Pacific Investment Management Co. is favoring local bonds in Brazil, Mexico and South Africa as emerging-market notes pay more than U.S. high-yield corporate debt for the first time in two years.
Relatively high amounts earned on securities in developing nations offer compensation for risks from slower growth to faster inflation worldwide, according to Ramin Toloui, global co-head of emerging-markets portfolio management at Pimco. The manager of the world’s biggest fixed-income fund has a positive outlook on the currencies of Brazil, Mexico, China and India and likes “high-quality” dollar sovereign debt from the first three countries, along with Russia and South Korea, he said.
Emerging-market local debt offered 5.22 percent on May 7, 25 basis points more than high-yield bonds in the U.S., the biggest premium since May 2011, according to indexes from JPMorgan Chase & Co. and Barclays Plc. Developing economies will expand 5.3 percent this year, compared with a 1.2 percent growth in advanced nations, according to forecasts by the International Monetary Fund released on April 16.
“I would prefer to be compensated by the yield for the risk of currency volatility in emerging markets in this global environment where growth is going to be challenged, which would pressure corporate profits,” Toloui said in an interview on the sidelines of the CFA Institute Annual Conference in Singapore. An economic slowdown would be “negative for U.S. high yields but could produce a desire for central banks and emerging markets to keep interest rates low and potentially cut.”
‘Seeking to Diversify’
Local-currency notes in emerging markets lost 1.5 percent this month through today in dollar terms, paring the advance in the past year to 14.2 percent, according to JPMorgan’s GBI-EM Global Diversified Index.
The bonds of Brazil, Mexico and South Africa are attractive as their nominal and inflation-adjusted yields are relatively high, said Toloui.
“You have some countries like Brazil, where they are raising rates but that is already anticipated in the yield curve,” he said. “You make money as a bond investor by finding investments in places where central banks are going to be hiking rates less than what is priced in the yield curve.”
Ten-year government bonds pay 9.85 percent in Brazil, 4.65 percent in Mexico and 6.32 percent in South Africa, according to data compiled by Bloomberg. The so-called real rate on real-denominated 10-year government bonds is 336 basis points, or 3.36 percentage points. Pimco also likes “quasi-sovereign” securities from Russia, Brazil, Mexico, China and South Korea, according to Toloui.
“Investments in local-currency emerging-market yields, which have the capacity to continue to come down in this environment, are good,” said Toloui. Such assets are a “destination for investments for many sovereign wealth funds that are seeking to diversify away from what historically is a lopsided allocation to developed countries’ bonds,” he said.
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