The Exchanges

Q Which two people have had the biggest impact on your professional life?

A The simplest answer would be my colleagues, Ben and Jakob. And I know that sounds maybe a little bit cheesy, but they put together our team, and they decided that I should be part of that team back in 2013. And it is impossible to imagine anything that has influenced my professional life more than that single decision that they made back then. Being part of this team for 10 years Which I think is a very unusual thing anyways. Going back further, my thesis professor at university, Klaus Lester was his name. He argued that I would probably find it more fun and rewarding to go into the financial sector than to deep dive into academic research and do a PhD because I was considering that. He suspected that would be a little bit of a lonely endeavor for me, so he at least brought me to the private sector, and that was pretty important as well, I think.

AI assessment note: “The simplest answer would be my colleagues, Ben and Jakob.”

Q So when you saw the first 20 years, academia, central bank, and then the sell side, when it came time to move to the buy side, how did you decide What area of the emerging markets you wanted to focus on?

A Well, the easy answer was that the opportunity that arose in 2013 was very unique, and you could say it could have been any EM asset class, and I would probably have jumped to it because it was about analyzing EMs. My now fellow colleagues, Bent and Jakob and Sweeney, they were put together to set up a team from scratch to run an EMD hot currency strategy. So that position, I think in hindsight was perfect in the sense that hard currency for me is one of the more analyzable asset classes of EM at the country level. And that is really what interests me is what happens at the country level. I'm not that motivated by the nitty gritty of understanding what a central bank does next week, how inflation moves. I like the bigger drivers of risk premium of countries, especially I like to look at policies and what are the consequences of economic policies. And those are some of the key drivers in hard currency. And it's a very fundamentally oriented asset class.

AI assessment note: “hard currency for me is one of the more analyzable asset classes of EM”

Q I'd love to turn to how you go about doing it. When you have a university set of 70, 80 different countries to look at, what team do you have in place to be able to cover the world?

A This is probably the question that we've been facing the most when meeting institutional investors, because they look at our team, and we are a team of four, that back in 2013 was put together to design a hard currency strategy from scratch. And the way we chose to set it up was somewhat, I would say, unusual. Where we have Jakob and Bent on the portfolio management side, Risk management side, liquidity management, and responsible for picking bonds within countries. And then we have myself and my colleagues on the country research side. So now you already have the number of people looking at countries, and you still have 80 countries to look at. We realized back then that we need to build some tools that can help us. It is not feasible to cover 80 countries ad hoc. It's not feasible to know what's going on in all these 80 countries all the time. That thinking where you think that you understand what's being priced in a country, and then you have to form an opinion about what's going to happen in the next one, two, three months, that is not a feasible approach with our setup. So we decided back then that we will try to build some tools that can guide us in systematically assessing sovereign credit risk. And that sounds very fluffy, I would say. But what it basically means is that can you find some data out there that can help you identify what is important for sovereign credit r…

AI assessment note: “we are a team of four, that back in 2013 was put together”

Q When you bring all this work together, how do you construct your portfolios?

A So I have to disappoint you there a little bit, because the way we have designed our team and set up the investment process, I don't construct the portfolio. I give all the feedback into views of countries. And then Ben and Jakob, they have the overview from Serene and myself in terms of the country exposure and the kind of overall risk we want to have in the portfolio. They have to take into account that overall risk. They have to take into account liquidity. And most importantly, I would say they spend a lot of time making sure that portfolio is very diversified. This is core to our strategy. Our strategy is characterized by many positions and not high conviction. We've seen plenty of accidents in EM the last 10 years, so putting all your eggs in a couple of baskets has never been our approach. We tend to have relatively measured bets. As an additional characteristic of the portfolio is that we don't take global macro bets, so we try to generate an all-weather portfolio In the sense that you don't have single risk factors that will significantly influence your alpha. We believe that part of our analytical framework is a statistical exercise. It also means that you have to have the law of large numbers to be on your side. High conviction doesn't come from that analytical approach. So we rather want to have many positions. I haven't even traded a bond in my life, which most peo…

AI assessment note: “the way we have designed our team and set up the investment process”

Q How'd you get your start as an investor?

A So I started off on sell side. So I covered mainly China, Latin America, or Swedish commercial bank. But in terms of getting closer to the investment side of things, I did a short internship at Goldman. That was between my bachelor and master's degree, and that was the initial teaching of my interest in financial markets and emerging markets, because I worked for Jakob Novy, and I was back then head of the CE department, Economic Research of Eastern Europe. And I saw the power of convergence of developing countries. They were basically looking at the Romania's of this world and trying to figure out how being a part of the EU and potentially the Euro area, how that would lead to convergence that we've seen in Southern Europe as well. And you saw some of the implications investment wise in terms of interest rate convergence and the amount of wealth being generated in those processes, of course, piqued my interest quite a lot. I spent 10 years in the central bank looking at EM, the Danish central bank, and then finally, in 2013, I moved to the buy side and decided that putting my hand on the plate instead of just writing research was the next step that I really would like to take.

AI assessment note: “in 2013, I moved to the buy side and decided that putting my hand”

Q At that asset class level, what are the drivers of return as you look at how you're going to generate returns in this space?

A So total return comes from a combination of carry and potential capital gains. So in the hard currency, the underlying interest rate is the U.S. treasury yield. And it's a relatively long duration asset class, so duration a little less than seven years. That means that you can imagine what kind of volatility you've seen in total return in that asset class, just from the basic fact that you've seen massive volatility in U.S. Treasury yields this year. So you have a developed market component of your total return, which is movements in U.S. Treasury yields and the carry that you get from that if nothing changes. We are not focused on that. We focus entirely on the EM side of the asset class. So we focus entirely on the risk premium, the spread that you get on top of US treasury yields. And we focus entirely on figuring out where that is going at the country level. So if Kenya trades at a spread of 600 to US treasuries, my job is to figure out if that is fair or not. And if it's not, then to take a position on it. So you have these two components, a DM component and an EM component.

AI assessment note: “total return comes from a combination of carry and potential capital gains.”

Q What did you learn from that early academic research?

A Well, I learned that if you make the wrong policy decisions, it can have huge implications. These countries had fixed exchange rates, and they opened up and attracted a lot of capital. They had a very long period of high growth. So in the short term, those policies had huge potential. You saw a lot of catching up in many of the Asian economies, including Thailand, Indonesia, You saw the implications of financial markets speculating in these economies. You saw huge short-term capital flows being channeled into property sectors and other investments that didn't really generate hard currency in the long term. And eventually, if you don't accumulate FX reserves, And you have a lot of risk taking, and you assume that you have fixed exchange rates, then there is a risk that you overshoot, and that's what happened. Then immediately, when you started speculating about the sustainability of those fixed FX regimes, that's when it cracked, and then you saw the downside of it. So I think I learned from that, that financial markets are very powerful. Expectations can be self-fulfilling, and if you make the good policy choices, you can have 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 brief moment.

AI assessment note: “Well, I learned that if you make the wrong policy decisions, it can have huge implications.”

Q When you look at the perspective of, say, democratic to autocratic governments, have you found in your work that a certain type of political regime is better or worse for the credit risk of the sovereign over time?

A Systematically, I'm not able to give you a clear answer on that. It is very clear that in most cases where you have less democratic countries, you will also find that across the board, governance measures, institutions, regulatory quality, rule of law, in most cases, they are a lot lower. Which means that sovereign risk is higher. What is complicated is that political stability is sometimes very high when you don't have elections. Now we're talking about a small subset of countries in the investment universe. But what that means is that you actually have a very high degree of political stability. And we all know that political change comes with uncertainty. And this is not just an EM thing. It's a US thing. It's a European thing. That the political cycle creates uncertainty. So I would say there are pluses and minuses in terms of political systems from a credit risk perspective. In theoretical terms, if you have the benevolent dictator, the ultimate dictator allocating resources efficiently, making all the right decisions with a high degree of willingness to pay, that would be a very low risk setup, but at the same time, it would not be a democracy. Unfortunately, autocratic regimes are not the benevolent dictator in any way. There is a lot of risk with it, and I think we've seen many cases in the past, and luckily, some of these countries like Zimbabwe, et cetera, are not in o…

AI assessment note: “So I would say there are pluses and minuses in terms of political systems”

Q Where are there opportunities that you're most excited about today?

A We've come out of three years of unprecedented shocks. Covid was the first unprecedented shock, and then very tragically, we now also have wars back in terms of the overall global market picture with Russia invading Ukraine and geopolitical risks elevated in many places. So it is an environment, I think, where you have lots of winners and losers. If you look at just a simple measure of standard deviation of spreads in EM, it is almost at historical highs. So picking the right winner and loser has become much more challenging and much more important. So when you ask me about where are the exciting opportunities, I would have to say that if you just look at it in ratings buckets, You have a lot of high-rated IGE countries, some of them in the Middle East, that has benefited from a period of high commodity prices and the fact that financing is not an issue for these countries. Given that many of the safe IGE countries are trading at very low spreads, many of the opportunities are in the gray zone area, in the lower-rated names, because that's really where you could Potentially see this very unique characteristic of our asset class, which is when you're shot out of market financing, or you're somewhere in between, it's too costly, you access lower cost financing, because you promise to make changes that ultimately will make credit risk go down if you implement them successfully. So…

AI assessment note: “many of the African countries like Ivory Coast, Senegal, Benin”