Flee ?Safe? Sovereign Debt, Says Hasenstab

Franklin recently became the largest private holder of Irish sovereign bonds with almost a tenth of the market, raising fears that prices would tumble as soon as he stopped buying. This month, however, Ireland sold 2.5 billion euros of five-year bonds paying 3.3 per cent, a sign of relative financial health. There was 7 billion euros worth of demand, with 90 per cent of the buyers coming from outside the US.

"This recent access to the market I think finally closed the door on a lot of the naysayers," says Mr Hasenstab.

Some investors are less sanguine. Myles Bradshaw, a portfolio manager at Pimco, says that Spanish bonds offer better value. "Getting the budget deficit down now depends on growth, but it's a small, open economy that needs global growth to pick up, and I can't really see that. So Ireland will need more austerity and I think that will be difficult to implement."

Mr Hasenstab says that his exposure to emerging markets means that he is already exposed to countries such as Spain and Italy, even if he does not own their bonds directly, due to the consequences of another crisis.

"If there's a tidal wave coming from a credit event in Italy, then it doesn't matter how great your thesis is on Malaysia, the ringgit's going to get blown up," he says.

But while Mr Hasenstab forecasts recession for Europe, he still thinks it will hold together, and is more upbeat about the global economy as the effects of quantitative easing by central banks in the developed world are exported to emerging markets.

Indeed, he remains patiently optimistic on one of the other great investment debates of the moment. "There's a lot of perma bears on China who believe that everything there is a Ponzi scheme and it's all artificial. I don't believe that."

He argues that overbuilding in China has helped the country avoid bottlenecks. "Brazil tops out at 4.5 per cent growth because they don't have the infrastructure, such as the roads, the rail systems necessary to grow faster without overheating.

"Were some developments, toll roads, or railroads built that shouldn't have been built? Sure, but I think that's not seeing the forest through the trees. Our sense is they will grow into that infrastructure over the next 10 years," he says.

That belief, he says, is a combination of the big macro themes, with the informed local knowledge behind such bets as Ireland, or Hungary when they are hated by the market. "Really, you can only do so much behind a Bloomberg screen."

Source: http://www.cnbc.com/id/100421965

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