Buy emerging-market debt now, advises Barton M. Biggs, chairman, Morgan Stanley Asset Management Co., New York.
Even though he doesn't think the drop in emerging-market equities is over, he argues in a research report "the brutal decline in prices of emerging-market debt seems to have gone too far."
"I think emerging market debt is a valid new asset category that deserves serious consideration," he added, expecting its annual total return over the next three to five years to be 12% to 14%.
"No other fixed-income instrument except junk (bonds, which he expects to return 10% annually) is close, but the volatility is and will probably continue to be much higher."
He expects the $20 billion in emerging-market debt mutual funds will double in the next few years as the new class attracts more investors.
"Institutions with high total-return assumptions will likely be almost forced to consider this asset category" with its high expected total returns, he added.
Many investors have overreacted to rising interest rates, which, he said, belie the strong growth in the U.S. economy, which in turn through imports boosts the economic growth of the emerging markets. In addition, he said worries about political events abroad, such as the Colosio assassination in Mexico and potential instability in Russia, conceal the strengthening creditworthiness of most of the emerging markets.