Betting on Government Debt — Emerging Markets Style

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
U.S. markets have been on a tear since the uncertainty of the Federal Open Market Committee (FOMC) meeting results lifted last Thursday. The DOW Jones Industrial Average gained 1.58% over the past five trading days, while the S&P 500 Index rose 1.96%. The NASDAQ Composite Index fared even better, jumping 3.12%, and the MSCI Emerging Markets Index (EEM) added 3.01%.
 
Your Dividend Pro portfolio ended the week mixed. UBS E-TRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (BDCL) was last week’s big winner, sporting a 4.43% gain, and your position in Fifth Street Finance Corp. (FSC) rose 3.87% for its first week in your portfolio. Hospitality Properties Trust (HPT), American Capital Agency Corp. (AGNC), and Apollo Investment (AINV) changed to HOLDs. 
 
Generating steady, reliable income in today’s low interest rate environment is no easy task. 
 
Yet this week’s Dividend Pro recommendation does just that through PowerShares Emerging Mkts Sovereign Debt (PCY) — an exchange-traded fund (ETF) that bets on the government (sovereign) debt of emerging countries.
 
I’m a big fan of emerging markets’ sovereign debt. In fact, PCY is the largest single holding in my discretionary accounts at my investment firm, Global Guru Capital
 
So, why bet on government debt located outside of the United States?
 
First, the average debt-to-GDP ratio for the United States is about 100%. In emerging market countries, this percentage ranges between a surplus, for tiny Estonia, to an average of closer to 40%. Even in Russia, the number is below 10%.
 
So, why is there a discrepancy between “us” and “them”? Unlike the United States and Europe, emerging market economies have learned to live within their means. That makes them less of a credit risk than, say, the European basket cases like Greece, Spain — or even U.S.-based versions like California. Overall, emerging market economies are in far better shape than what the ratings agencies give them credit for.
 
Here’s one caveat. Their superior debt situation does not mean emerging markets’ debt markets cannot get hit. During the May-June swoon, investors got nervous and threw out the baby with the bathwater, heading instead for the perceived safety of U.S. treasuries. But since then, markets have calmed and emerging market debt funds are once again trading at 52-week highs.
 
In addition to the steady monthly income, you can expect PCY to rise steadily in price. Just look at the way PCY has outperformed the U.S. S&P 500 over the past six months — while offering almost 2.5x the yield. 
 
 
So, buy PowerShares Emerging Mkts Sovereign Debt (PCY) at market today, and place your stop at $29.00. I would recommend options on this position, but they are simply too illiquid to do so at this time.

Portfolio Update

Hospitality Properties Trust (HPT) fell 3.83% last week on an earnings report miss. HPT reported Q2 earnings per share (EPS) of $0.75 vs. a $0.84 EPS estimate from analysts. Revenue beat estimates, coming in at $343.1 million vs. a $323.8 million estimate. You will receive your quarterly dividend payment of $0.45 on Aug. 22. HPT is now a HOLD.
 
Global X SuperDividend ETF (SDIV) rose 0.98%. Your next monthly dividend payment arrives tomorrow, Aug. 10, and is $0.119. SDIV remains a BUY.
 
Two Harbors Investment Corp. (TWO) lost 3.66% over the past five trading days. Barclays maintained its “Overweight” rating on TWO last Friday and raised its price target to $12 — 8.6% above yesterday’s closing price. TWO is a BUY.
 
American Capital Agency Corp. (AGNC) gave back 4.03%. AGNC reported Q2 comprehensive income of $480 million and a net loss of $261 million. This translates to $1.58/share gain and $0.88/share loss, respectively. Several analyst agencies reiterated their “Buy” rating and raised price targets. AGNC is now a HOLD.
 
Prospect Capital Corporation (PSEC) traded flat over the past week, gaining just 0.64%. PSEC’s next monthly dividend payment is Aug. 24 for $0.101575. PSEC is a HOLD.
 
iShares FTSE NAREIT Mortgage REIT (REM) lost 1.98%. REM traded down last week, but managed to hold the 50-day moving average (MA). REM’s current yield, as of Aug 8, is 10.05%. REM is a BUY.
 
PIMCO Municipal Income Fund II (PML) dipped 0.75% last week. However, “steady as she goes” is certainly the mantra for this fund. PML has closely tracked the 20-day MA since crossing above it on April 1. In addition, its “irregular” monthly payment has remained steady at $0.065. PML is a BUY.
 
UBS E-TRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (BDCL) jumped 4.43% last week, bringing its year-to-date gain to a whopping 35.90%. Trading above its 50-day MA, BDCL remains a BUY.
 
Apollo Investment (AINV) dipped 0.92%. AINV reported Q2 earnings yesterday, Aug 8. AINV reported net investment income of $0.20/share vs. a $0.21 expectation from analysts. Net asset value per share was $8.30, as of June 30, vs. $8.55 on March 31. Trading below its 50-day moving average, AINV is now a HOLD.
 
Omega Healthcare Investors Inc. (OHI) lost 1.62% over the past five trading days. OHI will pay its next quarterly dividend of $0.42 on Aug. 15. OHI is a BUY.
 
PowerShares Preferred (PGX) continued its slow, steady rise last week, adding 0.82%. This monthly income payer remains a BUY.
 
Fifth Street Finance Corp. (FSC) added an impressive 3.87% during its first week in your Dividend Pro portfolio. FSC reported Q2 earnings yesterday, Aug. 8, after markets closed. Net investment income was $0.27/share vs. $0.25/share for 2011Q2. FSC also declared a monthly dividend of $0.0958, which will begin on Oct. 31. FSC is a BUY.
 

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