if you think about, there's so many different factors to think about, right? I mean, there's so many moving pieces, and I know you guys are very sophisticated in how you think about all this. But I guess, like, one, one way to think about this, I guess, would be, you know, I'm curious how your team- determines what's a, what's an attractive opportunity versus, you know, or, you know, something that's maybe too risky, or how do you determine that something is not adequately priced?
Like, what's the process that the team goes through, for that?
Cem: I mean, it's the good old we're very bottom up. We're very detail oriented. We really look at every number we can, and so forth. So, and that pursuit, that relentless pursuit of, to use a fancy word, the truth, if you will, allows us to get as far as we can.
And then when we can't go further, we know our distance. We know sort of how much we don't know. How much we can't know. How much information risk we're running.
Greg: Yeah, I mean, you're never gonna have perfect information, right?
Cem: Right. Correct. Yeah. We're never gonna have the perfect... But in some places it's highly imperfect.
And then in some places we have to guess about the direction of policy. So we'll have a view on policy, but we can then check on how things are going through high-frequency data. So we do that in a very relentless way. And the second thing, and I think, you know, what I think is our magic, for lack of a better word, and I know this is a little, you know, maybe too cute to say, but it's our team process where all the entire team is very heavily vested in challenging each other, poking holes in each other's analysis- reading the footnote- looking at every row, to find the flaws in the, whatever. And that process inches us towards conviction. And ultimately what we're looking for is, A, we're trying to protect our downside. We're trying to make sure we can't lose a lot of capital in any investment. and secondly, I mean, again, easier said than done, or there's not that many out there, but we're looking for positive trending. We're looking for countries that are doing the right things.
And it doesn't mean they're doing everything right at the same time, but they're doing some things. And, and I forgot to mention earlier, many countries have
IMF programs. Within their IMF programs they're doing some things better than others. They're gradually making progress on their state-owned enterprise.
Pemex has been a weak link for Mexico for years, but it's gradually maybe improving. Eskom in South Africa the same. Gradually becoming less relevant because the private sector's you know, allowed to grow in the energy sector. So-They're inching.
You know, the weakest, the Pakistans, the Egypt, so many problems, but they're inching in the right direction. And if we find that right trend, it's telling us two things. There's a willingness to move in the right direction, but there's also a willingness to avoid a default situation. Right? So that combination is what we're looking for and we're finding.
Greg: Okay. I love that about your team, the constant debate.
Kind of poking holes in each other's thesis and things like that. It's kind of like makes everybody so much stronger. I mean, just anecdotally, like once in a while, I’ll get CC'd on an email about, you know, the team's debating such and such. They're long. And I'll look back and I'll be like, "Oh my gosh, this has been going on for days," and there's like 20 people are weighing in and it's really interesting to see, just like- That's, that's what we're doing ... the level of detail that is thought about really. And so I guess you, you need that.
Cem: We think we do.
I mean, that's what our investment process is. Everybody has a different investment process. Some have, you know, maybe better machines, better models. The one thing I say when we talk about models is that we do use models. We do all the quantitative work that you can possibly do.
But at least in our view, that only gets you so far because even some, some n- a, a number as trivial as debt to GDP. Well, it really depends. Two, two debts of 50% of GDP don't equal. It depends on the maturity structure. It depends on the cost. If it depends on the currency composition. It depends on the creditor composition.
It, there's all kinds of things there. It depends on whether they have market access and they can easily roll over or not. I mean, it's something that looks easy actually isn't. And so that's why we have this relentless we, we go, we go, we go, and that's how we get to some high level competence if you will.
Greg: Yeah. The human judgment, the experience, the hope that maybe there's still a role for us humans in this world of finance, I think, for some time to come.
Cem: I think so.
Greg: All right, last question for you, Cem. Is there a, if I asked you to kind of boil it down to one message that you wanted to leave investors with today, what would that be?
Cem: Still undervalued. Two components to that. One is everybody's saying our spread's too tight, they're tighter versus yesterday. I think they very substantially still overcompensate for default risk. So spreads, I think, can move lower.
Incidentally, you... I think it was a podcast that we did together, I think in December- where we were asked to make up bold predictions.
Greg: That's right.
Cem: And my bold prediction was spreads will even be lower. And, call it luck, well, they are lower today than when we spoke in December. So I do think there's... that's one element of the still undervalued. The second is there's the high real yield space, where there are many pockets of very high real yields, which we don't think will stay that high. So if we're good enough to find the right ones, we can deliver value. So I do think still undervalued is a valid, a very valid statement.
Greg: Okay. I love it. I think that's a great place to leave it.
You've given us a lot to think about. Thanks for taking us on this tour of what we all understand to be a very big and substantial part of the world, today. So I would thank you. Thank you. I want to thank our listeners and viewers for sticking with us through this conversation. Remember, you can follow Streaming Income wherever you get your podcasts.
That's Apple, Spotify, YouTube, et cetera. And go check out our LinkedIn newsletter, Where Credit Is Due, where we share thoughts from great investors like Cem, across fixed income markets, and beyond. So thanks a lot for watching, and we'll see you next time.
