This is the 4th Chapter of my book, and will live behind the paywall. At some point, I will make it to a single product, but that is in the future.
I started my fund management career as an Emerging Market analyst in 2002. I had wanted to be in emerging markets because I knew that China would be the next big thing. But in 2002, although China was starting to move, the big thing in markets at the time was the “convergence” trade. Essentially, whenever a country was seen as joining the Euro, markets would buy their bonds and currencies, with a view to some eventual convergence.
Convergence was a political rather than an economic trade. To join the EU, you needed to meet some economic measures on fiscal spend, reforms and debt to GDP, but once you were in, you were in. And the ECB would accept all European debt as equal, regardless of underlying economic trends.
I remember in 2005, I travelled to Nuremberg to watch Australia play in the confederation cup, and I started to think the convergence trade might be a problem. I had recently been to Warsaw and Prague for work and Ljubljana and Bratislava for pleasure, and what shocked me was that Nuremberg was much cheaper than all these places.
Does convergence make sense when you are already more expensive than parts of Germany? I didn’t think so, and I started to get nervous about the convergence trade. I put my concerns to the back of my mind, until in late 2007, credit concerns started to rise in the markets.
