Dec 14, 2023 · 43m · capital-allocators
Thomas Haugaard - Hard Currency Emerging Markets Debt at JHI (EP.356)
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In this episode of Capital Allocators, host Ted Seides interviews Thomas Haugaard of Janus Henderson Investors to explore the structural mechanics, systematic credit modeling, and market misperceptions defining the $1.3 trillion hard currency emerging market debt universe. Haugaard outlines how empirical country-level analysis, institutional governance metrics, and disciplined portfolio diversification enable active managers to exploit market inefficiencies and generate consistent alpha.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 13.4% of the talking time here. How this is scored →
Ted as informed peer 2.2 Guest teaching 5.2 Guest disagreement 0.5 Ted pushing back 0.0
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 13:50 Pushing back against standard EM media narratives
Thomas criticizes mainstream media and investor perception for fixating on headline-grabbing crisis countries like Russia and Venezuela while overlooking substantive reforms across middle-income emerging nations.
Hardest push from Ted ▶ 26:59 Ted presses on regime type versus sovereign riskTed directly challenges Thomas to state whether empirical data demonstrates that democratic governments are structurally safer credit bets than autocratic regimes.
Biggest teaching moment ▶ 22:00 Detailed explanation of market behavioral lag in credit rating cyclesThomas explains in depth why markets systematically overprice improving stories by 1 to 2 notches and over-penalize deteriorating stories, revealing the quantitative edge of their 1.5 to 2-year forward-looking model.
Ted holds their own ▶ 26:59 Ted framing the political economy dilemmaTed shows sharp macroeconomic insight by zeroing in on the intersection between political regime types and sovereign bond default dynamics.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Guest Overview and Capital Allocators University Announcement | 2 | 4 | 0 | 0 | Ted introduces Thomas and sets up the conversation with a high-level opening question about Thomas's academic beginnings. Thomas explains the economic mechanics and policy mistakes behind the 1990s Asian financial crisis. | |
| Career Path to Buy-Side Investing and Focus on Hard Currency | 2 | 3 | 0 | 0 | Ted asks standard career-progression questions. Thomas outlines his transition from the Danish Central Bank and sell-side research into fundamental country-level sovereign analysis. | |
| Fundamentals and Composition of the Hard Currency EMD Universe | 2 | 6 | 0 | 0 | Ted asks for a breakdown between hard and local currency universes. Thomas delivers a dense breakdown of index weights, benchmark compositions, and country diversification versus US High Yield. | |
| Drivers of Return and Sovereign Credit Risk | 2 | 5 | 0 | 0 | Ted prompts on drivers of return and credit risk. Thomas cleanly separates US Treasury duration beta from country-specific spread risk and frames credit risk around ability and willingness to pay. | |
| Market Misconceptions and Alpha Opportunities in EMD | 2 | 5 | 1 | 0 | Ted asks about common misconceptions in the space. Thomas challenges the negative media bias that fixates on serial defaulters like Venezuela or Russia while ignoring stable, reforming middle-income countries. | |
| Quantitative and Qualitative Modeling of Sovereign Credit Risk | 2 | 8 | 1 | 0 | Ted asks how a lean team of four covers 80 countries. Thomas delivers an extensive masterclass explaining why modeling defaults and spreads failed, and how predicting ratings cycles 1.5 to 2 years ahead captures persistent market mispricings. | |
| Key Risk Factors: Fiscal Metrics, Governance, and Political Regimes | 3 | 6 | 1 | 0 | Ted asks whether autocratic or democratic regimes correlate with better sovereign credit risk. Thomas provides a nuanced breakdown contrasting short-term political stability with long-term governance decay. | |
| Case Study in Market Inefficiency: Costa Rica | 2 | 5 | 1 | 0 | Ted asks for a concrete inefficiency example and portfolio construction details. Thomas uses Costa Rica's fiscal reform as a case study and openly reveals that he focuses on research and does not trade bonds. | |
| Current Market Outlook: China, Attractive Credits, and Macro Risks | 3 | 6 | 1 | 0 | Ted brings up macro risks and China. Thomas clarifies that their strategy holds zero direct exposure to China purely on valuation grounds and details high-spread opportunities in IMF-supported African issuers. | |
| Key Influences and Lessons on Empirical Analysis | 2 | 4 | 0 | 0 | Ted asks about major intellectual influences. Thomas highlights Hans Rosling's empirical mindset in Factfulness and Jerome Booth's contrarian framing of risk pricing in EM. |
Statements from this episode (20)
Haugaard: Capital Flows Into Emerging Markets Revolve Around Self-Fulfilling Expectations
“Financial markets are very powerful. Expectations can be self-fulfilling, and if you make the good policy choices, you can have a slow and steady catching up, and if you don't, it will be a bumpy ride, and you can have capital flows coming in and out in a very…”
Haugaard: Hard Currency Is the Most Analyzable Emerging Market Asset Class
“Hard currency for me is one of the more analyzable asset classes of EM at the country level.”
Haugaard: Hard Currency EM Debt Is a $1.3 Trillion Asset Class
“Hot currency as an asset class constitutes around 1.3 trillion USD. It's very comparable in size to the US high yield market.”
Haugaard: Over 80 Countries Now Issue Hard Currency Emerging Market Debt
“You find more than 80 countries issuing hot currency. And that number of countries has more than doubled in the last 20 years.”
Haugaard: Top 10 Countries Make Up 42% of EMBI vs. 86% of GBI-EM
“I think if you take the top 10 countries in the MB, the hard currency index, they constitute around 42% of the total index. If you take top 10 names in the local currency index, it's around 86% of the index.”
Haugaard: China Constitutes Only 4.5% of the Hard Currency EMBI Benchmark
“In the hard currency investment universe, and in the MB, there's probably around 4.5%. So China is a much smaller part than it is in most asset classes”
Haugaard: Hard Currency Emerging Market Debt Averages Under Seven Years Duration
“And it's a relatively long duration asset class, so duration a little less than seven years.”
Haugaard: Janus Henderson Ignores Treasury Yields to Focus Solely on Spreads
“We are not focused on that. We focus entirely on the EM side of the asset class. So we focus entirely on the risk premium, the spread that you get on top of US treasury yields. And we focus entirely on figuring out where that is going at the country level.”
Haugaard: Middle-Income Emerging Markets Have Adopted Developed Market Policy Frameworks
“There are plenty of those where you've seen a significant transition to policy setups that are very similar to developed markets, and that is not something that reaches a lot of headlines, but it is something that has been happening in the past 20 years, I wou…”
Haugaard: EM Debt Markets Price Sovereign Ratings 1.5 to 2 Years Ahead
“The dynamics of that relationship is market is forward looking one and a half, two years. And this is a stylized fact. There are plenty of deviations from that depending on specific economic development phases. But in general, the market is forward looking by …”
Haugaard: Markets Overprice Improving Sovereigns by One to Two Rating Notches
“At the end of a positive rating story, we almost always found that the market is pricing one to two notches too much of a good story. So when credit risk is actually not going down anymore, there's a tendency for investors to stick with a good story for a litt…”
Haugaard: Janus Henderson Model Explains 85% of Sovereign Rating Variation
“So we built a statistical model that identifies what explains ratings. It identifies around 85% of the entire variation.”
Haugaard: Regulatory Quality Is the Second Best Predictor of Sovereign Ratings
“And the second most important variable to understand where ratings are going is regulatory quality. That captures the perceptions of the ability of the government to formulate and implement Policies and regulations.”
Haugaard: Autocratic Regimes Score Lower on Governance and Carry Higher Risk
“It is very clear that in most cases where you have less democratic countries, you will also find that across the board, governance measures, institutions, regulatory quality, rule of law, in most cases, they are a lot lower. Which means that sovereign risk is …”
Haugaard: Lack of Democratic Feedback Mechanisms Gradually Builds Sovereign Credit Risk
“You do see that time corrupts, and a lot of the feedback mechanisms that you have in democracies, they disappear. They don't exist in the long term, and I think that's the biggest challenge. It's not you want to Two-year sovereign credit risk assessment that w…”
Haugaard: Janus Henderson Identified Costa Rica Mispricing Ahead of Major Rally
“For several years, we had a very strong rating compared to where the rating actually was, and we could see that the market was not pricing that rating, and part of the reason for that was because they had some short-term challenges in terms of approving issuan…”
Haugaard: Janus Henderson Avoids Concentrated High-Conviction Bets in EM Debt
“Our strategy is characterized by many positions and not high conviction. We've seen plenty of accidents in EM the last 10 years, so putting all your eggs in a couple of baskets has never been our approach. We tend to have relatively measured bets. As an additi…”
Haugaard: I Have Never Personally Traded a Bond Despite Managing EM Debt
“I haven't even traded a bond in my life, which most people would probably say is unusual when you've invested in EMH currency for 10 years, but I have very good guys who know that much better than me.”