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International Investments: Don't Cry for Argentina - But Be Careful of Argentina's Bonds

By Gary Scott

The global currency structure is changing. Emerging currencies are in turmoil. This may be exactly the opposite of what should happen.

Investors are rushing to major currencies because the old global economic engine was the development of the West. The industrialized nations had the best growth.

Today, the driving engine of the global economy is the development of emerging nations. Three of the most indebted currencies are the US dollar, euro and Japanese yen! Each of these areas has aging populations and huge, future retirement obligations.

Yet once again the thundering herd is rushing in reverse, using its past, emotional feelings as a guide.

Hopefully we are the wise, forward looking, few who will benefit from this.

We are reviewing a short list of emerging currencies that currently offer high interest rates (near or over 10%). The list includes Argentina, Brazil, Indonesia, Pakistan, Russia, Turkey and Venezuela. We most recently looked at the Turkish lira called the TRY, where I just invested 5% of my liquid portfolio. Now let’s look at the Argentina peso.

I have passed on investing in this but one of my advisors wrote:

“Gary, We recommend that you hold on Var Argentina, but if you choose to buy I recommend that you buy Argentina 03, 08, 2012. with a yield of 8,50% p.a. There is a sinking fund on these bonds and you will have 12.50% of the face value re-paid every year. You mentioned in one of your last mails, that you prefer to have the more risky investments in the pension account. If you want a real risk with high potential the bonds of this bank would be a good idea for the pension account.”

First, why high risk in the pension? If you have a pension and if it is not your only investment account, think about this. If you are going to make two investments, one seemingly safe (with low profit potential or income) and one seemingly risky (with high profit potential or income) look at what happens if you invest the risky deal in your pension. Your low profit deal pays low tax. If your risky deal, wins the big profit in your pension is tax deferred. If you lose, you get to top up your losses with tax deductible contributions. This is a way to get the tax man to share speculative losses, but not immediately tax speculative gains! This rubs against the grain of normal financial advice and only works if you have the two equal investments to make (and have asset protected both investments)! In the right circumstances it really makes sense.

Back to Argentina. Let’s return to fundamentals we recently reviewed.

Country Interest Rate GDP Growth Billions Foreign Reserves
Argentina 9.88% 9.1% 19.6
Brazil 15.68% 1.4% 59.2
Indonesia 13.45% 4.9% 33.8
Pakistan 9.33% 8.4% 9.8
Russia 12.00% 7.0% 205.0
Turkey 14.13% 9.5% 56.5
Venezuela 10.65% 10.2% 21.8

Argentina has good growth but foreign reserves are pretty low. Plus the country has previously reneged on its debt.

Plus let’s add one more factor ... inflation.

Country Consumer Price Increases
Argentina + 11.1%
Brazil +5.3%
Indonesia +15.7%
Pakistan +6.9%
Russia +10.6%
Turkey +8.2%
Venezuela +12.1%

Now you are beginning to see why I have added only Turkish and Brazilian bonds to my portfolio. Real returns are generally interest less inflation. So we could expect a real return on an Argentine bond to be 9.88% less 11.1%. That’s not so good. Brazil at 15.6% minus 5.3% (10.3%) and Turkey at 14.2% minus -8.2% (6%) look an awful lot better.

Enhance your profit potential with a diversified portfolio of emerging currencies through a MultiCurrency Sandwich. LEARN HOW

Learn about investing in emerging currencies, gold, silver, Ecuador, import-export, overseas markets and more. Join Merri and me at our September 15-16-17, 2006 International Business and Investing Made EZ course in North Carolina. Review where to invest and do business now and learn which markets and currencies may be strong in the year ahead. Our May course was overbooked and the September session is already filling up fast. Our free accommodations are reserved on a first come first served basis so do not delay! DETAILS


May, 2006


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