Jim Jubak

Jubak's Journal1/11/2010 3:15 PM ET

A new world: Where to put your money now

Credit-rating downgrades for developed countries and upgrades for emerging markets aren't exactly turning the world upside down, but it's a trend investors shouldn't ignore.

By Jim Jubak

As far as I know, there's no financial-markets law saying that if some countries get a credit-rating downgrade, then others must get a credit-rating upgrade to keep the system in balance.

But right now it seems to be working that way.

The past year has brought credit-rating downgrades to Portugal, Spain, Ireland and Greece, and credit-watch warnings to the United Kingdom and Mexico.

And it has brought credit-rating upgrades to Brazil, Peru, Turkey and Indonesia, and credit-outlook improvements to Russia and India.

See a pattern here?

Some of the world's developed economies are getting downgrades. If you included the U.K. and Mexico, I'd change my language slightly to say that many of the financial markets that U.S. investors know best are in trouble with the credit-rating agencies.

(For more on the chances that the United Kingdom will get a credit-rating downgrade, see my Jan. 8 column. For a look at Japan's financial problems, see my recent post on JubakPicks.com.)

Meanwhile, countries that have been off the radar screen for decades are getting upgrades. When Brazil got its upgrade from Moody's in September, it marked the first time that the country had an investment-grade rating from all three of the big U.S. credit rating companies.

Frankly, I don't know what's more shocking: the prospect that the United Kingdom could lose its AAA rating in 2010 or that Peru earned an investment-grade rating in December.

The world is (increasingly) flat

You might scoff at the source of these ratings. These are the same companies -- Moody's, Standard & Poor's and Fitch Ratings -- that missed the deterioration in credit quality in the run-up to the U.S. mortgage-backed-securities bust.

You certainly should question whether bond investors have let some of these ratings go straight to their heads, resulting in some questionable pricing based on turning current events into long-term trends. For example, the five-year credit default swaps that are a way to insure against a default by Indonesia are priced just 0.01 percentage point above those for Greece, even though Greece has a current credit rating four notches higher than Indonesia's.

And credit-rating companies do tend to grade on a scale. If the United States and the United Kingdom are still AAA-rated risks these days, how can Brazil's investment-grade status even be a question?

But there's enough reality to these upgrades and downgrades that I think we're looking at a long-term trend. It may not be the world turned upside down, but it's close enough that investors need to re-engineer their portfolios to take it into account.

After I expend a few words in an attempt to convince you that there's more here than Wall Street hyping another investment strategy, I'll give you some suggestions on how to incorporate this new world into your portfolio.

Peru is a great example -- and probably a story that you don't yet know by heart -- of the reality that lies behind these changes in credit ratings. On Dec. 15, Moody's became the last of the big three credit-rating companies to raise Peru's sovereign debt to investment-grade. Luis Carranza, Peru's finance minister, announced the upgrade at a news conference that essentially boiled down to "What took you so long, Moody's?" Fitch Ratings and Standard & Poor's had upgraded Peru in 2008.

Continued: Things in Peru are improving

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