LONDON With sweeping economic reforms, Argentina represents an investment turnaround story similar to Ireland in 2011, according to high-profile bond investor Michael Hasenstab, who has also gone out on a limb with a big bet on unloved Mexico.
Hasenstab, whose flagship $42 billion Templeton Global Bond fund is celebrated for hugely successful contrarian punts on Ireland and Hungary is pessimistic on much of the developed world, noting increased populism and nationalism. He also says the U.S. Federal Reserve remains "behind the curve" on raising interest rates.
Franklin Templeton's star asset manager, who oversees a total $120 billion, has instead moved to his biggest ever position on Latin America, having increased holdings of beaten-down regional assets from 2015.
Factsheets for the Global Bond Fund show Mexico, battered by U.S. President-elect Donald Trump's rhetoric over a border wall and import taxes, was his biggest holding at the end of September, at 16.7 percent. He said he had added to this position in the fourth 2016 quarter.
The bet on Mexico is typical for Hasenstab, who made his name buying unloved assets and waiting patiently, sometimes for years, for a turnaround.
Hasenstab reckons Trump's trade threats against Mexico are priced in. In comments were cleared for publication on Thursday he said the peso, currently at record lows around 22 per dollar MXN= has "well overshot" fair value of 12-13, especially given the country's sensible policies.
"At some point that might settle in and the peso will have a pretty sharp rebound ... this year, for sure," he told Reuters, speaking from his office in San Mateo, California.
Hasenstab added Argentine debt in September, raising it to 3-5 percent, with an eye on President Mauricio Macri's economic reforms and falling inflation. That's a shift from April, when he said he saw no value there and wanted proof of change before investing.
"Argentina is a turnaround story analogous to when we made the investment in Ireland ... There are still risks there in execution but in terms of a turnaround story you are well compensated in terms of yield," Hasenstab said.
Hasenstab bought billions of euros of Irish government debt in 2011, when a crisis had pushed yields to 14 percent. Holding a tenth of all Irish debt at one point, he has since sold at a huge profit.
He also waded into crisis-hit Brazil in 2015 as other investors fled and scooped double-digit returns last year.
Hasenstab contrasted Argentina's experiences after eschewing decade-old populist policies with the rise of nationalism in the United States, Europe and Britain.
"The real story is that the developed world is entering a period of populism ... at a time when parts of Latam, which experimented with that populism and found it ended in social and economic chaos, have done a 180 degree turn," he said.
EUROPE - POPULISM, VALUATION
Europe, where French, Dutch and German elections may bring a rightward lurch, is especially at risk. Hasenstab has been short euro EUR= since 2009 and expects it to slide below parity to the dollar this year from 1.05 now.
"I wouldn't go so far as to play a euro zone break up in 2017 or 2018 but I do think nationalist parties will gain enough prominence that the question will be discussed more and more, and will cause investors to question whether they want to put their capital in euro-denominated assets," he said.
Hasenstab's fund suffered in recent years as investors embraced U.S. Treasuries and the dollar - the global fund's assets are down from $70 billion at end-2014 and returns were plus 0.5 percent in the year to Sept. 30, 2016.
Over 10 years, however, it is the top performer within a peer group tracked by fund research house Morningstar.
Hasenstab's repeated warnings of a Treasury bubble appeared borne out when Treasury yields jumped over 100 basis points in September-December 2016. Morningstar data shows his fund enjoyed a 16.6 percent excess return over Citi's widely used World Government Bond index.
"The Fed is still behind the curve, given the growth and inflation outlook," Hasenstab added.
Hasenstab predicts a soft landing for China but does not plan to invest there, predicting gradual yuan depreciation CNY= and possible trouble further out: "The risks (for China) are two to three years out rather than in the next one to two years."
Emerging market risks were underscored when Hasenstab and fellow investors were forced in 2015 to accept a write-down on Ukrainian debt and extend maturities. In return they received higher coupons and growth-linked instruments.
Hasenstab had sunk around $6.5 billion into Ukraine from 2011, owning over a third of outstanding bonds at one point. He describes the investment as one of his biggest successes, with Templeton data showing cumulative returns on Ukraine of about 16 percent, even after the restructuring.
Asked about Kiev's stuttering progress on reforms - key to reviving growth and future payouts - Hasenstab said: "This is a long-term investment for us. We didn't expect everything to turn around in a year."
(This version of the story corrects fund performance in paragraph 16, paragraph 20 clarifies that Hasenstab does not plan to invest in China)
(Editing by Catherine Evans)