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Published: December 26, 2009
As the world evolves, so, too, does the
landscape for income investors.
Emerging markets -- any country in the process of rapid growth
and industrialization -- were once the exotic purview of Wall
Street's high-risk trading desks.
Today, however, these nations comprise more than 40% of the
world's population. They're responsible for a nearly a third of
the world's gross output. And they've become a mainstream asset
class that serious income investors can't ignore.
The International Monetary Fund says emerging markets accounted
for nearly all of the world's growth this year. What's more,
they're forecasted to grow at nearly three times the pace of the
rest of the world in 2010.
Several factors make this an excellent time for emerging
markets:
The first is the financial posture of the Western governments
post-crisis. They are continuing to rack up enormous amounts of
debt to stimulate economies devastated by the recession. At the
same time, these governments are also holding interest rates at
rock bottom to spur investment and job creation..
Secondly, though the United States and European Union were
devastated by the recession, many emerging-market countries were
not exposed to the excess leverage and subprime contagion that
nearly derailed the financial system. Developed countries
struggled to borrow more to combat the slowdown, but emerging
markets like China were able to confront it with cash surpluses.
Third, the supercharged economic growth of the past decade has
improved fundamentals in many emerging markets. In 1998, only
10% of emerging-market debt was highly rated "investment grade."
Today, that number has grown to about 50%, according to one
Morningstar analyst. Yet interest rates in these countries are
still much higher, reflecting the credit risk of years past
rather than the relative strength many of the economies show
today.
What these factors mean is this: Developed countries offer
deteriorating creditworthiness and low interest rates; emerging
markets offer improving credit strength and pay higher interest
rates. This may seem backward, and it is. In the meantime,
however, income investors should consider locking in emerging
markets' low-risk, high-rate returns.
Funds are the best way to invest in emerging market debt. With
funds, you own a share of a diversified pool of bonds that would
be impossible to amass yourself. A fund can also do things you
can't do yourself like employing a team of experts with
resources to scour the markets from India to Argentina in search
of the best investments.
These funds have been phenomenal performers. According to the
J.P. Morgan Emerging Market Bond Index, emerging-market bonds
have averaged about +11% per year in total return during the
past 10 years -- a period during which the S&P 500 Index posted
a loss. Although emerging-market bonds can be volatile, they've
only experienced three down years since 1994.
One standout is the Templeton Emerging Markets Income Fund
(NYSE: TEI). This fund has blown away the competition,
averaging an astronomical +15% per year in total return for the
past 10 years. TEI has rocketed an amazing +70% so far this year
as investors have fled low-yield U.S. Tresuries in favor of
higher-paying emerging-market debt. Since TEI's inception in
1993, the fund has posted double-digit positive returns in all
but five years.
TEI pays quarterly dividends at $0.25 per share plus a capital
gains distribution in December. At today's price, the fund
yields a solid 8%. Even more impressive, TEI doesn't use
leverage to juice returns. And, the quarterly dividends are all
interest income.
The fund held 93 sovereign and corporate bond from all over the
world with an average rating of "BBB-" from Standard and Poor's.
About 55% of the fund is in Asia and Latin America and 23% is in
Eastern Europe (mainly Russia). The top county weightings are
Brazil and Indonesia.
The world is changing. Income investors need to change with it.
It's time for income investors to embrace emerging markets. TEI
has pulled back from its highs and can be bought at its current
price.
-- Tom Hutchinson
Staff Writer
StreetAuthority |
