ByJeff S. Vollmer:
As a child, I was spoiled. Rotten.
By the time I was seven, my expectations had become so elevated
that disappointment was imminent. Eventually, the harsh light of
reality crept over the horizon. Once in view, I saw the light. And
was crushed.
You see, I was a baseball fan from day one. The Reds had me at
Hello. And having been born in 1969, I was indoctrinated at the
onset of one of the greatest teams in baseball history: The Big Red
Machine.
I sat on the old man's lap and watched my first game, chomping
nervously on my pacifier, warm milk in hand. Ended up getting so
nervous that I drank too much and wet my pants. Sorry dad. But I
wasn't embarrassed. I was obsessed!
How could you not be? Under Sparky Anderson's leadership, The
Reds won NL Pennants in 1970, 1972, 1975 and 1976. They went to the
World Series in 1972, 1975 and 1976. They won it all in 1975 and
1976, becoming the fist team since the '21 and '22 New York Giants
to win consecutive World Championship Series.
Johnny Bench, Pete Rose and Joe Morgan each won NL MVP honors
during that run. In fact, Rose was the only one who didn't win
twice.
During the playoffs, I would sprint home after Maple Dale
Elementary's final bell to watch my beloved Reds battle the
Pirates, Dodgers and Cardinals. Could've taken the bus. But it was
too slow. Every inning counted.
Well, the Reds made one last run at the NLCS, unsuccessfully, in
1979. By 1980, The Big Red Machine looked more like a vending
machine. Its best players scattered to the wind.
The next 10 years? A long walk through the desert. Following the
success with which I'd been confronted at so tender an age, those
10 years seemed like 10,000.
"Dad, are you telling me that the Reds don't go to the World
Series every other year? And what in the heck is Pete Rose doing in
Philadelphia?!"
Point is, cycles end. Rotations turn and favor yesterday's
weakest links, much to the chagrin of those appalled spectators who
assumed that success was everlasting.
Economies and the investments therein are no different.
Yesterday's world champions are tomorrow's limping losers.
From 1978 through 1999, the S&P 500 index was negative in
only two years. Otherwise, investors in large cap U.S. equities
kicked butt and took names. Lots of them.
Then, from 2000 through 2002, they did not. Yet, other areas of
the market did great. If you weren't tied down to one team.
Point is, as in life, success -- and a lack thereof -- occurs
cyclically. In a rotation. Losers become winners. When I grew up,
the New England Patriots were terrible. Laughingstocks. Look who's
laughing now. Certainly not their poster boy quarterback, who also
happens to be married to the world's most highly paid (and
reasonably attractive) Brazilian super model.
Five years ago, the very mention of emerging market debt was
enough to make the drunkest of speculators risk averse. Emerging
market nations were poor. And poorly run. Why invest in foreign
bonds that could be more volatile than domestic equities,
right?
Rotation shifts. That's why. Even dark horses leave the
barn.
As U.S. earnings as a percentage of GDP reach their highest
levels since 1929, and wages as a percentage of GDP reach their
lowest since 1937, you simply can't help but look elsewhere. U.S.
Treasuries? Two percent returns. European equity? Don't even go
there.
So what about those emerging markets? What, with their
burgeoning middle classes, sparkling infrastructure and thirst for
success? They're like the Dos Equis guy, with higher yields.
Don't simply consider emerging markets equities. Consider their
bonds. Less volatility. Lots of upside.
EM bonds provide 3% to 4% more yield than their U.S.
counterparts. Moreover, consider their debt to GDP ratios? Very
American, when America was debt free.
The G-5 -- the world's five largest economies -- comprise 40% of
world GDP, but hold 70% of world sovereign debt. Meanwhile, those
"risky" EM nations also count for 40% of the world's GDP, but they
have only 10% of the sovereign debt. And their annual growth rates
are quadruple (or better) that of their developed market
counterparts.
As Spain, Italy and the U.S. begin to droop under the weight of
their burdens, Chile, Korea and Colombia are saving their
allowances. Positioning themselves for future league MVP
awards.
Investors can purchase broad baskets of EM bonds through an
index. Those indexes can yield nearly 6.5%, a 4.5% spread. With
less than 25% of the debt. PowerShares' EM Sovereign Debt index (
PCY
) yields nearly 5%. Oh, and it's up over 14% on the year.
Equity-like returns, without the volatility. iShares offers a
similar alternative in its JPMorgan USD Emerging Market Bond ETF (
EMB
).
Don't like sovereign debt? Then opt for the corporate
alternative, iShares' Emerging Markets Corporate Bond ETF (CEMB),
or even the high yield EM investment, iShares' Emerging Markets
High Yield Bond ETF (EMHY). All have done quite well over the last
year. All will continue to do all right, so long as their patron
nations maintain their increasingly strong balance sheets and
growth relevance.
On the equity side, while they will remain volatile so long as
Europe's debt contagion rages, EM stocks are trading at a 20% to
30% discount to U.S. equities. Vanguard's emerging market equity
index (
VWO
) or iShares' MSCI Emerging Markets Index (
EEM
) both provide excellent means of hitching an allocation to these
rookie sensations.
If everyone admits that EM nations are the growth engines of the
global economy, then why are they trading at such discounts to
their aging, over-indebted, bickering developed-market
counterparts?
Because investing habits, like all habits, die hard. Like Bruce
Willis. Or Michael Meyers in Halloween 6.
But they do eventually die. And when they do, you do not want to
be the last guy on the deck of the Titanic, still waiting for the
waiter to bring your gin and tonic, even as the boat begins to list
uncomfortably, and the women and children have all but
disappeared.
Disclosure:
I am long [[PCY]]. I wrote this article myself, and it expresses my
own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
this article.
See also
Today In Commodities: Livestock Gets A Lift
on seekingalpha.com