In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they'd never buy.
This week our interviewee is Arif Joshi, co-head of emerging market debt at Lazard Asset Management, where he manages funds including the Lazard Emerging Markets Corporate Debt Fund.
Which Sector Shows the Biggest Promise in 2023?
Receiving EM rates: emerging market central banks were the first to hike rates (2022) and the first to finish their hiking cycles (in the first half of 2023). I believe they are also going to be the first central banks to begin a rate cut cycle in (in the second half of 2023) that is likely to last for the next twelve months. Unlike the developed world, core inflation has steadily decreased for the last two quarters, allowing EM central banks to cut rates more than the market is currently pricing in. Historically, investors gain their largest profits from fixed income from the moment central banks finish [begin?] rate hike cycles all the way through the end of rate cut cycles.
What's the Biggest Economic Risk Today?
Sticky core inflation is a significant economic risk. The policy response to the pandemic was fiscal spending on a scale that we have not seen in years. Unlike monetary stimulus, when you hand out cash to consumers, this is inflationary. The risk is that a year of large fiscal stimulus resulted in embedded higher inflation expectations in the minds of consumers, and this will be much harder to conquer than the models would suggest.
Describe Your Investment Strategy
Our core competence is understanding how economic policy is implemented across emerging market countries. We focus on isolating the one or two unique Achilles’ heels in each emerging market and then review whether policy choices in these locations incrementally move the country forward or backward. Second, is a sober acceptance of the negative tails that exist in emerging market debt, and we factor this risk into our consideration of the wider portfolio’s performance.
Which Investor/s Do You Admire?
Jeffery Gundlach is impressive - not only has he built two multi-billion businesses from scratch, but he continues to be vocal about his investment views. His long-term return history is the reason he is known as the “Bond Market King”.
Name Your Favourite 'Forever Investment'
Indonesia has been one of the best performing countries in emerging market debt over the last two decades. After its default in 1998, it set upon a path of orthodox fiscal and monetary policy. Although there were challenges along the way, the country went from default to investment grade and managed to adhere to a constitutional amendment that limited the fiscal deficit to 3%. Indonesia is an impressive example of how policy can transform a country for the better.
What Would You Never Invest In?
“Never” is a strong word, but as a general answer, I can’t see myself ever going long on a pegged currency. Economic conditions change over time and exchange rate flexibility is essential for sovereigns to bend to those changing conditions. Overtime, the road to emerging market defaults has been littered by pegged exchange rates and depleted foreign exchange reserves.
Growth or Value?
Value for bonds. In the bond market, there is the embedded pull to par over the life of a security. Therefore, to the extent you do your credit work, the bond market will tend to reward value more than growth over time.
House or Pension?
House. Over the last 500 years, the two best performing asset classes (by far) have been real estate and equities. Over a long-term, I don’t think that will change.
Crypto: Brilliant or Bad?
Brilliant. Crypto’s core function is to disintermediate a function that was slow and costly. The most productive innovations in history have been ‘brilliant’ and this is no exception.
What Can be Done to Improve Diversity in Fund Management?
Generally, people act in line with their incentives. Combine compensation at all hiring levels to improvements in diversity and I think it will result in a dramatic improvement in diversity numbers. As Garth Brooks said, “Diversity is the answer to the problems that are here and the problems that are coming.”
Have you Ever Engaged with a Company and Been Particularly Proud (or Disappointed) in the Outcome?
Over the last five years, I have spent time in both Lebanon and Sudan, meeting with heads of state, economists and policymakers. We discussed potential changes in economic management and initiatives to attract foreign capital into each country. Disappointingly, both countries are currently failed states [can we find a more diplomatic term than “failed states”?], even though they both have a talented diaspora and well-educated technocrats in-country. Economic development is ultimately about policy decisions in order to harvest the comparative advantages of your citizens.
What’s the Best Advice You’ve Ever Been Given?
As my mother advised me from a young age, treat others as you wish to be treated. This is a simple piece of advice that continues to ring true in the corporate world and in one’s personal life.
What Would You be if You Weren’t a Fund Manager?
Outside the world of finance, what interests me the most are government relations and politics. So, if I didn’t have a career in asset management, I would love to be a diplomat or an ambassador. Obviously, given my area of focus, I would request to be stationed in an emerging market country!
