GO
Loading...

Emerging Markets Bonds Safer Than US T-Bills: Study

Tuesday, 25 Oct 2011 | 2:11 PM ET

Emerging market debt could be safer than US Treasurys, according to a new study by Bank of America Merrill Lynch and the Eurasia Group.

"What everybody thinks is safe may be risky, and what everyone thinks is risky may be safe," said Lisa Shalett, chief investment officer at Merrill Lynch Global Wealth Management, who co-authored "The Great Global Shift; New World, New Rules" with Ian Bremmer of the Eurasia Group.

"We talk about US Treasurys as an example of something that actually in the long run may be a lot riskier," she added. "Emerging market debt might be a lot safer than folks think."

Emerging markets are now in better fiscal shape than America; their ratios of debt to gross domestic product (GDP) are half that of the U.S.

Plus, emerging nations have increasingly contributed a greater percentage of global GDP over the past decade than developed nations, according to the study. Where fiscal crises in South America and Asia riveted investors two decades ago, today the developed world is rattling global markets with their own high sovereign debts and deficits.

Investing in the Global Economy
Insight on why emerging market bonds are safer than U.S. Treasurys, with Lisa Shalett, Merrill Lynch Global Wealth Management and Ian Bremmer, Eurasia Group president, who also discuss why U.S. company models are not working in China.

"Change has arrived so swiftly that our largest institutions, while still holding to the paternalistic model of the West as benefactor/protector, are being surpassed by the very countries they were set up to help," details the report.

China, for instance, offered more aid to the developing world than the World Bank did over the last two years ($110 billion vs. $100.3 billion) — even as China continued to receive billions of dollars in aid from the World Bank, it goes on to say.

In order to adjust to that global economic shift, clients should double or triple their non-U.S. asset allocations from the typical 8 percent to 10 percent levels, said Merrill Lynch's Shalett. And emerging markets should account for 3 percent of an equity portfolio.

"This is about diversification, real diversification," she said. "Within every asset class within equities, you need to be in every geography."

However, attempts to classify emerging markets en masse falls short, she said. Acronyms such as BRICsmay have a catchy ring, but they convey a certain uniformity that doesn't exist. Russia, for instance, is rich in commodities, but has a shrinking population. Meanwhile, Turkey has seen a rise in religious conservatism, but its economy surged 10.2 percent in the first half of the year, the survey said.

And while China takes the investor spotlight, India and Indonesia merit more attention for their "compelling" demographics, commodity wealth, and political and economic systems, according to the survey.

Still, some emerging markets nations, such as Mexico, are "incapable" of hedging their way from economic drivers such as the U.S., added Ian Bremmer, president at the Eurasia Group.

"Mexico is basically a US investment — whether it's remittances, trade, drugs — you're investing in the U.S. if you're investing in Mexico," he said.

Follow the US Dollar Index

Track the Currency Markets Here

  Price   Change %Change
USD INDEX
---
LAQ
---