Why Even Debt Looks Better In Emerging Markets
by Tony Daltorio, Investment U Research
Wednesday, January 6, 2010
It’s a new year, even if Wall Street doesn’t seem to recognize it.
They still seem stuck on years gone by, when the west held all the power and didn’t have quite so much to worry about in the form of debts and deficits.
In Wall Street’s defense, the U.S. especially has kept its bonds temptingly liquid, advertising them as having practically risk-free rates: A dangerous illusion, considering how very unsafe they really are in countries like the U.S. and UK, where government debt has soared to unprecedented levels.
With fiscal deficits swelling in the west, major industrialized countries have no choice but to sell more than $12 trillion worth of government bonds through 2011 to fund the fiscal holes they dug themselves.
And despite how much politicians like to talk about financial reform, most of them actually prefer to keep things as-is, merely giving lip service to the concept of change.
Fortunately, savvy investors have a way out…
Emerging Markets Do It Better
Traditional financial hotspots failed investors in 2008 and 2009, and nowhere more than in the U.S., where the deficit reached 10% of GDP in the last fiscal year… the largest amount since World War II’s aftermath.
Meanwhile, net external debt nearly tripled to $3.5 trillion, with a projected increase of $1 trillion over the next decade… per year!
Add to that bankrupt states and the unfunded benefits the government owes to baby boomers, and the country faces one major problem with only one solution: Raise taxes substantially and slash spending at the same time… not a likely scenario in this very partisan political atmosphere.
Instead, the U.S. will doubtlessly continue eroding the value of its bonds, debasing the dollar and stoking inflation by printing more and more money… servicing its debt in increasingly cheaper dollars in a slow motion default that leaves US Treasury bonds worth a whole lot less in just a few years’ time.
Even as industrialized countries mortgaged themselves to the hilt to escape the financial crisis, blatantly ignoring that they have to pay off those debts somehow, someway in the future, many emerging markets handled the situation with low debt levels and prudent economic management.
As a result, while the U.S. debt-to-GDP level is fast-approaching 100%, China’s should soon stabilize at 46% and Brazil at 65%.
Though investors may not have known the exact figures, many of them still recognized the changing trends after Dubai’s recent debacle.
As the smoke screen of wealth and glamour dissipated to reveal painful levels of debt, emerging market bonds from China and Brazil benefited as investors recognized them as real safe havens.
Emerging Market ETFs
Though dozens of exchange-traded funds (ETFs) give easy access into the emerging markets, two especially target those countries’ sovereign debt:
- PowerShares Emerging Market Sovereign Debt Portfolio (NYSE: PCY), which makes a monthly distribution (profits from an investment trust that is then doled out to investors like a stock dividend) and has a near 6.5% yield
- JPMorgan USD Emerging Markets Bond Fund (NYSE: EMB), which also offers a monthly distribution and a 5.5% yield
- Or look into Templeton Emerging Markets Income Fund (NYSE: TEI), which also presents an easy in to take advantage of current trends.
Trading at about a 2% discount to its net asset value, it makes quarterly distributions that just sweeten the deal even more.
And considering that emerging markets are set to grow at rates the west can only dream about, investors should introduce a taste of less familiar lands into their portfolios.
Good investing,
Tony Daltorio
Related Investment U Articles:
- EU Summit Produces a Long-Term Solution for a Short-Term Crisis
- Brazil Points to a New Sovereign Debt Story
- Are Emerging Market Bonds Safer Than T-Bills?
- S&P Sounds the Alarm on U.S. Treasury Debt
- Global Wealth Will Skyrocket in the Next Five Years
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