Global Bond Investors Eye Emerging Market Carnage
"Sub"-merging markets: Not your grandfather's trade.
Brazil, South Africa and Turkey have all raised interest rates this week in an effort to stem currency slides and attract capital. Turkey's move is the most desperate: doubling the one-week repo rate last night to 10 percent. Market reaction has been swift and absolute. Traders have collectively hit the sell button, effectively telling Istanbul, "You can't fool Mother Nature."
Today's reaction is simply the latest in a string of down days for the entire emerging markets spectrum since mid-December. No asset class has escaped unscathed.
The carnage has started to attract the attention of global bond investors looking for deep value in highly distressed situations. Strategas bond guru Tom Tzitzouris writes this morning to clients:
We might have turned the page had we not heard similar comments over the weekend from Hans Humes, founder of Greylock Capital and the only American to serve on the Greek restructuring committee; he has also advised Belize and Costa Rica over the past several years. Humes sees value in the short-term municipal debt of Buenos Aires, where returns currently top 20 percent.
Let's be clear: These trades are for pros. You and I cannot call Charles Schwab and buy $1,000 worth of short-term muni debt issued by Buenos Aires. We can, however, buy exchange-traded funds (ETFs) that invest in these instruments on our behalf. There are several of these, and today we highlight two: Morgan Stanley's Emerging Markets Domestic Debt Fund (EDD) and PowerShares' Emerging Markets Sovereign Debt Portfolio (PCY). Fees are low and yields are high. Holdings vary greatly between them.
Mr. Tzitzouris is probably correct in suggesting we haven't seen the worst, but when yields start approaching the mid-teens, we too take notice... especially when the Hans Humes of the world see value.