Money began flooding back into China and other emerging markets as soon as the dust from the global financial earthquake settled, and it has been flowing freely ever since. So much so that the World Bank has been having nightmares lately about re-emerging asset bubbles in Asia.
On the equity side, the major emerging funds scored large net inflows of capital from late June through October, making them the best-selling stock funds on the planet this year. And until last week when people pulled more money out of emerging bond funds than they invested, the funds had been on a seven-week streak of net gains, fattening their coffers by $4.6-billion (U.S.).
How hot has emerging debt become? Angola confidently intends to float a $4-billion bond issue on international markets - the largest ever to come out of sub-Saharan Africa - even though it just reached a deal with the International Monetary Fund for fresh capital and has no credit rating.
That doesn't seem to faze Robert Smith, a veteran bond investor who made his name and fortune by going not only where most other investors feared to tread, but into assets few even knew existed.
Angola faces problems with its debt issue, Mr. Smith said the other day from his office at Turan Corp. in Boston, the investment firm he founded nearly 30 years ago to trade emerging-market sovereign debt, some of which only a dictator's mother could love.
First, it's a lot of debt, without a rating. Then, there's the IMF involvement in the country's finances - in short, conditions investors have typically shunned.
But Mr. Smith has never been your typical bond player.
He built his fortune in markets with three defining characteristics: a lack of liquidity, lack of transparency and lack of information. "The riskier the better," he said, laughing. And then there's all that oil Angola is shipping to China and other markets.
"I want to invest in a country that exports oil or other commodities, as a protection against inflation."
Over the years, Mr. Smith has made big scores in such unloved instruments as Turkish trade credits, Nigerian oil warrants, Salvadoran bonds and other debt backed by the not-always-reliable guarantees of shaky governments.
Sometimes he loses big, too, like the single day in 1998 when Russia defaulted on its debt and made him $15-million poorer.
The man once dubbed "king of the jungle bonds" recounts his adventures as a pioneer in frontier markets in Riches Among The Ruins (Amacom). One story not in the book was his biggest coup, and it happened to involve Angolan debt.
Back in 1995, a hedge fund was going out of business and Mr. Smith's firm snapped up about $20-million of Angolan bonds at 5 cents on the dollar.
At the time, the government wasn't paying up. But Mr. Smith, whose investing hallmark is patience, won a judgment in a British court after a three-year battle. When the Angolan central bank realized its assets in Europe were about to be liquidated, the government quickly paid off the bonds, to the tune of 100 cents on the dollar, plus 40 cents interest.
"That was not a bad recovery," he joked.
At 69, Mr. Smith is no longer as eager to head into the world's danger zones in search of investment opportunities, as he did in Iraq soon after the U.S. invasion (although he remains a big fan of Iraqi government bonds, because he expects Washington would prevent any default). And the rise of the Internet and computerized trading means that players everywhere have instant access to the same information and can capitalize quickly on price discrepancies.
Still, he continues to look for untendered bonds on which countries with black marks on their credit ratings, such as Ecuador and Argentina, have to keep making payments in order to maintain access to international capital. And he says he'll be at the front of the line if the Palestine Monetary Authority on the West Bank ever issues any debt.
Meanwhile, Mr. Smith, who owns a vacation home in B.C., has been a buyer of Canadian currency and three-year Canadian government bonds.
"There's a certain security in owning a good Canadian bond. And at my age, I don't want to have to make it all again."Report Typo/Error