Text on screen: PIMCO

Images of emering market countries

Text on screen: Pramol Dhawan, Head of Emerging Markets Portfolio Management

Pramol: We often get asked, is emerging markets debt attractive now? And the answer is yes, for three main reasons.

Full page list graphic – Title: Why emerging market debt is attractive:  Bullets: Higher yields, Historic default rates for EM are similar to corporate debt, EM premium due to home bias

Firstly, for higher yields. We’re in an environment right now of very low nominal and real interest rates, and I think that’s going to push capital naturally away from the developed markets into the higher real rate yielding world, much of which resides in the emerging market landscape.

Secondly, in emerging markets, historical default rates are actually very similar to corporate debt,

Full page chart titled: Historical default rates: emerging markets vs. developed markets corporates. Bar charts shows historical default rates for emerging markets (EM) and developed market (DM) corporates across Aaa, Aa, A, Baa, Ba and B-rated bonds as of May 2020. Default rates are 0% for Aaa and Aa for both EM and DM. For A, DM defaults are up slightly and EM is at 0%. For Baa, DM defaults are up 0.1% and EM is at 0%. For Ba, both DM and EM defaults are 0.5%, and for B, DM defaults are up 2.4 % and EM is at 2.5%.

The most important point to highlight is the underlying risk to bondholders in emerging markets  are similar to that of U.S. corporate bonds, and yet EM bonds tend to offer materially high yields.

So what explains this EM yield advantage if the underlying default risks are similar?

The third reason is EM premium. Well, we suspect that comes down to behavioral factors. Many investors don't traffic in emerging markets due to their home bias.

The EM asset class offers structural risk premiums, and much of that is due to investors not navigating within that asset class due to home biases.

Full page list graphic -- Title: Why does PIMCO have advantages in managing EM debt?  Bullets: Scale, Global macro expertise, Bottom-up credit analysis, Actively sourcing

So why does PIMCO potentially have advantages in managing EM debt? Firstly, our scale. PIMCO’s been a long term investor in emerging markets and is quite often one of the largest and most significant investors in both the hard currency space and in the local currency space. This often gives us the opportunity to dictate pricing and terms for new issues and new deals.

Secondly, global macro expertise. EM is often the tail that gets wagged by the dog. Put very simply, what the Fed does matters for emerging markets, and through the investment committee, through our global advisory board, through our regional portfolio committees, as well as our cyclical and secular forum, we effectively get the top down expertise to help us to guide the EM investment narrative.

Thirdly, our bottom up credit analysis. EM is a volatile asset class, and in a volatile asset class. Our bottom up credit research enables us to do the analysis and the due diligence on corporates, quasi-sovereigns, and sovereigns to make sure that we are being very risk aware.

And finally, active sourcing. We have the ability to source opportunities that are off the radar screens for index tracked funds, crossover capital, or smaller boutique investment firms.

That independent thinking and analysis enables us to think critically about investment decisions within the emerging market world and helps us to carve our own path in terms of decisions that make their way onto our portfolios.

Split Screen: Text on Left – EM debt can help investors meet their income objectives in a low-yield world, Image on right: Emerging Market country.

To summarize, EM debt can help investors potentially meet their income objectives in a low yield world.

And there are many advantages to partnering with a strong active manager

Images of PIMCO trade floor

that has both the scale and the expertise to focus on risk mitigation as well as identifying opportunities.

Text on screen: For more insights and information, visit pimco.com

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Disclosures

IMPORTANT NOTICE

Please note that the following contains the opinions of the manager as of the date noted and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

Past performance is not a guarantee or a reliable indicator of future results.

Management risk is the risk that the investment techniques and risk analyses applied by an investment manager will not produce the desired results, and that certain policies or developments may affect the investment techniques available to the manager in connection with managing the strategy. All investments contain risk and may lose value. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Diversification does not ensure against loss.

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