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Leo Hu, senior portfolio manager for emerging market debt hard currency strategies at NN Investment Partners, based in Singapore.
Hu is used to dealing with relatively unstable markets, but in 2014 he was caught off guard when Pakistani anti-government protests erupted.
“Pakistan was under an IMF programme at that time, and its macroeconomic metrics were improving. But what was underestimated was the political noise,” he recalls.
In consequence, the price of Pakistani bonds dropped significantly and his fund was hit by a loss. But they didn’t sell the position, he said.
“We reassessed the situation to see how severe it was. And we looked at the fundamental story, the valuations, whether the bond was attractive or not. And we concluded that it was still attractive because the administration was likely to survive and there was little chance of a coup.”
He ended up buying more and the bond price gradually improved, he said.
The mistake was buying the bonds too quickly initially. “We should have waited a bit and bought [during a later period].”
Another lesson, he said, was that a thorough analysis of the political situation is crucial when investing in emerging markets and especially in frontier markets.
Hu pointed to the current situation with Argentinian bonds. Many investors have an overweight position in Argentina because the country and the reform momentum are strong under the current government, he said.
But he believes Argentinian bonds are over-invested. “If the market corrects, you will need to sell it, and there is not that many people that can buy it because they have it already. That’s the technical mistake”.
“The lesson we learnt is that when a position becomes crowded we tend to take profit earlier and exit.”