Are Emerging Market Bonds Safer Than T-Bills?
by Jason Jenkins, Investment U Research
Friday, November 4, 2011
Emerging market debt could be safer than U.S. Treasuries, according to a new study by Bank of America (NYSE: BAC), Merrill Lynch (Nasdaq: PGEB) and the Eurasia Group.
Lisa Shalett, CIO at Merrill Lynch Global Wealth Management, recently co-authored the report The Great Global Shift: New World, New Rules with Ian Bremmer of the Eurasia Group.
“What everybody thinks is safe may be risky, and what everyone thinks is risky may be safe,” Shalett said. “We talk about U.S. Treasuries as an example of something that actually in the long run may be a lot riskier. Emerging market debt might be a lot safer than folks think.”
What many in the investment world may not be aware of is that emerging market countries are now in better fiscal shape than the United States.
Most emerging market ratios of debt-to-GDP are half that of the United States.
A New Definition of Safety
In addition, the study used the International Monetary Fund’s World Economic Outlooks Database to show that emerging nations increasingly contributed a greater percentage of global GDP over the last 10 years than developed nations.
And this data presents us with the reversal of fortunes. Where fiscal crises in South America and Asia riveted investors two decades ago, today the developed world is engulfed in a battle with their own high sovereign debts and deficits.
Since this global shift has happened so swiftly, we see that our larger institutions, which were set up to help these emerging markets, are now being surpassed by them because we’re holding onto the belief that the West will always know, and do, what’s best.
A perfect example is 2009 through 2010, where China gave more funding to emerging markets than the World Bank – even though China received billions of dollars in aid from the World Bank.
Shalett goes on to say in the study that to account for the global economic shift, investors should double or triple their non-U.S. asset allocations from eight to 10 percent levels. Emerging markets should account for three percent of your equity portfolio.
Avoid Cliché Investments
She stresses that this is about real diversification within every asset class within equities. For this strategy to be effective, you need to be in multiple geographical regions. When you follow the new fad and attempt to group countries by catchy acronyms, you probably won’t find yourself on the right path.
When we classify emerging markets into acronyms such as BRICs or the N-11, we are placing a certain uniformity among emerging markets that probably doesn’t exist. There’s consensus that the BRICs (Brazil, Russia, India and China) and the Next Eleven or the N-11 (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam) have the high potential of becoming the world’s largest economies in the twenty-first century.
However, they’ll get there in different ways.
Russia is rich in commodities, but has a shrinking population. Turkey, on the other hand, has seen a rise in religious conservatism and its economy surged 10.2 percent in the first half of 2011.
And while China is the emerging market darling of the investor world, India and Indonesia should get a lot of attention for their demographics, commodity wealth, and political and economic systems.
According to the survey, all of these aspects should be taken into account when looking for emerging market diversity.
Good investing,
Jason Jenkins
Article by Investment U
