Pacific Investment Management Company (PIMCO) is out with a
very
compelling call on emerging market corporate
bonds
. The rationale is that since the economic crisis in the
developed world four years ago, the fiscal and economic strength
of emerging markets are looking extremely attractive to big money
managers.
The problem is that, due to record low rates around the globe and
increased demand, bonds issued by emerging market governments are
not yielding as much as they have historically. Further, because
of their new relative strength compared to developed nations,
more emerging market governments are issuing debt in local
currencies. Money managers typically favor dollar-denominated
debt for its security against inflation and devaluations in
emerging markets.
Enter emerging market dollar-denominated corporate debt.
As late as 2000, emerging market sovereign debt made up
approximately 80% of total issuance. Since 2003, emerging market
corporations have issued the majority of debt and the forecast
for 2012 is for more than 75% of total issuance to come from
corporates. The absolute dollar amount of sovereign issue has
remained fairly constant between $40 and $80 billion each
year.
PIMCO suggests emerging market corporate debt as both a
strategic and tactical move for investors. Holding emerging
market debt over the long-term will increase overall yield and
the debt denominated in local currencies may help to guard
against long-term depreciation in the dollar. Because corporate
debt tends to be of shorter duration, it can be a good tactical
decision as well. Record low rates must increase eventually and
when they do, bond prices will come down. Shorter-term debt will
not decrease in price as quickly as longer durations.
PIMCO especially likes issues of quasi-sovereigns, that is
corporations owned largely by the state, for their higher yield
and safety relative to sovereigns.
The iShares JP Morgan USD Emerging Markets Bond (
EMB
,
quote
) holds 141 bonds almost exclusively in sovereign debt with an
average duration of 12 years. Total return over the last
year was 19.9% with 4.06% dividend yield and an expense fee of
0.6%.
Other choices for emerging market sovereign debt include the
PowerShares Emerging Markets Sovereign Debt (
PCY
,
quote
), which is dollar-denominated debt, and the WisdomTree Emerging
Markets Local Debt (
ELD
,
quote
), which is local-currency debt.
I highlighted the WisdomTree Emerging Markets Corporate Fund (
EMCB
,
quote
) in an article last May as part of a
diversified income strategy
. The fund is up 9.5% since its launch in May and pays investors
a 4.3% dividend yield. The fund is fairly diversified with
exposure to corporate debt in Latin America (51.5%), Asia (23.9%)
and EMEA (24.6%) and sector exposure in energy (35.7%),
industrials (19.8%), metals (19.6%) and telecom (12.6%).
Full Disclosure:
Author owns shares of PCY and EMCB