As we have said previously, many investors made macro asset class investments in high risk assets. When they wanted exposure in junk bonds, they invested in vehicles exposed to junk bonds. Investors wanting EM exposure invested in an EM vehicle. To which situations they were exposed were unknown to most investors. If readers take anything away from this report it should be this:
To see a list of high yielding CDs go here.
When monetary policy produces Goldilocks financial conditions, it is possible for most assets classes to rise in value (even the most impaired assets). However, when the tailwinds from extraordinary monetary policy accommodation are removed, assets values can sink, not necessarily to the same degree.
Sophisticated investors better understand which of their investments are benefitting from improved fundamentals and which are benefitting from Fed-driven asset value inflation. When the Fed unwinds policy accommodation, sophisticated investors take closer looks at their investments and begin to weed out the problem children. We believe that this is playing out at the present time. Readers need to understand that not all EM investments are impaired, but not all are healthy either. Time must be taken to research and evaluate each holding.
This goes beyond deciding whether or not one wished to be invested in EM, junk bonds, etc. It means deciding in which specific assets within these asset classes one wishes to invest and which assets one wishes to avoid. When we suggest this approach, readers often tell us that they have neither the time nor the expertise to evaluate individual investments. Not to be harsh but: Make the time and either acquire the expertise or hire someone who has the necessary expertise.
By not considering each investment individually, there is the potential that one could sell a good investment and/or retain a potential problem. Blanket selling of assets almost ensures that healthy babies will be thrown out with the gray bathwater.
We will try to separate opportunity from danger.
When considering investing in emerging markets, we would prefer economies which are not running large current account deficits, are known for upholding rule of law and are well managed. We believe that the following countries fall into this category:
South Korea: The Republic of Korea is a rising economic powerhouse. In fact, we question whether it should still be considered an emerging economy. Rising automaker Hyundai, electronics powerhouse Samsung and AAA-rated financial institution, Hana Financial Group are all domiciled in South Korea. The ROK is A-OK and could be the most attractive economy in which to invest in the Asia-Pacific Region
Mexico: It is said that the three most important considerations for opening a successful business are location, location and location. Mexico is conveniently located next door to the largest most dynamic economy in the world. In fact, approximately 75% of Mexico’s exports go to the United States. Mexico has taken steps to privatize its energy sector and become more competitive in the area of taxes. Mexico might often be lumped in with other Latin American economies, but it is beginning to pull away from the pack and moving closer and closer to the developed world.
Poland: This is the growth story of Eastern Europe. Poland’s economy is the sixth largest in the EU. Since 1999, Poland’s GDP has averaged 3.70% and did not sink into recession as a result of the 2008 financial crisis. Poland’s largest trading partner is Germany, Europe’s largest and (arguably) healthiest economy.
By Thomas Byrne – Director of Fixed Income – Investment Consultant
Thomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.
High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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