ETF.com: How do you access the emerging market local debt? Is it through an ETF or do you buy straight-up bonds?
Dow: It depends. There are not very many vehicles. I go through a closed-end fund. I'm hesitant to recommend it.
ETF.com: So if emerging market local debt is bottoming out, what about emerging market equities?
Dow: You don't want to be in the assets that rely on growth for the reasons I just explained. Earnings aren't going to rebound. Currencies should probably stabilize; they'll go up and down a little bit, but they're not going to move dramatically. And with emerging market local fixed income, you get the carry, and you get the interest, which you're not going to get in the equities.
If you want to buy EM equities, you just need a better dip. Same thing with emerging market fixed income; you just don’t need quite as dramatic a sell-off to get involved, because the risk/reward is a little bit more in your favor.
There are three factors you need for emerging markets to take off. You need some sense of where the Fed is going with interest rates, and I think we're realizing that they want to raise rates, but they're not going to go very far.
The second thing is the dollar. When the dollar is sprinting to the top side, people are not going to want to get involved in emerging markets of any shape. But the dollar is not doing the exciting things that people thought it was going to do when we were predicting a more aggressive rate cycle. So, those two pieces have fallen into place.
The third piece was growth. You need a growth differential to compensate the credit risk in emerging markets. That growth differential is just not there yet with respect to the U.S., because they're working out from under their credit buildup from the last cycle.
ETF.com: Is that sovereign debt, or corporate debt or high-yield debt?
Dow: I like sovereign, because you're not really taking as much credit risk with local-currency sovereign debt. It tends to carry pretty well. But the closed-end fund, which we're not mentioning, yields around 11%. That's quite attractive.
Again, you have to share my view that we're bottoming. It's important to say an L-shaped bottom, because when you say something is bottoming, people think V-shaped. That's their first thought. This is more of an L-shaped bottom.
ETF.com: From a very simplistic point of view—not that you're recommending this—but a 60/40 portfolio actually sounds like it makes more and more sense in this slow-growth world at best.
Dow: Particularly if 40% is cash. Everyone has the parameters within which they have to manage. Some people need to be fully invested; other people have more discretion on the cash side. I'm keeping a large amount of cash, and I have my core positions in emerging markets and a couple of other things I think will play out over the long term. I'm waiting for a better entry point.
Think about it from a sentiment standpoint. People are very bearish, yet we're not very off from all-time highs. That means we probably can't go down massively unless something really dramatic happens fundamentally. I just don't think that's likely.
ETF.com: So are you not in U.S. equities?
Dow: It's not attractive to buy. Our bearishness is deep but not acute. Bearishness is very widespread but it's not that panicky bearishness that you can step in and buy something. That's what I would be waiting for.
I don't have that many U.S. equity positions. I have various and sundry positions. It's mostly idiosyncratic stuff, and I'm hanging on to things I bought in February when things got a little panicky, and a lot of them are correlated to a weak dollar. They kind of go up and down. But most of what I have is correlated to a weak dollar I bought at good levels, and it pays a reasonable rate of interest.
I’m waiting for something dramatic to happen when the bearishness becomes acute and not just pervasive.
Contact Drew Voros at [email protected].