Why So Many Emerging Markets Are Blowing Up Right Now

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

So Tracy, obviously 2019 for sort of mainstream risky assets like stocks in developed markets has been, it's been a pretty good one.

Tracy Alloway (0:32)

Yeah, I think we're ending solidly up on the year, it looks like.

Joe Weisenthal (0:38)

Yeah, one of the weird things though, I would say, is that despite the, you know, on the surface, everything looks good or growth, I guess, is okay. Stocks are up a lot. There are a lot of things around the world this year that maybe in another year would be seen as more systemic or troubling, all kinds of hotspots and flare ups and protests, basically everywhere you look.

Tracy Alloway (1:03)

Yeah, so as someone who's in Hong Kong and has been for the past six months, one of the really remarkable things about this year is just how fast we've seen social unrest basically spread around the world. I think Hong Kong was the first place where it really cropped up this year, but then we saw lots of protests in South American countries. We saw them in the Middle East yet again.

And a lot of these are still taking place, of course, and it takes a while to sort of get through the impasse with protestors.

Joe Weisenthal (1:36)

Yes, and there's all these protests, you know, they have multiple causes, but each is in some level inextricably tied to something in the economy. Maybe the economy or some economic decision is a spark. Of course, everything is very complex, but all kinds of things related to public subsidies and pension systems and cutting of government support for various domestic programs, they seem to frequently play a part in the unrest. And of course, that feeds into the perception of economic and financial stability everywhere that you see these things flare up.

Tracy Alloway (2:17)

Yeah, I totally agree. There's always an underlying economic trend in a lot of the dissatisfaction that we're seeing around the world.

Joe Weisenthal (2:26)

Absolutely. So today on the podcast, we're going to be speaking to an investor who's been looking at world markets, emerging markets for a long time, knows a lot about how these types of things play out or how they don't play out.

Maybe learn something about the connection between unrest, fiscal problems, financial stress, bond markets, and how investors can think about these situations.

Tracy Alloway (2:54)

Yes, I like this one. And before we start, we should just throw out there that one of the really interesting things about all this social unrest and how it affects the fiscal situation of countries is that when it comes to debt sustainability, we don't really have an overarching bankruptcy regime for the world, right? Every country is sort of different, so you never quite can be sure how these things are going to play out. And each country might experience a very, very different outcome.

Joe Weisenthal (3:26)

Exactly right. So with that intro, I want to bring back Paul McNamara. He's a portfolio manager at GAM Investments. He's been on the show before, one of our favorite people to talk to here. So Paul, thank you very much for joining us.

Paul McNamara (3:43)

Thanks very much for having me.

Joe Weisenthal (3:45)

So interesting year in your line of work, huh?

Paul McNamara (3:49)

Certainly has been.

I think Lebanon is probably the one in terms of social unrest, but international investors always, I think, make good villains for evil capitalism. And I think in terms of sovereign debt, there was a thing in the New York Times recently when a bunch of hedge funds tried to stop Puerto Rico from spending money on sort of protecting the population from storm damage so that they could repay in full the debt that the hedge funds had bought in the 40s. So yeah, it's an interesting place to be.

Tracy Alloway (4:27)

Well, why don't we start with Lebanon? We're going to sort of bounce around from place to place, I think, given that we are talking about emerging and frontier markets. But I'm particularly interested in Lebanon because I remember when I was out in the Middle East, every once in a while when you were talking about debt sustainability with an analyst or when a piece of research crossed my desk, it would say something like Lebanon has a public debt to GDP ratio of something like 150%, which is really, really eye-catching and probably worse than the vast majority of even emerging market countries. And yet every analyst, every research note would kind of swat that away as not really relevant for the time being.