The “Surprising Secret” Behind Today’s Bankrupt Countries

Yesterday, I attended a “100 Women in Hedge Funds” event on Sovereign Risk at rating agency Moody’s in Canary Wharf in London. (I introduced myself as the “token male”.)

With the crisis in Greece and the downgrade of Spain’s debt the very same day, the timing could not have been more apt. As the meeting was conducted under Chatham House rules, I cannot go into details of who said what.

Suffice it to say, the mood was so uniformly pessimistic, I was extremely tempted to leave early and buy long dated call options on National Bank of Greece (NBG). (Don’t bother. The “vega” is way too high, and the options are very expensive).

But as I perused Moody’s research, I was reminded that there are patches of good news coming from countries that are getting the basics right.

The economic ne’er-do-wells of 2009- the ones that Moody’s downgraded in 2009 and 2010-  include Japan, Latvia, Lithuania, Ireland, Hungary, Iceland, Ukraine, Jamaica, Barbados, Bermuda, Montenegro, and the Fiji Islands. Greece, Portugal and Spain have joined their ranks in 2010. For most of these, the outlook was also negative.

But these downgrades a have been balanced by upgrades in Brazil, Indonesia, South Africa, Philippines, Uruguay, Chile, Ecuador, Belize, and Lebanon. And the outlook for China, Turkey, Peru, and Hong Kong are all positive.

So what’s the “surprising secret?”

Well, truth be told, you don’t have to be a Jeopardy contest winner in geography to notice a pattern here.

Countries in Asia and Latin America are enjoying steady upgrades.

Japan and the countries on the periphery of Europe are getting downgraded left and right.

As it happens, I am long on the  stock markets of Brazil, Indonesia, Chile, and Turkey in both my investment advisory services as well as client accounts at Global Guru Capital. And they are among the best performing stock markets in the world over the past 18 months.

Lest you think investing in countries with high credit ratings is a Holy Grail, remember that Hungary- last year’s “Greece”- has been also one of the best performers of 2010.

The lesson?  It’s the “old world” of Europe – not the “new world” of Asia and Latin America- that is now forced to face its fiscal follies.  But it’s also worth remembering, that- as the example of Hungary shows- economic conditions improving from “horrible” to just “bad” can yield big investment profits

After all, it wasn’t long ago that Brazil, Indonesia, and Turkey were the world’s biggest economic basket cases. And today they are the rock stars of global stock market performance.

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