Hello, and welcome to The Download. I'm your host, Dave Richardson. It is time to check in with the person that I refer to as the most interesting woman in the world. And I'm going to try and get this right, Polina. I want you to be harsh and precise with me because I've fungled it so many times. Polina Kurdyavko.

Spot on.

Spot on. Now, here's the harder one. I always joke that I have the longest title at the firm. I also joke about it because my mom made it up. You'll have to tell me who came up with Managing director, senior portfolio manager, head of emerging markets, BlueBay fixed income RBC Global Asset Management UK Limited. That is a mouthful.

Absolutely. You can use any one of those three, and I think it will still do the job.

All right. So that must have been your kids who came up with that one?

I bet they're not sure what that means.

Well, I'm sure they're very proud as we are always to have you here. I call you the most interesting woman in the world because you are just everywhere. Your mandate, as we suggested in your title, is in emerging market, fixed income, but you seem to be connected in so many other ways. And as I always like to start, where's the most interesting place that you've been to recently and what were you up to when you were there?

Well, recently, I have visited Panama and El Salvador. These are smaller countries which don't often get mentioned when we talk about broader emerging markets. But interestingly, those countries have very specific dynamics, which makes them also an interesting investment proposition despite being relatively small economies.

When you were there, what was particularly interesting about the visit? Let's take Panama. What's going on in Panama right now?

Well, in Panama, I would say a few observations. Firstly, Panama has the PAB currency. Interestingly, in the environment where there's a lot of uncertainty in the US politics, regional pension funds—not only local pension funds—started to increase their exposure to Panama as a proxy for hard currency deposits. I didn't appreciate how much demand there was for such a small country, but actually that improved financing of Panama and made it a lot less reliant on international markets. In fact, Panama is the best performing investment-grade country year to date, where the spreads have tightened over 90 basis points since the beginning of the year. Now, another interesting fact was a discussion that I was having with Panama Canal authorities when we talked about the direction of travel and strategic investment of Chinese into the country. I think it was very clear, having had a number of meetings with senior officials from the US, as well as management of Panama Canals and other strategic enterprises, that it's likely that we will see diminishing influence from Chinese going forward. So much so that perhaps in a few years’ time, the only focus when it comes to Chinese exposure to the countries, it would be more Chinese takeaways, not anything else. But I think that was an interesting geopolitical observation for me.

Yes, of course, that was a big headline early in this current Trump administration regarding the Panama Canal. Then, of course, in El Salvador, you were taking advantage of the fabulous surfing off the coast of El Salvador. I think what a lot of us think of when we think of El Salvador in the headlines, it's their shift to holding Bitcoin as a currency. And then their prison system. What were you there for and what interesting things did you observe?

Sure. I love surfing, but I never have time to surf when I go on my trips. I did not explore El Salvador surfing. However, what was a surprise for me is, firstly, food in El Salvador. I did not think that El Salvador would be a place where I would experience one of the best cuisines that I have done in Latin America. That was a big surprise for me, so much so that I am coming back one day to the same restaurant that I visited, which probably was the best meal I've had in the last few years, I would say. Now, the second observation for me would be the focus on security. We know that the current President has more of an authoritarian regime, if you will. There are pros and cons of that regime. Now, the pros are that in a short number of years—we're talking about only a couple of years—the President managed to deliver an improvement in security which the country was not able to deliver over the last three or four decades. In fact, the homicide rate today in El Salvador is lower than the homicide rate in Costa Rica. That's a very interesting observation. Security is key for unlocking growth in the country, for allowing to do the reforms in the country, which will tighten the fiscal deficit. That, to us, was a very positive step in the right direction. More so, even though the President might have more of an authoritarian style and I would say unusual thoughts when it comes to Bitcoin incorporation in daily operations, what was also interesting is how focused the administration was on following the IMF program. In fact, so much so that you could almost say whatever IMF says is gospel in the country. The current administration was fully on board with that. It's music to credit to see this.

Yeah, and I always love to delve into these topics with you. Less so about the cuisine and the surfing, although always interesting—I am always interested in eating in these different places—but more so to highlight the breadth of the issues that you're looking at and how it's so important, the relationships and the contacts that you've developed over the year, to understand the subtle nuances or even large things that are happening on the ground in some of these countries and that many Canadians would think of as high risk, unstable, completely foreign and «emerging» to a Canadian investor, but issues that end up being critical to you understanding the investment potential in the country. The El Salvador example is perfect. You wouldn't think of security and what's happening with the murder rate and what's happening from a crime perspective in El Salvador as critical to your decision making in investing in the fixed income in that country. But as you said, you can make that connection. It's important that you know what's going on in the ground and you cover, as I think you mentioned when we were talking earlier, about 80 different countries. So you've got to stay on top of a lot of things that are going on?

That's why I find my job fascinating.

Yeah. So Polina, let's start to work around the world. If we look at Latin America, you mentioned your recent visit, but there's some other areas in Latin America that are of particular interest to you as well right now?

Yes I think that when we look at any credit, if we look at the sovereign credit, the approach or the template, if you will, is often very similar. We need to understand what is happening on the fiscal front. We need to understand what is happening on the political front and how does that impact the politics more broadly in the country. One of the most exciting development for me in emerging markets is a trend when it comes to fiscal improvement. If you look at emerging market economies, with the exception of a couple of countries out of 80, most expect to have a tighter fiscal deficit or improvement in fiscal deficit next year compared to this year. If you look at developed market economies, it's the opposite trend. For creditors, you want better fiscal to be aligned with potentially improving trend in growth due to the reforms that were introduced over the last few years. That's exactly what we're observing in the number of emerging market countries. In fact, moreover, we could see a political transition next year in Latin America and countries like Colombia and Brazil that could move, I would say, more populist government to a more market friendly government. And that could be another positive boost to the performance.

Okay. And how about we go to Asia? I know the last time I met with you, you had done some very specific work in Lebanon that created some incredible opportunities for gains for investors in that space. Are there any other areas in Asian markets that are particularly interesting to you?

Well, I'd start by saying that China is always fascinating. Of course, you would not be surprised if I said that I was recently in China as well, because China sets the pace for global growth, for the monetary policy, for the currency performance and it anchors a lot of important pillars, if you will, of countries' economic development. For me, the takeaways from China this time around were the following. Firstly, we think that the monetary policy will continue to be accommodative. In fact, if anything, we think rates in China could go to zero. Given the negative inflation that the country is experiencing. And that should be positive for local currency, both FX and rates. Secondly, because China has a closed capital account and the real estate market is still not recovering, domestic investors have very few options when it comes to allocating capital. And so should the rates get to zero, we could see a rally in the Chinese equity market. In fact, we've already started to observe that. That might not be driven by improving growth trends, but it is driven by very supportive technicals. Interestingly, having been to China, while we're not seeing strong growth drivers, we think financial assets this time around will perform well, both in equity and in credit, because of the trend that I outlined. Outside of China, we look at idiosyncratic markets such as Pakistan or Sri Lanka, which actually still give you double-digit yields and are on a sustained trajectory. Those are areas where we opportunistically take long exposure to.

Polina, again, I think one of the things that you've done so well as a guest on this podcast over the years is for Canadian investors who tend to think of emerging markets as, in many cases, places they haven't been. We think of Canada very proudly. I'm sitting here actually in our capital today. Just behind me, if you're watching the video, is our parliament buildings with the big Canadian flag flying overhead. We're very proud of the stability and strength of Canada. And we think of maybe some of these emerging market countries, again, as being unstable, politically, debt-ridden, risky. Risky is the word that I would say. But you've done such a good job as we've had you on the podcast of destroying that myth in many, many ways. So if I'm a conservative, a moderate or even an investor who does want to take on some risk, what are some of the areas that should be of particular interest? And why would Canadian, at those different levels of risk, want to get into emerging markets right now?

Well, I would start by saying emerging markets is a $30 trillion universe, which encompasses at least four sub-asset classes. There is something for everyone in emerging markets. I would broaden the universe in the context of your risk spectrum. Let's start with, are you positive on beta or not? If you are not positive on beta in emerging markets, the best way for us to trade volatility in emerging markets is actually to have exposure to absolute return products because they generate double-digit return through volatility, not through focus on directional trends in emerging markets. However, if you would like to have beta exposure and you are semi-convinced by some of the arguments that I've put forward, I think there's a scale of instruments that can give you that return profile. If you look historically at the asset classes, the best index when it comes to Sharpe ratios or risk-reward has always been the emerging market corporate because it has the lowest volatility. In fact, the volatility in that index, in some cases, is lower than in developed market corporate indices, but it still has higher yield and high elevated return profile. I would say that would be the most conservative end of the spectrum. If you are looking at the asset class and actually you feel more confident with some of the high yield exposure—you could look at the sovereign asset class, which is 50/50, investment-grade high yield—but this is the only asset class, as I mentioned, where the spreads on the high yield securities still have not normalized compared to their historical average. That's why, year to date, this is the index that is delivering 10% plus return, whereas most of the corporate indices in developed markets are delivering between 6% plus return, let's say. Now, the last point on the continuum would be the local currency markets. This is the asset class which has been unloved, at least for the last decade, because for the last decade, the currencies have depreciated in nominal terms against the dollar to the tune of 50%. But we think that this is changing. There are a number of push and pull factors to argue that dollar weakness is more structural in nature than cyclical. We know that on one hand, US politics have raised a lot of questions. Again, as I mentioned earlier in the podcast, even the regional pension funds in Latin America are considering increasing the allocations to neighboring markets as a proxy for US risk. But also, if you look at the monetary cycle in the emerging markets, in the 25 years plus I've been doing this job, the biggest change that I've observed in the emerging markets is the change in monetary policy. It has become more orthodox. When we look at the emerging markets today, you have highest real rates differential between emerging market countries and developed market countries in the last decade. At the same time, you still see currencies that are broadly cheap, as I mentioned, given the devaluation. Now, faced with the inflation dynamic, which is on the downward trend and has been on the downward trend for a majority of emerging markets over the last two years, there is no reason why central banks should not be cutting. Therefore, we think that if we start seeing that cutting cycle over the next 12 months, that potentially gives you double-digit return opportunities in the local currency. When you think about the carry that you are getting with local currency—for example, Brazil’s front-end rates at 13% plus—we're talking about double-digit carry in a number of places and a potential for appreciation in price given this yield compression after the country starts cutting cycle as long as they can keep the fiscal anchor.

Yeah, and this is why this area, I think, is so interesting for Canadian investors as a place where they can add diversification to their portfolio and also juice up returns because there's still that perception—and the perception ends up in a reality—that there are some higher yields out there, that that you can take advantage of because there's still a view in many places that these countries are riskier, that inflation is higher, that somehow I'm safer staying at home. But in the hands of a really, really great professional investor like yourself who has all kinds of experience, all kinds of contacts— there are risky places out there that you need to avoid, and there are situations that you want to avoid—but someone like yourself can avoid those situations and find the places where maybe the broader market and investors more broadly, have not given credit to countries that have made incredible progress or have emerged from that old state and become places that you should be looking at to invest, to generate better risk adjusted returns. And again, this is what you've done. You do such a great job explaining it. So Polina, I know the one thing I can always rely on you—and our listeners can always rely on you—is to say, hey, right now I'm a little worried about what's going on in emerging markets. Maybe this isn't the time to stretch out and head into these areas other than maybe your core weighting that you would have in emerging market. And then when you're excited about it, you say you're excited about it. And this is a place that investors should be looking at. Maybe not pounding the table because it impacts the sound quality on the podcast. So don't do any pounding. But where's your thinking on the asset class overall if investors are listening to this podcast today?

Dave, I would start by saying that when I look at the world—I would agree with one of the IMF representatives that I met a month ago or so—I would say as well that having been doing this job since 1998, this is the biggest level of uncertainty on growth that I have seen. When you have so little visibility on growth outlook, you have to be cautious, full stop. And we're cautious by nature because asymmetry is always to the downside. Therefore, with this cautious preamble, I would say that when I look at certain opportunities in the emerging markets, I'm not betting on growth. I'm betting on prudent fiscal. I'm betting potentially on policy changes with the elections. I'm betting on relatively unleveraged balance sheets, and I just want to get a relatively high yield for relatively low level of volatility or comparable level of volatility in fixed income. To me, in this juncture, firstly, it's easier to make to some degree a macro call than to make a credit cycle call because we have so much uncertainty on growth. When it comes to macro call, it's that direction of rates and FX that I talked about earlier, which could, in the short term, play out faster than the evolution and the length of the credit cycle once we start seeing more confirmation for growth. That's why I would say, cautious on growth. We like local currency here. We also like valuations in hard currency, and we're relatively comfortable with our low default outlook. Therefore, we do have exposure to hard currency credit in emerging markets, and we are taking additional exposure to some of the local markets where the opportunity might lie between now, for example, and 6-12 months from now.

Some of that ties into the expectation that the US dollar will continue to be relatively weak as we move out over the next 5-10 years, correct?

Absolutely. But as cautious investors, we're not relying on dollar weakness to generate returns. We're saying it's nice to have, and it can help the currency stability. But given how high the rates are in the emerging markets, as long as fiscal is intact, just the curve normalization could deliver you high single digits or lower double digits returns in this part of the cycle.

Polina, again, you're always so gracious with your time. I don't want to hold you too long, but I'd be remiss if I didn't talk about the issue that's on a lot of Canadians' minds, and that's tariffs. We know what we're facing here in Canada. As we look broadly across the emerging markets, is this something that concerns you? Does that put at risk some of your expectation around the fiscal discipline that you're seeing in some of these countries? Maybe just talk about tariffs in general in terms of your view and how you're investing money right now?

Sure. I would say that when we try to predict tariff risk, we think that the best way to play it is not to identify individual countries to be the main winners or losers, because there is no rhyme or reason in some cases to those negotiations, I'm sure you’re aware, Dave. For us, the approach has been very simple. We look at the corporate businesses and we say, which businesses have such thin margins that if the tariffs hit them, they make their business model unsustainable? That's where we focus our attention on. That's for the absolute return strategies where we can express a negative view on corporate credits as well as a positive view on corporate credit. That's where we focus our event trades, low margin businesses across the world, that in the global growth environment and in the environment with uncertainty of tariffs will struggle.

Great. Well, Polina, that was fantastic. I love bringing you on. I could talk to you all day. And I think the listeners could listen to you all day because of your depth of knowledge and depth of experience in this space. It's really something unique across the industry. So we always appreciate that. But it's so important for Canadians, I think. I always talk, when I'm out talking to Canadian investors, and I do a lot of that, about the idea that the Canadian investors have embraced a global diversification, particularly in the equity portion of their portfolio. But so many forget the opportunity to more broadly diversify their holdings in fixed income. And what you've highlighted just one more time for Canadian investors—again, it's not for everyone, but I would argue that most people should be looking at these areas of the world. Again, emerging markets is not a single country. It's not a block. There are 80 individual countries, and you want to have an investment manager who's able to evaluate all of those situations and the risks and rewards that come with each of them. But this is an area where Canadian investors should be looking. And it would be a great idea to make sure when you're talking to your financial adviser to see where this might fit into your overall portfolio, if it makes sense for you. Because just like every emerging market is different, every individual investor is different as well. But I think Polina has given you a base in understanding why there are some opportunities for different types of investors in this market. Polina, thank you again for joining us today. We look forward to catching up with you in a few months. We have you on regularly for a reason, and we hope you'll continue to join us when we ask.

Thank you very much, Dave. It's always a pleasure.