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An Emerging Bond Trade? (w/ Anthony Antonelli) | Trade Ideas - YouTube
Channel: Real Vision Finance
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Welcome to "Trade Ideas."
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I'm Jake Merl sitting down with Anthony Antonelli,
director of Greylock Capital Management.
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Anthony, it's great to have you on the show
for your very first Real Vision interview.
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Thanks.
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Great to be here.
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So before we get into your actual trade idea
for today, can you please go over your background,
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who you are, and what you do at Greylock?
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Sure.
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Well first of all, I'll start with Greylock
Capital Management.
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We're an emerging markets asset manager.
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We focus particularly on distressed restructuring
and high yield opportunities globally throughout
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the emerging markets.
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My role there, the functions that I try and
fulfill, are providing macro strategy and
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trading color around some of the investment
ideas and opportunities that we see out there,
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and then try and scale those down to a more
granular level to try and do some security
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selection around it as well.
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And so with that in mind, what's your trade
idea for today?
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Well I'm here to make the case for emerging
markets as sort of an asset class.
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I'll talk a little bit about the emerging
market bonds side of things because that's
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our primary area of expertise over at Greylock
Capital.
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And I'm here to basically tell you that emerging
markets are expected to have a good year this
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year, after what was a very, very ugly 2018.
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So what are you specifically looking at that
has you so bullish on EM?
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Well, let me just give a little bit of the
background.
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So 2018 brought out a lot of blood on the
streets.
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Things were bad in the currencies.
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They were bad in the commodities.
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They were bad in the stocks.
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It didn't matter what asset class you were
in within emerging markets, you were feeling
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a fair bit of pain.
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And what we've seen, the data, historically
speaking, is that after very poor years, the
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subsequent year and following years, in fact,
are much, much better for the asset class.
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We specifically focus on the emerging market
bonds, the dollar denominated.
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We also do FX and foreign currency bonds.
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But emerging markets overall are very correlated.
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They're all very related.
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So when one asset tends to do well, they all
tend to move together.
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Last year, we saw the Fed basically go full
tilt on quantitative tightening, raising rates,
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trying to slow things down a bit.
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And we saw cracks through Argentina.
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We saw cracks in Turkey.
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We saw slowdowns that eventually led to contagion
and brought things down from there.
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And as I pointed out, what we're seeing since
then was the Fed pivoting, kind of calm things
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down by saying, we're no longer going to raise
rates, we're not going to suck liquidity out
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of the system like a vacuum cleaner, and we're
just going to let things ride more without
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our intervention for now, until we see things
in the inflation pick up in the United States.
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So that's actually set a much better backdrop
for risk assets, and emerging markets are
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one of those.
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And we've started to see that coming up.
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So as I said, if you go back historically
in the tough years-- like 1994, 1998, 2008,
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2013-- but in the subsequent years, you see
a big pickup from there.
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So in addition to the mean reversion aspect
of the trade, are there any other macro fundamentals
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that's confirming your thesis?
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Yeah.
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So last year, again, in 2018, one thing that
we saw was emerging markets FX.
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Now emerging market for FX as foreign currency,
and a lot of times the currency is the early
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sort of barometer or indicator for how a country
is doing.
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Their currency is almost like the stock of
a country.
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So seeing and measuring how that's doing in
relation to itself and in relation to other
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assets is something that gives us some tells.
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And last year, what we saw in 2018 was literally
the worst or most volatile year in emerging
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markets foreign currency since the data began
in the year 2000.
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So what that means is that last year, we saw
massive spikes in volatility in the currencies.
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Usually those spikes and volatilities are
associated with down periods.
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And the readings were so extreme.
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I mean, you can probably see an RSI indicator,
which kind of measures the extreme levels
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of momentum and movements in a particular
price or chart.
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We saw readings that were some of the highest
ever on a monthly basis.
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And usually after those types of periods,
things tend to calm down.
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And that's sort of what we saw.
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Right now, we're in a little bit of another
sort of retest.
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The way I like to think about these things
is when you have an earthquake, you have a
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subsequent sometimes aftershock.
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And right now, it feels like we're having
a bit of an aftershock.
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The dollar's sort of breaking out.
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But the expectation is that we won't see the
emerging markets foreign currency volatility
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relative to the developed markets volatility
that we saw last year.
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And if we don't see that, then that probably
means that we're going to have a better back
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half of this year.
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So you're not worried about the dollar continuing
to strengthen?
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In the short term, the dollar has been very
strong.
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There's been a lot of flows into the dollar.
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It's definitely broken out recently here.
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So the dollar is a primary pressure point
for emerging markets.
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And the real reason that's the case is because
a lot of these countries have borrowed in
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dollars.
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And as a dollar goes up, the local currency
goes down.
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Now they have to have a lot more dollars to
pay back that debt.
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So it gets more expensive.
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People don't trust that they'll pay them back.
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And then all of a sudden, next thing you know,
investors aren't loaning to them, and bonds
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start to fall to the price where people would
begin to want to get enticed to purchase them.
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So strong dollar is definitely a concern for
the emerging markets.
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But we do have some reasons to believe that
the current dollar situation's probably not
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going to last throughout the entire year.
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And why is that?
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One of the main reasons is that the US needs
to borrow a lot of money.
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The reality is that the US is running massive
budget deficits, and they do have to come
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up with the money somehow.
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And usually the two ways you can do that are
you either borrow it or you print it up, you
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have the Fed monetize it.
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So far, there's no problem.
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The world loves treasuries.
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The world loves dollars.
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And I think as we move forward over the course
of time, the sheer supply of treasuries that
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are going to be issued is going to put some
crimps on the strength of the dollar, as people
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get flooded with the total supply of dollars
that they need for those investments.
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But how much time do you think that will actually
take?
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Is this like a short-term thesis, or will
that take longer term for people to get bearish
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on bonds?
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Well we've started to see bonds come off the
lows.
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I mean, about a month or two ago, yields were
really screaming lower.
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We're starting to see that come back a little
bit, things to normalize a little bit.
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We had GDP data we're starting to see.
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If the US economy continues to improve, then
you should start to see yields coming back.
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And I would imagine that we'll probably start
to see that within the next quarter, two quarters.
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It's hard to dictate exactly when people will
start to move away from the dollar.
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But it would probably really be contingent
on also Europe getting its act together, which
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they started their quantitative easing programs
over there, which is basically money printing,
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in a sense, to try and get things moving over
there to try and spark activity.
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There's a possibility that that will ultimately
start to filter through, and you'll get that
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weaker dollar.
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And so how do you see the Fed affecting your
thesis?
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The Fed, I think, is going to remain on pause.
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I've been one of those that thought that they
did start to overdo it.
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I understood what they were trying to do.
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But the reality is that the world has a lot
more debt now than it ever has.
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And I think they made a slight miscalculation
on how fast rates can go up before that debt
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starts to cause pain to investors out there.
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And when debt starts to go down, stocks also
start to go down.
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And so I think that cascading effect was what
alerted the Fed that maybe they need to hit
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the brakes.
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So in terms of how long the Fed stays on pause,
I think they're going to be on pause for quite
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some time.
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And in fact, maybe their next move, if the
world doesn't get better, if we do start to
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see things weakening, I mean, futures are
already starting to price in Fed cuts sometime
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next year.
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It's not that far-fetched.
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So with all this in mind, how would you actually
go about making this trade?
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Well at Greylock, we focus on emerging market
bonds.
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Specifically, one broad index that we use
is the EMBI, the Emerging Markets Bond Index.
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It's sort of a hodgepodge global mix of sovereign
bonds.
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And that's something that we follow because
it's something that's tracked as a measuring
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tool for how things are doing in the asset
class.
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So I'm looking at the EMBI here.
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It's been basically trapped in a range between
380 and 360.
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We've had the 200-day moving average start
to slope down.
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The 50-day has crossed below that 200-day.
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We've been trading in this range, and we keep
touching that low end of the range.
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And the expectation is that that low end of
the range starts to break.
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When you have numerous hits of a specific
area over the course of time, that area tends
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to get weakened.
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So the way I think about it is like if you
had a shield and it keeps getting bashed by
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somebody with a sword, eventually that shield
breaks.
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Or if you have a paper bag and you put some
water in it, at first, it holds fine.
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But you keep pouring more water in it, eventually
the bag breaks.
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And so we're looking at that key level, that
360 area on this index.
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And by the way, it's a spread level.
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So 360 means that it's 360 basis points above
a risk-free rate, a measurement there.
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So this is kind of a spread index.
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For viewers at home, there's different ways
to play this.
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But the expectation is that if the spreads
start to break below 340-- in this case, by
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the way, lower spread means higher prices--
so the spread starts to break below 360, the
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target area would be 340, and there's a chance
that by the end of this year, we could be
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somewhere in that 320 to 340 area that we
saw kind of late 2017, early 2018.
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So on the EMBI index, the weekly chart that
you're probably seeing right now, one of the
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things there we have, we have momentum has
flipped from negative to positive on this
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trade.
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We have the MACD, which is momentum indicator.
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That's trending lower, which again, lower
in this case is good.
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And you have the RSI, the Relative Strength
Index.
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That's another momentum indicator.
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Measures overbought, oversold.
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And that one is below 50, which is another
point of strength that we like to see.
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Plus, I have the 35-week moving average that
I use on that chart, and that is also trending
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lower as well.
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So things are moving in the positive direction
this year versus the negative direction last
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year.
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So how would you recommend traders or investors
express this bullish view on emerging markets?
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Well for them, there's different ways to do
it.
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There's ETFs.
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Going to be equities, currencies, bonds, everything?
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Or are you specifically just recommending
emerging market bonds denominated in dollars?
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I specifically like the emerging market bonds.
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You get paid to wait.
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You get some upside potential.
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You clip a coupon in the meantime.
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It really depends on people's risk appetite.
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For fast or money traders, certainly the equities
are probably the way to go.
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For people that are a little bit more conservative
than emerging market bonds, currencies, of
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course, are for people that have a very high
risk tolerance.
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So it really depends on the individual investor
and how they like to play the game.
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And for that EMBI index, would you have a
stop loss on the upside?
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Yeah, so I'd be targeting above the 200-day
moving average, which I believe was about
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384 last time I checked.
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So a little bit above that if you want to
keep a tighter stop.
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For longer term investors, I think you can
stay at a higher area.
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And in fact, that's probably for many people.
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Especially when you're investing in bonds,
usually you capture more of the return when
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you stay holding the securities a little bit
longer.
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So for more patient longer term investors,
I would say you probably can stay in longer.
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Put the stop loss higher than that.
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The last year's lows were 440.
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Obviously we start getting to those areas
again, I would say forget this trade, maybe
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go the other way, or get out.
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But there's a lot of sort of room from here
to there.
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So before we wrap things up for today, what
would you say are the biggest risks to this
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trade?
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Well the ones always in the forefront are
the Fed and anything that they say that sort
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of gets the dollar moving.
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The reality is that the dollar strength is
usually a sign of global liquidity tightening.
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When global liquidity tightens, money leaves
emerging markets and comes to dollars, because
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it's like, why do I need to invest in something
that's risky when I can just park it in cash?
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So stronger dollar, rising US interest rates,
that's the type of thing that attracts inflows
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out of emerging markets and into the US, let's
say.
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So that would be a key one to watch.
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Trade deal between China and the US, that's
always more of a topical noise.
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We see a lot of trading and volatility that
happens around that, so I would keep my eyes
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on that as well.
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I think that a trade deal will eventually
happen sooner rather than later.
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And when it does, that should also be a catalyst
on the positive side.
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But certainly if there is rhetoric the wrong
way, then emerging markets are going to feel
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that pain.
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Anthony, that was great.
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Thanks so much for joining us.
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Great to be here.
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Thanks.
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So Anthony is bullish on emerging markets.
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Specifically, he thinks that JPMorgan emerging
markets bond index could reach between 320
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and 340 over the next eight months.
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You would have a stop loss above the 200-day
moving average.
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And he suggests expressing this thesis through
emerging market ETFs.
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That was Anthony Antonelli of Greylock Capital
Management.
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And for Real Vision, I'm Jake Merl.
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