DoubleLine: Emerging Market Debt and the Three C’s

DoubleLine Emerging Markets Fixed Income Fund webcast titled, “Emerging Market Debt and the Three C’s”

On May 24, 2016, Luz Padilla, Director of International Fixed Income, and Analysts Bill Campbell and Valerie Ho, held a webcast discussing the Emerging Markets Fixed Income Fund (DBLEX/DLENX) and the Low Duration Emerging Markets Fixed Income Fund (DBLLX/DELNX), titled “Emerging Market Debt and the Three C’s.”

This recap is not intended to represent a complete transcript of the webcast. It is not intended as solicitation to buy or sell securities. If you are interested in hearing more of Ms. Padilla views, please listen to the full version of this webcast on www.doublelinefunds.com under “Latest Webcasts” under the “Webcasts” tab. You can use the “Jump To” feature to navigate to each slide. You can also learn more about future webcasts by viewing the 2016 webcast schedule at www.doublelinefunds.com under “Webcasts.”

Central Banks

• The majority of central banks are engaging in easy monetary policy and looking to support risk markets against a backdrop of tepid growth and inflation.
  • A decision on continuing to raise interest rates at the Federal Reserve (Fed) is currently on hold.
  • European Central Bank (ECB) recently cut their deposit rate to -40 basis points (bps) to try to stimulate banks to lend their excess reserves. They have also increased their quantitative easing (QE) program to 80 billion Euros of bond purchases per month, expanding the purchase program into the corporate bond sector.
  • The Bank of Japan (BoJ) has been injecting a fairly large amount of liquidity into markets. The BoJ recently cut their deposit rate to -10 bps and are considering potentially expanding.
  • People’s Bank of China (PBoC) is looking to cut both benchmark rates and targeted reserve requirement ratio (RRR).

The Fed

• The market-implied expectation of a rate hike, according to the World Interest Rate Probability (WIRP), is 34% for June.
  • Historically the Fed has not hiked when the WIRP has been below 50%.
• Even if the Fed does hike rates, DoubleLine believes it will be a gradual pace of hikes.

China

• China remains a major source of volatility as they struggle to balance adjusting their growth model away from investment to consumption and services and maintaining economic and social stability.

Commodities

• There has been a sharp move upwards within commodities from the lows of February.
  • President Rousseff is trying to implement unpopular fiscal and structural reform.
  • “Lavo Jato” scandal involved government officials granting lucrative contracts to several construction-related companies.

Emerging Markets (EM) Performance

• The JP Morgan EM Global Diversified Index had a 10% move in terms of performance from the lows of February. Spreads have tightened from 500 bps to 400 bps level over this period.
  • Given the current environment, DoubleLine believes spreads in the 400 bps range are on the cheap side and that 350 bps is a more normalized level.

Brazil

• Brazil’s lower house voted to impeach President Dilma Rouseeff. The Senate will vote on a final decision later this year.
  • Vice President Michael Temer has stepped in as the interim President.
    – Temer has reestablished confidence in Brazilian markets and shown a commitment to fiscal reform. He has added well-trained “technocrats” to his administration.
    – Temer represents a regime shift from the previous administration’s interventionist policies.
    – Temer has inherited the difficult task of rebalancing an economy that is currently in a recession with high inflation, rising debt levels and historic low consumer and business confidence.
• Brazil has announced structural reforms and is likely to introduce some sort of pension reform and labor reform.
• Political risks to outlook for Brazil include:
  • Corruption investigations include members of Temer’s administration.
• We are positive on Brazil for the long-term.

Argentina

• Maurico Macri was sworn in as Argentina’s first non-Peronist President in 14 years.
• Macri’s administration has exceeded market expectations by passing new policies to address Argentina’s economic imbalances, which include:
  • Sharp depreciation of an overvalued currency
  • Removal of capital controls
  • Adjustment of electricity tariffs
  • Settlement with holdout creditors, allowing Argentina to regain access to international credit markets
• Argentina’s $16.5 billion global debt offer received nearly $70 billion in investor interest in April.
• Challenges to rebalancing the economy remain:
  • Devaluing the currency and removal of subsidies has pushed inflation higher to about 30%. Macri’s Republican Proposal Party (PRO) lacks a majority in congress.
  • Macri’s plan of fiscal gradualism to consolidate the budget may risk policy credibility.
  • Large financing needs by the sovereign, provinces and corporates.
• We remain optimistic on Argentina.

Venezuela

• The Maduro administration’s unorthodox economic policy has led Venezuela down a spiraling path of wealth destruction, security concerns and massive shortages.
• Inflation estimates are close to 400%, creating massive shortages in basic supplies, such as medical equipment, basic goods, water and electricity.
• Falling oil prices have cut dollar export revenues by over 60%, challenging Venezuela’s financial capacity to avoid a sovereign default.
• Maduro has prioritized external debt servicing at the expense of imports, indicating his administration’s willingness to pay debts and a concern that a default on debt would trigger a full-blown political crisis.
• Opposition parties have initiated a recall referendum to pave a way for a transitional new government.
• Questions remain about Venezuela’s ability to service foreign debt and the governability of Maduro’s administration.

EM Outlook

• EM fundamentals have been slowing from a strong base.
  • There appears to be a stable base for countries to implement meaningful reforms that should lead to future growth despite macro headwinds.
• Oil may have found a near-term bottom.
• Spread valuations are near 2011 levels shown during the European Crisis.
• U.S. Treasury (UST) yields may remain range bound.

DoubleLine Emerging Market Fixed Income (DBLEX/DLENX)

• Top country allocations:
  • Peru: 15.6%
  • Mexico:15.1%
  • Chile: 14.3%
  • Colombia: 12.3%
• 81.2% corporate, 16.3% quasi-sovereign, 0.8% sovereign
• Duration is 5.10 years
• 59.9% investment grade bonds
• 100% U.S. Dollar (USD) denominated bonds
• Top industries: Banking, Utilities, Transportation

DoubleLine Low Duration Emerging Markets Fixed Income Fund (DBLLX/DELNX)

• Top country allocations:
  • Columbia: 15.2%
  • Mexico: 14.5%
  • Peru: 9.7%
  • Panama: 9.6%
• 91.25% corporate/quasi-sovereign, 7.35% sovereign
• Duration is 2.80 years
• 74.6% investment grade bonds
• 100% USD denominated bonds

Question and Answer

EM Credit Analysis

• DoubleLine does all of its own EM credit analysis. DoubleLine has 4 corporate credit analysts dedicated to EM, as well as 3 portfolio managers: Luz Padilla, Mark Christensen and Su Fei Koo, all of whom are responsible for all corporate research used to make fund decisions.

Quasi-Sovereign

• A quasi-sovereign is a company or a corporation that is either partially owned or majority owned by its government.
• The DoubleLine EM team likes quasi-sovereigns because they have seen historically received government support especially during times of financial stress.

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