Although everyone has been led to believe by the same economists (who could not predict the crisis in the first place) that we are out of the woods, though some still do remain skeptical. The ones who remain skeptical are the same perma bears who have been skeptical since beginning of the year, 2009. You may however, be very surprised to note that while economists, pundits and investors alike have been skeptical of the recovery, however, some investments have generated phenomenal returns. These profitable returns have, in fact, come from the BRIC nations, where Latin America has generated over 100% returns in the period Jan-Oct 09 (YTD), India has generated over 80-100%, while China has generated over 50-60%. Europe and US have generated positive returns too, in the range of 40-50% in Europe and 20-30% in the US. Additionally, investors who invested in Energy and Global Emerging Markets combined also made profits of 20-30% in Energy and 50%-60% in Global Emerging Market investments. Asia was another important region where investors profited from 50%-60% returns this year.
But the most surprising place to invest has been bonds, where Emerging Market bonds have rallied over 40%-50% while developed economy bonds have risen by 20%-30%.
The only laggard this year has been Japan, which also is close to losing its status as the 2nd largest economy in the world to China soon, as calculated by the size of their GDP.
Coming back to bonds, which are considered safe and have seen a huge resurgence this year. Investors have been scrambling to invest in bonds while companies and Govts worldwide are issuing new bonds. The bonds from developed countries and companies from those countries have been slow but the large corporations from emerging markets around the world have issued trillions of dollars worth of bonds and all have been oversubscribed due to the overwhelming demand. Countries such as Iran, Russia, Philippines, UAE, Venezuela, Croatia, China (to create their bond market, not to collect any more money than they already have) have issued bonds.
Due to rising demand and investor appetite, the yields have continued to fall. Compared to 6 months ago, bond prices have rallied to anywhere between 20% to 50% up, depending on the company's credit risk / sector and the bottoming of the equity markets in Mar/Apr 09.
Some good ideas this year include investing in alternate currencies such as GBP and EUR to yield higher returns of say, 5% pa in the bond along with the rise of the GBP or EUR, by say 10-15% (from 1.40 GBP to 1.65 today) or (EUR from 1.25 to 1.50 levels). Along with the increase in the bond prices of anywhere between 10% to 50%, a yield of 30-40% was not at all difficult to reach in the past year. However, going forward this return has reduced to about 15% since the capital appreciation on bonds has almost come to an end and if difficult to find, but returns of 5-6% on an unleveraged basis are possible along with an additional return of 10% on the currency gain. Hence, 15% on an annual basis is quite achievable, in my opinion, over the next 6-12 months.
Some bonds that may offer such returns include the Al Dar bond of Abu Dhabi, Vedanta Resources from UK, or Rep of Venezuela (in USD). Amex, Gazprom and Goldman Sachs also offer returns of approx 5-6% in GBP while in EUR, ANZ bank, Rep of Venezula and Rep of Philippines offer the opportunity to obtain a return of approx. 5-6% pa. Please review your risk profile and investment horizon with a qualified investment advisor before investing in any investments.
Whether the current crisis gets worse or not, at the end of the term of the bond (approx 4-7 years), the company or the country is bound to repay the bond else it will trigger another global crisis. The trick is to identify the bond that has the least likelihood of default at the end (i.e. the company will do well over the next few years and make enough profits or its stock is doing well etc) but perhaps has some difficulties today i.e. cash crunch, litigation etc.
The investment opportunities in the future will mostly come out of gains in currencies against USD since USD is expected to continue to weaken. For example, the Bond fund of UBS investing in Brazilian bonds has risen over 50% YTD primarily because it takes exposure to Brazilian Real which has risen from 2.50 to 1.70 against the USD (up by 32%). Such investments will continue to yield results until US gets out of its quagmire of fiscal deficit and low interest rates compounded by the falling real estate and a widespread financial crisis that gobbled up giants such as Bear Stearns, Merrill Lynch, Citi, Lehman Bros, Fannie Mae and Freddie Mac, AIG, 100 banks in US, Madoff, UBS, Iceland, Latvia etc etc. A spending equal to the annual GDP of USA has been approved by the US Congress, the amount of this spending is beyond enormous at USD 14 trillion dollars. This will continue to create financial problems for the US no matter what anyone says, in the coming years. Someone cannot just continue to spend to cover past problems. This only creates worse problems in the future.
In short, if a suitable allocation is done across all investment sectors, regions worldwide etc then profits continue to accrue since some market will always continue to go up, regardless of what the economists or the TV presenters or the media continue to propagate to meet their own agendas.
Stay tuned....