We are all too familiar with the economic headwinds facing the U.S. and Europe. The larger, more mature economies of the U.S. and Europe are being held back by low growth, high unemployment, housing downturns and massive deficits. Most economists don’t see this changing much in the coming quarters. The consensus seems to be that the possibility of a recession has risen. Barring a recession, most pundits predict slow growth as their best case scenario. So how do we invest in this environment? I would suggest investors take a look at emerging market bonds.
The economic outlook for many of the smaller, less developed economies – the so called emerging markets – is much different. hese regions have much better growth rates, trade surpluses, favorable demographics and lower deficits. This economic outperformance is expected to continue. One byproduct of this better economic backdrop is a favorable bond market environment. In countries like Brazil, Chile, Mexico, South Korea and Australia, to name a few, interest rates are higher and real yields (average bond yields minus inflation) are positive. The currencies of these more dynamic economies are also expected to appreciate against the U.S. dollar, the euro and the British sterling.1
Contrast that with the bond market here in the U.S. and Europe. We have record low interest rates on our government bonds and real yields have turned negative in 2011.1 These low yields point to an environment of very low returns on government bonds going forward. In addition, our massive deficits most likely will necessitate a decline in currency valuations over time In short, not a lot on the upside going forward.
In summary, the economic conditions here in the U.S. and Europe are expected to languish. But this is not true everywhere. Yet, many investors do not have any international bond exposure. I would take a look at the composition of your bond allocations. Consider overweighting the bond markets and currencies of the faster growing emerging markets and reducing exposure to bonds in U.S. and European markets. Be sure to look for bonds that are un-hedged to the U.S. dollar. In this environment you want the currency exposure for additional appreciation potential.
1.Wells Fargo Funds Management, Investment Perspectives, International Fixed Income, 10-2011
Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP® and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Additional risks are associated with international investing, such as currency fluctuations, Political and economic stability and differences in accounting standards. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.
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