The New Allure of Emerging-Market Debt

SingaporeWith growth prospects in the U.S. and other industrialized nations projected to be stagnant over the next few years, where can investors turn for higher yields? The answer for many is emerging-market debt funds and exchange-traded funds, where returns have been far more attractive than, say U.S. Treasury yields, with the added benefits of portfolio diversification and currency appreciation.

Emerging-market debt funds and ETFs invest in the fixed-income securities of developing nations. These securities can include sovereign debt/government bonds; bonds of emerging-market corporations and government-run entities; or other foreign-currency-denominated debt instruments that are typically tied to a country's GDP growth rate or the appreciation of its currency against the U.S. dollar. Already, more than $40 billion has poured into emerging-market debt funds this year.

Three Key Factors

Investors are flocking to these debt funds because several analysts and the International Monetary Fund have forecast that growth rates in emerging markets will more than double those of industrialized nations in 2011. The IMF projects emerging-market economies will grow 6.5% in 2011, compared to 2.6% for the U.S. and 2.4% for other developed nations. But growth is only part of the allure.

"The story for emerging markets for U.S. investors comes down to three things: yields, credit ratings and the U.S. dollar," says Ed Lopez, marketing director of Van Eck Global, which offers an emerging-market ETF.

Lopez says emerging-market debt has more attractive yields that are close to 6% versus 2.5% for 10-year U.S. Treasurys. He also points out that emerging nations have lowered their risk profile because their credit ratings have been getting upgrades, while developed nations have seen downgrades. And the record price of gold indicates that people are moving to precious metals as a hedge against U.S. dollar weakness. All these things favor emerging-market debt as an investment over the debt of developed nations.

"A Comprehensive View"

Cristina Panait, vice president and emerging-market strategist of the $400 million Payden Emerging Market Bond Fund (PYEMX), incorporates all types of debt instruments in her portfolio. Although it primarily comprises sovereign debt, 15% is in bonds of privately owned corporations and 14% in bonds of 100% government-owned companies.

"In order for us to be involved in a country, we have to be positive about its fundamentals. We wouldn't invest in a country just because it has a high yield or everyone is interested in it," says Panait. "We take the approach of having a comprehensive view on all the investment opportunities and pick the ones that we think are most attractive in each country."

The fund was up 28.9% in 2009 and is up 14.86% through October.

Other emerging-market bond funds to consider include T. Rowe Price Emerging Markets Bond (PREMX), up 13.75% through October; and PIMCO Emerging Local Bond (PELBX), up 16.66% through October.

Emerging-market bond ETFs include Van Eck's Market Vector Emerging Markets Local Currency Bond ETF (EMLC), which doesn't rely on just U.S. dollar-denominated debt but also factors local currency appreciation into its returns. PowerShares Emerging Markets Sovereign Debt Fund (PCY) and the iShares JPMorgan USD Emerging Markets Bond Fund (EMB) are ETFs that track only U.S. dollar-denominated debt.

Beware of a Global Slowdown


Popularity and relatively strong returns, of course, don't eliminate risk. Lopez warns that Van Eck's ETF entails currency risk, so returns could be hurt if emerging-market currencies fail to appreciate against the dollar. Other risks that go along with investing in emerging markets, such as transparency risk and political risk, should always be considered.

"But the main risk is that if you have a double-dip recession in the U.S., it could translate into a general global slowdown," says Panait. If growth drops in many emerging nations, it could worsen their debt situation. It could also bring risk aversion back into the market. And "if investors don't want to own any risk, there could be a flight to quality such as Treasurys," says Panait, "and that might negatively affect emerging markets."

So, be thorough before you invest in emerging-market debt -- and if you do invest, stay alert afterward.

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randeg11@yahoo.com

Well, it is not only in the down-market that we have to be careful in investing our hard-earned money but this alert is good for all year round decisions. I agree with the author though that with the weakness of the US dollar, investors are driven to the emerging market. Evelyn Guzman http://www.debtchallenges.com (If you want to visit, just click but if it doesn’t work, copy and paste it onto your browser.)

October 07 2010 at 6:59 AM Report abuse rate up rate down Reply
ronsjigslures123

Sure many are making a good buck in some of the market yhese days .. but you have to remember that prices of everything in the USA is going up by 15 to 20% at a time .. chocking the millions of BUYERS out of money, the rich can always buy .. BUT A COUNTRY LIKE THIS ONE NEEDS THE MILLIONS OF LITTLE PEOPLE TO BUY ... other wise the rich and there bucks will become a LOT less in value, so they will intern loose tons of money over time. The same thing will happen to these people making tons of cash in the stock market, or bonds,secuitys or what ever .. without the world market selling LOTS of products, all there money will not be worth as much. Remember it takes a LOT of money to be rich these days, and cost a lot to keep all that money. I can keep my money burried in the back yard in a box, and get it when i want, and don,t have to worry about paying a accounting firm millions to watch my money, or tax lawers a million to make sure everything goes ok, and don,t fore get the taxes, it costs me mothing to get a grand out of my box when i need it ... the rich can,t they pay many people to keep track of there holdings and cash .. and the price of being rich is going up and up, hold onto your money people this whole thing will come tumbling down soon, the USA and other world nations can,t keep borring peter to pay paul to much longer, there running the nations like people did 15 years ago when a person had 35 credit cards in there name, and just keep paying ONE credit card statement with another credit card, and so on down the line, your bound to hit the END OF THE LINE.

October 07 2010 at 12:08 AM Report abuse +2 rate up rate down Reply
hemipwr54

Invest in the UAW Health Care Fund they seem to have a in with the Government , I mean they can get billions of taxpayers money with just a little begging . What better way than the UAW way , borrow money from someone then make that person buy your product so you can pay them back their won money , such genius . Buffett is wondering why people aren't investing in stocks as much as they should , reminds me of Enron wanting people to invest telling them everything is fine right up till Enrons collapse , nice try Buffett .

October 06 2010 at 12:08 PM Report abuse -2 rate up rate down Reply
rgkarasiewicz

This is a sucker's bet. Don't get ensnared in that net. Move your funds into government inflation-protected securities such as U.S. Series I Savings Bonds or TIPS.

October 06 2010 at 10:26 AM Report abuse -2 rate up rate down Reply
1 reply to rgkarasiewicz's comment
bbpincorp

yup...some suckers made 43% in 21 months

October 06 2010 at 11:45 AM Report abuse rate up rate down Reply