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You're listening to Strictly Business
Podcast with Lindsay Williams.

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With me is Peter Kent, Co-Head of Emerging
Market Fixed Income at 91 in Cape Town.

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We're going to talk about the following.

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The headline is, Reframing Fixed Income,
the old rules are no longer fixed.

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Peter, welcome.

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And are you telling me with a straight
face that the old rules that you've

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learned over the decades, I think,

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for fixed income are now obsolete?

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there's a blurring of lines.

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Fixed income is no longer fixed income.

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Is that what you're saying?

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Hi, Lindsay.

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Thanks for having me.

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I am saying that, but can I maybe add a
little, a layer of detail of it?

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Yes, please.

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So I think there's a couple of
observations.

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The first one, which we've been talking
about for a few years now,

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is this concept of the EMification of DM.

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So the blurring of lines between the way
that emerging markets have been behaving

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and

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trading and how developed markets have
been behaving and trading.

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That is one sort of blurring of lines that
we've been talking about for a while.

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And then the sort of more recent one is
the nature of how

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developed markets fixed income has been
trading.

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in relation to equities, in relation to
cyclical risk.

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It just hasn't been behaving defensively.

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And we can get into some detail on both of
those.

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Just before we get into that detail,

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are you saying that developed market bond
markets are no longer a safe haven?

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And that's been evident.

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I mean, we've needed safe havens over the
last few months.

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You're saying that they're not a safe
haven.

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And in the old days, as a layman, I used
to think, well, if equities are going up,

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then bonds are going down.

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No.

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the case, Peter.

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Yeah, so that is the exact point.

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So the point is this, you know, in my 25
odd year career of being in the bond

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market,

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when you look at the nature of economic
shocks that we have to deal with, they've

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been demand shocks.

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So this is a little bit economically
quirky.

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But think about recessions, for example,
think about the GFC or previous

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recessions.

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What tends to happen is business
investment tends to go into contraction,

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people consume less.

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So you have what we call a demand shock on
the economy.

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That demand shock is relatively easier to
model as an economist,

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and it's relatively easier to deal with as
a policy maker,

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because what happens is as that sort of
cyclical growth starts to deteriorate,

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because demand is coming down, inflation
comes down at the same time.

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So as a policy maker, you just need to
stimulate fiscally or from a monetary

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perspective.

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And the markets can deal with that in a
way where cyclical assets like equities

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have a tough time.

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But because inflation is coming down,
bonds have a good time.

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So they help diversify.

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Now, what we've had over the last five or
10 years is more supply shocks.

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So think about Brexit.

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You know, that started in 2016.

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Think about the Russia-Ukraine war where
we essentially had a whole bunch of global

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commodities and agri-products.

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ripped out of the global economy.

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You had trade also impacted.

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We've had COVID.

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I mean, that was the ultimate supply shock
where the world had to shut down.

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So all of the usual logistical and trade
lines were closed.

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And then more recently, we've had tariffs,
which is a big supply shock.

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So what happens in a supply shock is
growth goes down.

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But because there isn't as much supply as
there was in the past, inflation remains

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sticky.

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So as your stocks and your more cyclical
part of your portfolio struggles,

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the fixed income part of your portfolio
doesn't help you nearly as much because

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inflation doesn't come down.

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So that is one of the key differentiators
in the last five years, I would say, to

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the previous 20 of my career.

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We'll talk about the consequences, rather
the future, at the end of this chat.

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But all the shocks you've talked about
have been exacerbated in the first few

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months of this year, notably with tariffs,
which you've mentioned.

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but also The way that the world conducts
itself, the world order, you say, has been

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turned on its head.

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What do you mean by that?

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I mean, I know what I think when I think
of the world order being turned on its

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head.

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The relationship between China, the United
States, Europe, everywhere seems to be

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completely different.

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And that obviously affects markets.

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Yeah, I think I have to tread carefully
here and stay away from political

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statements.

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But it's plain for everyone to see.

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You know, we had a post-Bretton Woods.

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economic and financial architecture that
essentially meant that America would guard

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all of

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the sea lanes, would guard all of the
trade.

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America would consume global products,
would run a trade deficit,

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would essentially export the industrial
sector to the rest of the world.

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And in return, the rest of the world would
then invest in U.S.

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assets.

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U.S.

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bonds would help them sort of fund this
endeavor.

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That has been a financial architecture and
a financial system that existed for most

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investors' memories.

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That is getting torn up at the moment.

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You know, the Trump administration is,
from an imbalance perspective, you know,

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they think the kind of trade deficits that
they're running are ultimately

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unsustainable for global trade.

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So they are trying to create a more
sustainable world.

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sustainable global trade environment.

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And from a national security perspective,
you know,

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they feel vulnerable that they have to
rely on the rest of the world for quite a

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lot of their manufacturing.

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I think COVID was a shock to the system
where there was a medical emergency and

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they couldn't provide what they needed.

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So the U.S.

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is trying to rebalance trade, is trying to
get the industrial sector spurred on shore

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again in the U.S.

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so that they can in their opinion,

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improve the sustainability of global trade
and from a national security perspective,

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look after themselves and make sure that
they can manufacture whatever they need as

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a country.

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That is essentially the global trade and
financial system turning on its head.

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Yes, and of course, that means that
traditional defensive property has come

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into question.

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So somebody constructing a portfolio, for
example, and saying, well, I want this

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risk via equities and whatever it is.

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But of course, I need a defensive quality,
whatever percentage they assign.

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That percentage may have to be called into
question going forward.

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Lindsay, I mean, it's a really interesting
point because, you know,

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we started this by saying that developed
market bonds haven't been as defensive as

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the past.

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Something that's new over the last couple
of months is we've spoken about the U.S.

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administration and changing policy.

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The result of that is there's policy
uncertainty and there's credibility

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questions,

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and the dollar has been weakening in
environments where it should be

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strengthening.

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You know, normally when there are
incidences of economic shocks, normally

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when there's geopolitical shocks,

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everyone goes running into the arms of the
dollar.

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That has not been the case for the last
two to three months.

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So it's not just developed market bonds
that aren't behaving defensively.

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a lot of asset classes that we normally
use as defensive assets places to hide.

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There's question marks over.

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So what are the implications of that?

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That doesn't mean that you should sell
your developed market bonds en masse or

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get rid of all of your dollars.

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It just means that the nature of risks
have changed.

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So owning a 30-year bond in an environment
of supply shock, you know,

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has interest rate risk that you probably
underestimated.

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So you probably need to be diversified
more than you've been in the past, and you

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probably need to own.

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more of a basket of shorter dated bonds
and longer dated bonds.

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And equally, you used to have a
significant portion of your portfolio in

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dollars as a defensive allocation.

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You need to think about Swissy.

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You need to think about yen.

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You need to think about euro.

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You need to think about some emerging
market currencies, Asian emerging market

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currencies.

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Taiwanese dollar has been unbelievably
strong over the last couple of months.

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So all of this points to an environment
where you need to diversify on dimensions

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that you hadn't really thought of

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before.

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That dollar factor is so, so important.

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It wasn't that long ago, Peter, that I was
talking to currency analysts and we were

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talking about the dollar almost reaching
par with the euro.

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Now I'm looking at a euro dollar of, I
don't know, 115, something like that.

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And if you see the way that markets are
reacting to the weaker dollar, i.e.

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gold, that's a great example.

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It's just one of the factors that's
driving gold.

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But also, the weak dollar is sort of
taking away the super risk reputation.

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of emerging market debt.

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Is that the case?

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I'm not going to join the dollar pylon.

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There seems to be, you know, there seems
to be a lot of market commentators,

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investors with a smile in their face
cheering on the demise of the dollar.

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I'm not one of those people.

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I think when you look at what the dollar
has done over the last decade post the

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global financial crisis,

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it's pretty much moved one way in a rally.

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Now, why is that?

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You know, in an environment where balance
sheets were being constrained after the

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global financial crisis,

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nominal growth was in short supply across
the globe.

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You know, there was essentially fiscal
policy, balance sheet policy was

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throttling the global economy.

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And the only place that could grow
healthily was the U.S.

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You know, through big tech, they could
innovate, they could create nominal

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growth.

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So the U.S.

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cannibalized capital for the last decade
for good reason.

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People were putting it there because it
had good return prospects.

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That is going to change going forward.

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The prospect of supply chains being
rewired, the global order being put on its

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head, means there's going to be a lot more
investment,

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there's going to be a lot more
construction.

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Unfortunately, there's going to be more
investment in defense, which is ultimately

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an industrial product.

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So nominal growth is going to be higher
than the past.

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Equally, inflation is going to be stickier
for the points that we've discussed.

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So...

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nominal growth will not only be a U.S.

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phenomenon for the next decade.

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It's going to be shared more widely.

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So capital will immediately be shared more
widely.

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That is an environment where the dollar
doesn't do what it's done over the last

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decade.

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That is very important for emerging
markets because emerging markets are

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ultimately measured in dollars.

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So the denominator is in dollars.

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You measure a dollar return.

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So when the dollar is rallying, that's a
high hurdle.

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And then obviously the dollar.

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is a source of liquidity for a lot of
emerging markets.

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A lot of emerging markets borrow in
dollars, they trade in dollars.

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So if the dollar is strong and in short
supply, that acts as a handbrake to

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emerging markets.

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So the dollar shadow, I call it, which is
a grinding,

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rallying dollar for the last decade, this
has been a shadow for emerging markets.

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That shadow is probably gone.

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I don't think, I'm not sitting here saying
that the dollar is going to go to hell in

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a handbasket.

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But, That shadow that emerging markets has
had to deal with for the last decade is

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surely going to change for the next
decade.

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That's quite important.

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Peter, you're co-head of Emerging Market
Fixed Income at 91 in Cape Town.

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So you've got to get on your soapbox now
and talk about emerging market debt as a

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diversifier.

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You make the point in your piece that
there's never been a better case for

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diversification.

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So please put that case.

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Lindsay, I would like to think I never get
on a soapbox.

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box.

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Half of my career has been spent in
developed markets and half of it has been

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in emerging markets.

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I like to consider myself as a balanced
representative of all bonds, to be honest.

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So from a balanced perspective, I think
this point of diversification is very,

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very important.

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Not because you need to pick the winners,
but a global order that's turned on its

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head,

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an environment where inflation is going to
be sticky because the nature of shocks.

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have changed to supply shocks means it's
an environment where you actually need to

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try and avoid the losers.

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So you should be diversifying far and wide
to preserve capital.

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The other point as well is when you look
at markets across the globe, values are

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generally stretched.

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And that's probably the same for most
cyclical assets.

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So the next decade, the next five to 10
years, you're not going to get massive

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capital uplift either.

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Not like we've had over the last decade.

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You're probably going to have to get much
more of your returns from income.

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So an environment where you need to
diversify more, where traditional asset

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classes are not trading as you expect,

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EM really does appear as a place where you
should consider.

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It should be at the global investor table.

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And I think what frustrates me as a
balanced person looking at EM and DM is EM

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gets a bad rap,

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whereas EM policy has actually been quite
orthodox over the last five or 10 years.

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You know, we had a...

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EM had a tough time around the taper
tantrum.

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And on average, we got our act together
since then.

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So EM really should be at the global
investor table, not as a majority holding

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in a portfolio,

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but certainly something in a new world
when the rules have been redefined, it

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needs to be there as a diversifier.

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It's very interesting indeed.

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And I'm going to give you the last
question now.

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And it's quite a difficult one, even for
you.

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Is this just a once-off?

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I mean, you said you've been 25 years in
the market and you've learned the way to

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do things and the way things behave.

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Are you saying that potentially the old
ways are now gone and this is not a

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once-off and this is how

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things are going to be in the foreseeable
future?

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I think when you look at the underlying
reasons behind what I'm saying, I don't

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think it's a once-off.

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It feels like a multi-year.

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decade thing you know so so supply chains
being rewired um

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supply shocks and growth and inflation
moving hand in hand this is a phenomenon

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that's happened multiple times likely to

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be uh repeated it's just an environment
where the underlying factors suggest that

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this

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is going to be a multi-year

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type thing nominal growth inflation being
sticky um you know i think

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When you looked at the global financial
crisis and you saw the way that regulators

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and everyone dealt with that,

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everyone essentially contracted balance
sheets.

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That was a force that then played out for
the next decade.

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More investment, the world changing,
supply chains changing, the nature of

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shock changing.

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That is not a temporary phenomenon.

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That's something we're all going to have
to deal with over the next five to 10

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years.

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Peter, a fascinating subject to
brilliantly describe by yourself.

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Thank you very much indeed.

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Peter Kent is co-head of Emerging Market
Fixed Income at 91 in Cape Town.

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