Michael Hasenstab is one smart guy. He holds a Ph.D. in economics and is the portfolio manager of the Franklin Templeton Global Bond Fund. A strong believer in on-the-ground research, he travels extensively, speaking with finance ministers and bankers of various countries. His results are telling: the Fund was awarded ‘Best Global Bond Fund’ by both Lipper and Morningstar in 2008.
We caught up with him to find out what opportunities he sees in the fixed income universe.
Opportunity 1: Indonesia
“I think there are some pretty interesting opportunities in Indonesia,” says Michael, “one of the encouraging things about Indonesia is the proactive nature that policy makers are taking to build a war chest to deal with the contagion effects of this global crisis.”
Michael is especially drawn by Indonesia’s response to the financial crisis, saying, “instead of just sitting back and saying, 'it’s not our fault', Indonesia is being very proactive, it’s going out and raising capital, reducing reserves. It’s seeking new facilities through the Chiang Mai Initiative to get access to swap lines should they need more resources, they also have a government that’s following a very prudent fiscal approach, they are not overspending but they are trying to spend where necessary to help alleviate the effects of the recession.”
Overall, Michael believes the long-term prospects for Indonesia remain bright. “I think Indonesia has suffered sort of unjustly, whether we talk about sovereign credit spreads, its currency or widening local interest rates, considering where Indonesia’s long term fundamentals are now. A place like Indonesia can be volatile certainly in the short term, that’s why we have a diversified portfolio in Asia, but I think in the long-term, Indonesia will present some pretty good investment opportunities.”
Opportunity 2: Mexico
Michael believes that concerns about Mexico’s sensitivity to the US economy are overdone, saying, “I think the issue with Mexico is that not only has the currency market equilibrated to that dynamic, it has started to price in levels that assume Mexico is going to face some financing crisis, a balance of payments crisis, a solvency crisis, and that we think has gone too far.”
Similarly, Michael believes Mexico’s fundamentals remain strong. Mexico, he notes, “(has) reserves much in excess of that potential capital flight and so they have the cushion to actually manage this and have been proactively accessing international facilities as well, so things could continue to be choppy for the next couple of months but again, way overdone relative to fundamentals.”
Michael holds the view that “were Mexican Central Banks to more proactively cut rates, which I think they need to do, because growth is so weak, the market would actually reward Mexico for that proactive move and probably you would see some more stability over time and potentially, even appreciation. It’s hard to know for sure, but I think what underlies that is that Mexico’s balance of payments is still actually solvent and so they can afford to have some lower interest rates and still have their debt service condition supportive of the stronger currency.”
Opportunity 3: Russia
Michael acknowledges the complexity of investing in Russia, saying, “we need to sort of break apart Russia, there is the government sector, there is the top-tier corporate sector, and then there is kind of the lower-tier corporate sector. I think within the smaller, less capitalized, highly indebted lower-tier companies in Russia, there is going to be some big problems and probably a lot of defaults. But if we look at the top-tier companies, they are actually pretty well capitalized and have either explicit or implicit backing by the government.”
Michael sees an opportunity in Russian sovereign debt. “Pure government debt, external debt is very, very small, and this is one of these situations where the market is saying there is a 50% chance they default on the government debt and we would evaluate that to be much lower. So, we think Russian sovereign debt, dollar-denominated debt is a good opportunity.”
Related to Russia are concerns about a crisis brewing in Emerging Europe. Michael however, believes such concerns need to be more specific, saying, “I think the market seems to be talking about Eastern Europe like it’s one country and it is so diverse. The situations going on in Romania or in Bulgaria are very similar to what happened to the Asian crisis back in the late 90’s and those situations are very dire and they probably are going to be in a lot more pain whether it be in currency or potential defaults.”
One country in Emerging Europe catches Michael’s eye. “Poland had a lot of foreign direct investment that came into their economy as opposed to a lot of hot money, so when capital flows that came into Poland, it was actually real plant and equipment, building operations in Poland for very good reasons, they had competitive labor force, they had low taxes, they had skills, and they had low wages, and that is still present in Poland. So long term, I think there is a lot of potential that the Polish economy has.”
Ask The Experts: Michael Hasenstab On Bonds in 2009