This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Sinking of Italy, Greece Highlights Strength in Emerging Markets

BOSTON ( TheStreet) -- Greece and Italy look to be on the brink of failure, prompting investors to flee not only Europe, but also some emerging economies for fear of another widespread credit crisis.

DoubleLine portfolio manager Luz Padilla says that would be a mistake, costing investors money in some of the most vibrant economies where credit ratings are actually improving.

"The underlying credit metrics of a lot of these countries and companies are stronger than their ratings would imply," says Padilla, who manages DoubleLine's $200 million Emerging Markets Fixed Income Fund (DBLEX) from her Los Angeles office. "We're talking about apples and oranges. It really is the emerging markets that have the stronger balance sheets and have the potential to continue to make improvements to their underlying credit metrics because their growth trajectories are significantly higher than those of the developed markets."

Emerging-market countries such as Brazil, Russia, India and China have easily outpaced growth in the U.S. and Europe, although equity performance has slipped in recent months. For example, Brazil's Bovespa index has dropped 16% this year, on par with declines of European bourses like Germany's Dax and France's CAC 40. Analysts have also been down on growth expectations, as the Bovespa's price-to-earnings ratio of 9.3 also matches those in Europe and actually trails the S&P 500 index P/E of 13.1.

When it comes to fixed income, though, Padilla says there are plenty of opportunities in emerging markets. There are risks as well. She notes that in local currencies, investors didn't get much of a return in 2010 but still had almost three or four times the volatility of sovereign debt and corporate debt, which are denominated in dollars.

"At this point in time, it's the corporate sector in dollars that offers the right mix of attractive valuations as well as the potential for additional credit improvements and migration up the credit curve," Padilla says.

The portfolio of the DoubleLine Emerging Markets Fixed Income Fund shows that Padilla isn't kidding. About 75% of the fund's assets are in emerging-market corporate bonds, compared with about 13% in quasi-sovereign debt and 11% in cash. The portfolio counts 82 issues as of Sept. 30, with Brazil, Mexico and Peru each representing about 14%.

Less than 7% of the portfolio is in bonds rated AA or A. The fund didn't own any triple-A rated debt as of the end of the third quarter. Instead, about 43% of the portfolio is in BB-rated bonds and another 25% in triple-B-rated bonds. She's comfortable with such risk because she says credit-rating agencies are too harsh.

Even though the credit ratings may not be high, Padilla says she and her team are finding global leaders in emerging markets that have debt that trades at spreads equal to two times that of a similar company domiciled in developed markets. She sees opportunity, though, because developed markets don't have the same growth trajectories as emerging markets.

"Here we have companies -- we're not talking about small companies, these are large-cap companies -- that have strong underlying credit metrics and that are operating and domiciled in countries that are heading in the right direction," Padilla says.

Two issues that Padilla highlights are Brazilian media provider Globopar and Colombia's Pacific Rubiales, which is a producer of crude oil and natural gas.

While the fund is young, it has held up fairly well compared to its benchmark, the JPMorgan Emerging Markets Bond Global Diversified Index. Since its April 2010 inception, the fund has an annualized return of 8.7%, trailing a 9.3% return on the benchmark index. Over the past year, the fund has an annualized return of about 5%, compared to a 3.3% return on the JPMorgan index.

-- Written by Robert Holmes in Boston.

>To contact the writer of this article, click here: Robert Holmes.

>To follow Robert Holmes on Twitter, go to http://twitter.com/RobTheStreet.

>To submit a news tip, send an email to: tips@thestreet.com.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $121.30 0.00%
FB $94.01 0.00%
GOOG $625.61 0.00%
TSLA $266.15 0.00%
YHOO $36.67 0.00%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs