Korea/Philippines Investment Opportunity, Comparison of CDS with Europe/Middle East

If you look at the attached chart, you will observe the Credit Default Swap Rates (CDS) of various countries. The CDS prices indicate the chances of a default of a country or a company and are used as a tool to hedge against defaults by investors. Higher the price (or rise), higher the chances of default.

Greece has risen from below 200 levels in late 2009 to 1,297 today.

Germany has been stable but volatile at 44 today. It went over 60 few months ago and over 90 in 2009, but was below 20 until Sep 2008.

Dubai continues to be among the highest in the region. When compared to two benchmark large countries, Bahrain and Egypt on the chart we see that Bahrain despite its problems is at 269 and has come off from 350 levels, was stable all through 2010 though it touched a high of 700 in Nov 2008.

While Egypt rose to 800 levels in Sep 2008 but has come down and was stable at 250 levels until Jan 2011 and jumped to 345 and touched 400 levels 2 months ago at its peak recently.

Dubai is at 371, Bahrain at 269 and Egypt at 345 in Middle East.

Dubai was highest ever in late 2008, was volatile in 2009 and stable in 2010 and has been coming down every week in last few months, from over 400 levels it is now at 371 today.

When compared to all these countries, I find Korea to be very strong and an excellent investment opportunity.

Korea is at 99 level, despite many people considering it as risky or a 'developing' country. Korea was very stable until 2008, when it rose due to the onset of global crisis, went as high as 650 levels, then dropped all through 2009 to below 100 level and has remained stable through late 2009 until today in Apr 2011 and getting gradually lower.

Compared to Germany, Korea is currently risky but rising and Korea is not in a region where there is a financial crisis while Germany is. Additionally, Japan, Australia and China are all growing (or will grow/spend in the near future) very rapidly helping Korea among other adjoining countries in the region.

Compared to Middle East, Korea is at least 5 times or more safer.

Over the last one year, the highest growth of risk and hence rise in CDS prices has been in following nations:

1. Greece, increased by 817 points
2. Ireland by 473 points
3. Portugal by 406 points
4. Venezuela by 208 points
5. Egypt by 125 points
6. Bahrain by 112 points
7. Lebanon by 93 points
8. Spain by 83 points

The above increase since April 2010 clearly indicates that Portugal, Spain, Ireland, Greece etc are all in trouble and will eventually default or cause sufficient financial problems thatthey will be unable to rise.

There is a strong rumour that Greece may default this coming weekend. Let's see.

Yields on 10 year bonds of Portugal continues to rise and is at 10% levels, same like India, while Greece is at 15%!

Meanwhile, the decline in risk and decline in CDS prices has been most in the following countries from April 2010 to April 2011:

1. Argentina by 303 points
2. Iceland by 146 points
3. Ukraine by 112 points
4. Dubai by 46 points
5. Kazakhastan by 32 points
6. Colombia by 28 points
7. Chile by 26 points
8. Philippines by 22 points

Iceland and Dubai may not have improved considerably but risk has come down, according to market valuations.

While Philippines is another country which continues to grow quietly and its bonds also offers a great investment opportunity.

Korea Idea:

Govt of Korea USD bond maturing 2025, rated A, size USD 400m touched a high of USD 118.50 in Oct 2010 and has declined to USD 106 levels (10.5% down) today yielding a solid  5.10% in USD.

Chances of rise of this bond to USD 110 levels are quite high over the coming months which shall deliver a 4% gain plus interest earned. Or one can continue to remain invested until it goes back to USD 115 levels.

Korea will grow at an estimated 4.3% in GDP in 2011 and grew 6.2% in 2010. It is Asia's 4th largest economy. Unemployment is only at 3.8%. Korean Won has strengthened from 1220 levels to 1080 levels over last year, a 11% rise, in an uncertain period which is an indicator of better times to come in Korea. Foreign Investment in Korea was USD 825 billion in 2010 a jump of 13.6% from 2009.

Aside from Korea, Rep of Philippines offers two USD bonds, one maturing in 2034, coupon 6.375% which has declined from a high of USD 119 to USD 104 (down 12.6%) today yielding 6%. A bond maturing in 2020 yields 4.54% at coupon of 6.50% which has declined from USD 121 to USD 114 today (down 5.7%). As yields compress and come closer to the 2020 bond yield, price of 2034 bond will continue to rise with strengthening of the Philippines economy.

Both are interesting ideas to consider in your portfolio.

Stay tuned....