Beat the Stock Market With Emerging Market Bonds

The risk factor has fallen

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funds bonds newspaper e1293719808732 Beat the Stock Market With Emerging Market Bonds

You can say one good thing about the August-to-September stock market swoon. It gave an investor committing new money the chance to earn higher future profits — lower prices going in means more upside potential. According to my proprietary stock-valuation model, which uses very conservative inputs for earnings growth and P/E ratios, it’s now reasonable to expect the S&P 500 index to generate a 7.3% compound annual return over the next 10 years.

That’s certainly a lot better than 2.2% on a 10-year Treasury note. A decade from now, if my projections pan out, $10,000 invested today in the S&P will grow to approximately $20,200. The same stake in a T-note, with reinvested interest, will increase to just $12,500.

But wait a minute — to earn those outsized returns, a stock investor must put up with huge monthly, weekly and even daily price swings. Isn’t there some way to beat the T-note without bungee-jumping your portfolio?

Yes, there is. In fact, the type of bond I’m going to tell you about has the potential to make almost as much money for you as the stock market in the coming decade, with roughly 30% less risk.

Emerging from Obscurity

I’m referring to emerging-markets bonds. In recent years, most U.S. investors have heard complimentary things about the developing stock markets of the world (especially Brazil, Russia, India and China — the so-called BRIC countries). The real unsung story, though, has to do with the emerging countries’ bond markets.

Only 13 years ago, in the fall of 1998, the developing world was a basket case. Russia had just defaulted on its debt and Indonesia, Korea and Thailand were facing currency and debt crises on much the same order as Greece today.

Through severe fiscal retrenchment, both the private and public sectors in most emerging countries healed their balance sheets. An economic boom followed, which continues, more or less unabated, to this day.

As a result, the developing countries now hold 60% of the world’s foreign-exchange reserves — no more currency-devaluation threat. Even more to the point, from a bond investor’s perspective, the typical government in the emerging markets carries less than half as much debt, relative to GDP, as the U.S. Investment-grade corporations domiciled in emerging markets are shouldering nearly 40% less debt, relative to equity, than their counterparts in developed economies.

In short, EM bonds generally are far less risky than they were a decade ago. Yet these bonds still command exceptionally high yields, in many cases approaching or even exceeding the total return I’m forecasting for the U.S. stock market over the next 10 years.


Article printed from InvestorPlace Media, http://investorplace.com/2011/11/beat-the-stock-market-with-emerging-market-bonds/.

©2014 InvestorPlace Media, LLC

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