How emerging-market local-currency bonds might fit in your portfolio

IN THE FIRST episode of “Cheers”, a 1980s television comedy, Diane Chambers, a graduate student, intends to elope with Sumner Sloan, a literature professor. In stark contrast to the genial barflies at Cheers, a Boston watering-hole, Sloan is well-educated and middle-class—but also, it turns out, vain and deceitful. He’s goofy, says Sam Malone, the bartender whose on-off romance with Diane is the show’s dramatic axis. “He’s everything you’re not,” she retorts.

And so is Diane. That she and Sam are dissimilar in personality and social background is one reason why “Cheers” is so funny. The yoking of opposites is a dependable ploy in situation comedies. It is also a useful trick in investing. The injunction not to put all your eggs in one basket can be found in any finance textbook. But there is more to diversification than that. The ideal diversifier is not just something other than what you own, but something that contrasts with it.

Suppose your investments are tilted heavily towards the S&P 500 index of America’s leading shares, a principal character in global capital markets. Where can you find a Diane Chambers to balance your Sam Malone? Emerging-market government bonds in the issuer’s own currency may be the contrast you are seeking. They are not stocks, they are not denominated in dollars and they are not widely...

via The Economist: Finance and economics Business Feeds

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