October 19, 2020 BARRON’S 35
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Y
ield-focused investors may need
to look further afield for income—
potentially much further, to
emerging markets.
While emerging market debt can be
risky—Turkey raised benchmark interest
rates by two percentage points just last
month—there are plenty of attractive areas
for income-oriented investors looking
abroad. For example, yields on Asian junk-
bond markets, whether sovereign, corpo-
rate, or both, are about 7.7% and 8.4%,
according to UBS and ICE Indices.
UBS strategists consider Asia’s high
yields to be the result of an “increase in
risk aversion and idiosyncratic risks” that
should reverse over the next year or so and
give investors a boost as risk premiums
over safe Treasuries come down. “We ex-
pect [risk premiums] to tighten as econo-
mies across the globe gradually reopen,”
the strategists say. “Attractive [relative
yields], spread-tightening potential, and
limited defaults should lead to attractive
total returns over the next 12 months.”
Morgan Stanley Wealth Management
strategists concur, at least on the tailwinds.
“China was the first country to enter the
Covid-19 crisis and appears poised to be
the first out. Resumption of economic
activity during the second quarter should
jump-start global growth, especially given
huge government stimulus programs,” the
strategists wrote. “Ample liquidity from
the Federal Reserve and a weakening dol-
lar should catalyze investor interest.”
However, Morgan Stanley recommends
emerging market equities and doesn’t have
an explicit position on emerging market
debt. But the latter market offers a better
yield for investors who can withstand
emerging market risk. TheiShares MSCI
Emerging Marketsexchange-traded fund
(ticker: EEM) yields just 1.9%, while the
iShares J.P. Morgan USD Emerging
Markets Bondfund (EMB) pays out 4.1%.
Once investors decide to buy emerging
By Alexandra Scaggs
Industrials and Tech
Make a Good Match
To the Editor:
I liked Al Root’s cover story “Industrial
Stocks Are Getting Ready for 10 Years of
Outperformance. Here’s How to Play It,”
(Oct. 9). This industrial evolution will le-
verage benefits of modern innovation in
software, artificial intelligence, data analyt-
ics, security, and faster edge computing to
improve shop-floor processes.
These developments together with the
Internet of Things and fifth-generation, or
5G, wireless (low latency, superfast) con-
nectivity with sensors, robots, process
equipment, etc., will not only improve pro-
cesses and products but also reduce oper-
ating costs and improve margins by in-
creasing yields. This is highly rewarding in
semiconductor fabs, electronics, and medi-
cal-device industries, which are typically
capital-intensive operations. These techni-
cal solutions are available today, and some
plants are starting to deploy them. Once
their cost benefits are seen, more industries
will follow, eventually reducing our depen-
dence on offshore manufacturing.
Pradeep Goel
Naperville, Ill.
Bringing It Back Home
To the Editor:
While “The American Dream: Bringing
Factories Back to the U.S.” (Oct. 9) men-
tions that U.S. production of pharmaceu-
ticals peaked at the end of 2006 and de-
clined since, it doesn’t mention the
reason—the tax break for manufacturing
drugs in Puerto Rico was fully phased
out by 2006. Not only did the loss of that
tax break have the unintended conse-
quence of moving drug manufacturing
out of the U.S., but it also caused Puerto
Rico’s economy to crash—a crash from
which it has still never recovered.
Simply bringing back that tax break
would not only be beneficial to reshoring
of U.S. manufacturing but it would also
help restore Puerto Rico’s economy. A
INCOME INVESTING MAILBAG
Try Emerging Market Debt
For Some Attractive Yields
market debt, no matter which vehicle they
use, they need to make another key call:
how to bet on the dollar. Since March, the
Fed’s interest-rate easing has led the dollar
to depreciate against foreign currencies,
giving a boost to returns of markets in local
emerging market currencies.
But the dollar’s depreciation might not
continue if fiscal stimulus doesn’t get passed
before the election. And a Covid-case resur-
gence could slow global growth during flu
season and cause a flight to safety and the
dollar.
Investors who want to hang on to dollar
exposure and keep expenses low might
want to consider emerging market dollar-
denominated debt ETFs, such as EMB. Its
net expense ratio is 0.4%, and it has re-
turned 3.8% over the past 12 months.
Others might want to own foreign cur-
rencies, or may be hesitant to track a broad
benchmark, which provides diversification
but also risk. EMB,for example,tracks a
J.P. Morgan–run index of emerging market
bonds, and its top 10 holdings include Tur-
key, Russia, Qatar, and Saudi Arabia.
For these investors, actively managed
closed-end funds may be the ticket.
Morgan Stanley Investment Manage-
ment’sEmerging Markets Domestic
Debtfund (EDD), for example, lists debt
issued by Malaysia, Thailand, and India
among its top 10 holdings, with its biggest
single-country exposures to Mexico and
Poland. It currently yields about 7.8%. The
fund has leverage of 22%, meaning that it
has invested a decent amount of borrowed
money. That could leave it vulnerable to
some market swings, but that is partly
offset by the fact that it’s trading at a 17%
discount to its net asset value.
TheStone Harbor Emerging Markets
Incomefund (EDF) has its top single-
country exposures in Mexico and Indone-
sia, and has in its top holdings more niche
credits such as Uruguay, Egypt, and Ecua-
dor. Its heftier, 15% yield comes with 26%
leverage, while it trades at a smaller dis-
count than its peers, of just 3.4%.B
double win for America.
Edward Taussig
Brooklyn, N.Y.
Taxing Capital Gains
To the Editor:
Concerns about the potential impact on U.S.
equity prices resulting from Joe Biden’s pro-
posal to tax capital gains at higher ordinary-
income rates can be mitigated by noting that
this would apply only to incomes above
$1 million (“Nothing Worries This Stock
Market—Not Even a Possible Tax Hike,” Up
& Down Wall Street, Oct. 9). Also, though
tax-optimization strategies for high-income
individuals could result in asset selling prior
to the tax increase going into effect, the
shares sold could be quickly repurchased
while establishing a higher cost basis. The
30-day “wash sale” rule that applies to real-
ized losses does not apply to capital gains.
David I. Kass
University of Maryland,
College Park, Md.
Code Blue?
To the Editor:
Ben Levisohn writes in “This Is What’s
Causing the Stock Market to Rise” (The
Trader, Oct. 9) that the market might be
anticipating a Blue Wave, but I fear that
Uncle Sam might be in for a Code Blue.
Dr. David J. Gross
St. Augustine, Fla.