Market Overview

Some Emerging Markets Primed for Higher Credit Ratings

As the U.S., Japan and some developed Europe nations come to grips with astronomically higher debt-to-GDP ratios and less-than-perfect credit ratings, investors looking for sound fiscal positions might do well to consider emerging markets.

From Latin America to the Middle East to Southeast Asia, there is no shortage of emerging markets with low debt-to-GDP ratios as ETFdb recently noted.

Sturdy balance sheets and improving credit ratings are two reasons investors have embraced emerging markets bond ETFs in 2012.

That trend has benefited both dollar and non-dollar denominated fare as the dollar-denominated PowerShares Emerging Market Sovereign Debt ETF (NYSE: PCY) is up almost nine percent year-to-date while the local currency WisdomTree Emerging Markets Local Debt ETF (NYSE: ELD) has jumped nearly six percent.

On the equities side, there are several ETFs poised to benefit if the countries these funds track receive higher credit ratings in the coming months. In some of the following examples, it's not a stretch to see ratings agencies taking positive near-term action.

Global X FTSE Colombia 20 ETF (NYSE: GXG) Last year, Standard & Poor's and Moody's Investors Service both raised Colombia into investment grade territory. Colombia's economy is growing, though that growth is expected to taper off this year. The banking system there is fairly strong and the central bank is mulling its first rate cut since 2010 to bolster growth.

S&P said earlier this year it does not expect to raise Colombia's rating this year and at least one analyst is not forecasting a ratings increase for South America's third-largest oil producer either.

"I don't think we will see Colombia's credit rating upgraded for sometime as there are still a number of structural problems to be dealt with but the ratings agencies will continue to hint at it as an incentive for the government as Colombian governments will basically follow the US lead economically and are strong exponents free trade, unimpeded capital markets, unregulated foreign investment and minimal regulation of the economy," Caiman Valores, an independent analyst based in Medellin, told Benzinga.

Bottom line: Colombia probably will not see a credit ratings boost this year, but that does not mean it would be a shock to see it happen.

iShares MSCI All Peru Capped Index Fund (NYSE: EPU) Staying in Latin America, Peru is another rising economic power. Last year, S&P and Fitch Ratings lifted Peru into the lower end of the investment-grade spectrum so that might diminish the chances for more praise in 2012.

As is the case with Colombia, that does not mean Peru is not deserving. The country's debt-to-GDP ratio is just 24.3 percent, ETFdb reported. There are other factors that could prompt ratings increases for Peru in the not-too-distant future. The economy is growing and political risk is relatively benign.

If the risk on/materials trade comes back to life, EPU will be a prime beneficiary because Peru is the world's second-largest copper and silver producer and a major gold producer as well.

iShares MSCI Philippines Investable Market Index Fund (NYSE: EPHE) Just a few weeks ago S&P raised its rating on the Philippines' long-term foreign currency-denominated to BB+ from BB. That is the highest rating for the country since 2003.

The move by S&P followed Moody's Investors Service raising its outlook to positive on the Philippines in May. These moves make sense as the Philippines is home to a debt/GDP ratio of 51 percent as of the end of the first quarter. Fitch might be compelled to follow suit and if the Philippines continues to be one of the brighter stars in Southeast Asia, a move to investment-grade status may not be far off.

EPHE has been on of the strong emerging markets ETFs this year. In the past three months, while the Vanguard MSCI Emerging Markets ETF (NYSE: VWO) is off almost six percent, EPHE is higher by half a percent.

For more on emerging markets ETFs and credit ratings, click here.

Posted-In: Long Ideas News Bonds Short Ideas Emerging Market ETFs Commodities Events Global Best of Benzinga

 

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