Why investing in BRICs Debt is much more Profitable than Equity

Any BRICs investor can tell you intuitivity without performing extensive spreadsheet analysis that putting money into debt has proven to be more profitable than equity over the last five years. Now an article from PIMCO runs through the numbers and shows that investing in emerging market fixed income has been much more profitable than equities. BRICs debt has not only outperformed in absolute terms but has shown even greater out performance in terms of Sharpe ratio.

There are many reasons why this has happened. Management quality and rule of the law is not the best in emerging markets particularly in India, China and Russia where corruption scandals seem to hit every day. Siphoning off money from public listed companies is expected from promoters who seldom get caught. Even the Asset Management Companies are corrupt and indulge in Fraud leading to lower returns. Debt tends to outperform in such scenarios since escaping interest payments or principal repayments is very hard. Debt investors have much greater rights than equity holder who are easily duped by promoters both legally and illegally.

How to Invest in The Indian Stock Market

Investing in the Indian Stock Markets is like navigating your way through a minefield with innumerable instances of fraud, unethical actions and disregarding the interest of the retail investor. The SEBI which is India’s stock market regulator remains mostly toothless and a blind spectator to the whole stock market fraud schemes like pump and dump. Most of the IPO’s that come in the Indian markets are blatantly manipulated by the market operators, promoters and shady investment bankers. However SEBI has not taken any action so far which would make one speculate that the regulator is itself compromised. The pump and dump schemes continue unabated in the market which remains quite shallow despite the more than one trillion dollar capitalization. Mid cap and small cap corruptions scams happen with alarming regularity and even top MNCs defraud the retail investors using legal loopholes.

Any investor will tell you that the management quality in India is pretty bad with the choice mainly restricted between Bad and Ugly. Though there are some of the better business groups and companies like Infosys, the management quality leaves a lot to be desired. This is a reflection of the general system of the country where endemic corruption is present with politicians and bureaucrats indulging in scam a day. I think the quality of the management plays a big role in the long term returns of the stock. It is highly unlikely that the company stock will give you good returns as the management siphons off the profits and cash through various shenanigans. Management whose past behavior reeks of corruption will unlikely change its behavior in the future and might lead to catastrophic losses.

Choosing the Right Asset Class in Emerging Markets: Why It Matters

EM investment options are growing.

In February 1995, JPMorgan launched the first EM fixed income index: the Emerging Markets Bond Index (the EMBI) which generally tracked Brady Bonds. This index evolved into the EMBI+ and the EMBI Global a few years later when EM countries began to regularly issue bonds in the international capital markets. In June 2005, J.P. Morgan complemented its traditional global government bond indexes with the GBI-EM (the GBI). The GBI and its variants tracked investments in EM local bonds. As the breadth of opportunities within EM expanded, J.P. Morgan devised an additional benchmark, launching the CEMBI family of indices in November 2007. The CEMBI was the first widely used benchmark for EM corporate bonds.

Today, investors can express their EM views through asset classes focusing on:

• external sovereign bonds,
• US dollar-denominated corporate bonds,
• local currency-denominated bonds,
• currencies,
• equities,
• or combinations of these strategies.