The general strength of emerging-markets economies — coupled with backsliding by the developed markets — has created appealing investment opportunities in the global fixed-income space, according to Art Steinmetz, chief investment officer in charge of fixed income at OppenheimerFunds Inc.
“It used to be if a country had a developed-market label, it got a free pass [from investors] on its lax policy strategies, and the emerging markets would get punished if there was even a whiff of trouble,” he said. “But the monikers are starting to not matter, because the emerging economies really are the engines of the world right now, and over the past year, the problems facing the developed markets has been laid wide open.”
Mr. Steinmetz manages the $12 billion Oppenheimer International Bond Fund Ticker:(OIBAX) and the $8 billion Oppenheimer Global Strategic Income Fund Ticker:(OPSIX).
“Our portfolios have been overweight in the emerging markets for many years,” he said, citing a 55% emerging-markets weighting in his International Bond Fund.
And of that 55% weighting in emerging-markets debt, all but 10 percentage points is invested through the local currencies.
“Just like the developed markets, the emerging markets are starting to issue debt in the local markets, and that provides better currency diversification,” he said. “You can also get higher yields by investing in many of the local currencies.”
An example is Brazil, a large and growing closed economy with “rising interest rates and reasonably low inflation,” Mr. Steinmetz explained.
He also likes the economic strength of Indonesia.
“It’s like the Brazil of Asia,” he said. “Indonesia is an emerging economy that is doing all the right things.”
Closer to home, there is Mexico “as a high-beta play on the U.S. recovery,” he said.
“There are a lot of cyclical issues swirling around right now, but we’re looking at the structural issues that will play out over a long time,” Mr. Steinmetz said. “And one of the major structural changes is that policies in a lot of the emerging markets have put those economies in better shape than most developed markets.”
In terms of the United States, Mr. Steinmetz admitted that “it is scary to look at the raw numbers.”
Combining the federal, state and local government debt, Mr. Steinmetz calculated a 140% ratio of debt to gross domestic product.
However, he added, “We’re not Greece.”
“We have a flexible currency, we haven’t been cooking the books, and our demographic situation is not nearly as a bad as it is in Greece, because of our flexible immigration policy that allows us to bring in more workers,” Mr. Steinmetz said.
Further, he added, while spending by the federal government has hit record levels over the past year, the country’s total debt has been shrinking because of a deleveraging by the private sector.
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