Is Emerging-Market Debt Mispriced?

Emerging-market specialist John Cleary at Focus Capital says it's time to buy emerging-market debt. He has run down his equity book in this asset class and is running to cash and debt. Cleary says in the current period of volatility you don't take risks -- which means preserving capital and seeking steady predictable returns.

But he is not ignoring return opportunities. Cleary argues that the widening out in spreads on Asian corporate debt in particular should present a reasonable turn. Emerging markets are still growing even as the economists fret about the strength of the US economy, and the companies that are benefiting from that growth have seen their debt sold down on contagion fears. Look to the lesson of the late nineties, says Cleary, where the currency crisis had the same effect. Investors that made money from that period of distress were buyers of beaten-up debt.

It takes resolve to go in and buy when the market seems to be running in the opposite direction. The fear of default (which wider spreads reflects) is out of whack with the reality in those markets, he believes. Instead of bonds pricing off domestic economic worries they are reacting to the US subprime-generated volatility.

The less brave might just want to sit on the sidelines. Cleary has a duty to his investors to commit capital to the markets. The rest of us can afford to hang on, and if Sandy Jadeja's chart reading is correct, there is no reason to rush in. Sandy ran through the Dow, FTSE-100 and crude prices for us this morning. The message: the equity markets are still looking for a base, so there will probably be some more downside, and the crude price is probably going higher still!

If you like cars, stay with the programming this week. Lots more to come from the Geneva motor show.

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