Global Macro Investing in Emerging Markets Debt Asset Classes

Michael Cirami:
Thank you for having me. It's really great to be here.

EMS:
Absolutely. So to kick off the conversation, tell us a little about the firm and how you got to where you are today.

MC:
Sure. Yeah, so it's been kind of a wild 20 years, I guess, in the industry. I started my career in 2003 when I was hired to find investment ideas in central Eastern Europe, the Middle East, and Africa. And I have to admit, I didn't know much about what I was doing back then, but I had a great boss who helped me not get in trouble and I had a really nice mentor in that. And then in 2021, I left my firm and joined Artisan Partners with two colleagues and we built out a new investment team and started managing money just about a year ago now.

EMS:
Great. So given that, I'd love to hear about your outlook for EM debt across various asset classes.

MC:
Yeah, so we look primarily at the sovereign debt markets within the emerging market space, but also do some corporate investing. And emerging market debt, it's a very interesting asset class in the sense that there's dollar denominated debt, there's local currency debt that would be, think about a bond issued by the government of Mexico in the Mexican peso. And so there's a lot of different dynamics and sort of crosswinds within the asset class. And the outlook right now I think is perhaps similar to the outlook for many assets in that it's just quite a challenging environment. I mean, there's so many different uncertainties that is causing a ton of volatility.

And so we're seeing those types of gyrations in the EM debt space over the course of the last year. And the way I broadly think about it is you get these various episodes where the babies are being thrown out with the bath water and we're coming in trying to save the babies and select good investments. And we're kind of in the middle of one of those moments where a lot of things have sold off in our space, but at the same time there's a number of good investments. Primarily the way I think about this is countries that are either doing good things or set to do some real positive things. Happy to talk more about that.

EMS:
Yeah, absolutely. Mike, it is indeed a very interesting time right now with everything going on in the markets. So I'd love for you to elaborate more on some of the specific opportunities you see in your area.

MC:
We tend to focus on macroeconomics and political analysis. So if I think about emerging market and debt investing, we're looking for countries to improve. So you want to have risk premium kind of shrink within a country. And to me the most important thing is policy. So is a country putting the right policies in place or is it moving in the wrong direction? And a big picture, you could think of like Venezuela or Argentina, which are two classic cases of countries for the most part that moved in the wrong direction and you pretty much want to steer clear of that. And then there's many countries that have gone through meaningful reforms over the last couple decades that have moved in basically the right direction. And you could look at Central Europe as a place that has exhibited that, like Poland, Czech Republic, two countries that have really moved up this sort of development scale.

And so today when we're looking at the landscape, we're looking for places that are closer to the beginning of their journey of development and we see a mixed universe out there. But some of the places that are quite appealing and attractive would be maybe things that are a little bit off most people's radar like Uzbekistan and Kazakhstan in Central Asia. We see countries in the Caribbean, like the Dominican Republic, that are doing quite interesting things and countries throughout Africa that are also may be in a little bit of a challenge spot, but pivoting towards the right direction. And I'll throw out Kenya as one which had an election last year and a change of leadership. So our approach is really to kind of look wide and far for opportunities and it's these types of reforming countries that really get us the most excited.

EMS:
Great. Mike, on the other hand, as I mentioned, it's quite a challenging environment and I welcome your thoughts on some of the biggest challenges you're facing and how you're circumventing them.

MC:
I'm a dead investor, so I'm always worried about things, I'm not really fun to be around in that respect. So I do have my wall of worry. I think about all the geopolitical risks that we're facing. Obviously there's Russia's war in Ukraine, the geopolitical flareups that are happening with respect to the US and China. So those conflicts reverberate throughout EM and they often play out in a quite negative way. We've obviously seen inflation be a problem. It's pretty much a global phenomenon with the exception of a handful of spots. And this has been quite a concern for us as well. And then tightening of monetary policy in the US and the ECB have also really just provided additional challenges and headwinds. So those are the kind of big macro things that are framing our thinking when we think about the asset class, but then there's stuff within EM that we need to worry about as well.

I think we're quite familiar with all of the debt buildup that we've seen in the developed world, whether it's eurozone countries or the US. But this has also gone on in the emerging market space as well. And a number of countries have been either pushed over the ledge with respect to their debt profile or getting pretty close to it. We've seen defaults recently in Ghana, Sri Lanka last year, and there's a number of other countries that are headed in that direction. There's quite a lot to worry about. We spend a good portion of our time, at least I do, worrying and trying to separate those problem cases from the real strong investment cases.

EMS:
Mike, we've covered a lot of ground today and I'd love to hear any final thoughts you'd like to share with us?

MC:
I guess I'll leave you with maybe the most important piece that EM debt is not this really narrow universe. I think as an asset class, there's been a great disservice when the bricks term was really kind of coined and it spiraled out of control to really have four or five countries define what EM is. And now we have a series of benchmarks that are also quite narrow in their focus that define our asset class. The best way to approach emerging market debt is to really look quite broadly at a very wide universe. And I think when you do that, you really end up in this environment where there's always things that are improving and always things that are deteriorating, and it just makes it for a very ripe universe for active management.

EMS:
Well, Mike, I wanted to thank you so much for sharing your perspective with our listeners.

MC:
Thank you for having me. It's been a real pleasure.

EMS:
And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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