Text on screen: PIMCO
FULL PAGE GRAPHIC: How are emerging markets coping with the COVID shock thus far?
Text on screen: How are emerging markets coping with the COVID shock thus far?
Text Footer: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.
Ribbon Graphic: Pramol Dhawan, Head of Emerging Markets Portfolio Management
Photo of Pramol Dhawan in studio
Text on screen: Pramol Dhawan, Head of Emerging Markets Portfolio Management. PIMCO provides services to qualified institutions, financial intermediaries and institutional investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.
Pramol Dhawan: The emerging world has been home to some of the most troubling virus-related experiences, but also some of the most successful responses anywhere in the world.
China and many other countries in Asia, for example Thailand, have had remarkable successes; and yet others, notably in Latin America, continue to struggle.
FULL PAGE GRAPHIC: TITLE - Three key cycles to assess emerging market countries, BULLETS – Liquidity cycle, Business cycle, Political cycle
Text on screen: TITLE – Three key cycles to assess emerging market countries, BULLETS – Liquidity cycle, Business cycle, Political cycle
We assess each country based on three key cycles: the liquidity cycle, the business cycle and the political cycle. While the liquidity and business cycles have turned positive, we are most focused on the political cycle, not just in emerging markets but developed markets also. It will be very important to understand the political knock-on effects, ranging from major changes in government – think about Argentina last year – to also the potential use of sanctions against countries like Russia and Brazil’s ability to impose long-term fiscal discipline.
FULL PAGE GRAPHIC: How are you positioning portfolios in the current environment?
Text on screen: How are you positioning portfolios in the current environment?
At PIMCO, we are fortunate to have an extremely well-resourced emerging markets team, as well as firm-wide expertise on global monetary and political matters. This means that we can thoroughly cover each and every country across the full opportunity set; and this allows us to stay well diversified rather than concentrating into a small subset of countries. Diversification will be more important than ever.
The vast majority of these countries are in sound economic shape and offer attractive levels of compensation, especially considering how low interest rates in the developed world. But there are a few lower-quality countries that remain at the mercy of commodity prices, the IMF and China’s willingness to extend bilateral loans, all of which are difficult if not impossible to predict.
CHEVRON SPLIT SCREEN: Text on left: Emphasizing high-quality borrowers in U.S. dollars until the economic recovery matures, B-roll on right: Global stock
Split screen with chevron: TEXT ON LEFT – Emphasizing high-quality borrowers in U.S. dollars until the economic recovery matures, IMAGE ON RIGHT – trade floor with people
For the time being we are emphasizing higher-quality borrowers in U.S. dollars until the global economic recovery matures and broadens.
Consider Mexico as a case study: while growth there has deteriorated, Mexico’s balance sheet remains strong.
FULL PAGE GRAPHIC: TITLE – Case Study: Mexico, SUB-TITLE – Considerations: LIST – Forecast for inflation, U.S dollar or peso-denominated exposure, Where to focus on the yield curve
Text on screen: TITLE – Case Study: Mexico, SUB-TITLE – Considerations:, BULLETS – Forecast for inflation, U.S. dollar or peso-denominated exposure, Where to focus on the yield curve
The question here is not about the risk of capital impairment but about fine tuning one’s forecasts of inflation – it has been quite sticky and refusing to decline as the central bank would have hoped – and whether or not one should take exposure via dollar-denominated bonds or indeed local peso bonds, and indeed where on the yield curve to be focused.
And despite ongoing struggles with the virus in the region, we find that a number of banks and other financial institutions across Latin America, including Mexico and Brazil, are offering very attractive levels of compensation. Especially when we consider their leverage and their capitalization.
FULL PAGE GRAPHIC: Any longer term thoughts on the asset class and its role in portfolios?
Text on screen: Any longer term thoughts on the asset class and its role in portfolios?
Investors are facing a magnified challenge in meeting return objectives now that yields are so low across the developed world.
FULL PAGE GRAPHIC: TITLE – Facing yields in the developed world, LIST – Holistic approach to portfolio construction, Move beyond developed markets, SUB-BULLET – Augment yield, Enhance diversification
Text on screen: TITLE – Facing yields in the developed world, BULLETS – Holistic approach to portfolio construction, Move beyond developed markets, SUB-BULLETS – Augment yield, Enhance diversification
They need to think through portfolio construction more holistically and consider moving beyond home-biases of developed markets in an effort not just to augment yield but also to enhance diversification.
One area that’s very interesting, at least for those investors that can move beyond daily liquidity vehicles, are privately originated lending arrangements. Premiums there are incredible attractive. Private credit in emerging markets is not just about distressed lending. It’s about finding credit worthy borrowers that are an important part of the growth cycle and who want to diversify the supply of their capital away from global bond markets. Most EM investors crowd into a tiny corner of the liquid bond market but there is so much more that is available and often with far more attractive risk/reward profiles.
The most important question EM investors face is the direction of the U.S. dollar. After nearly a decade of appreciation, it is reasonable to ask how much longer that this can last, especially given the Fed’s drive to keep monetary conditions loose. A turn in the dollar cycle will have major implications for all asset classes, but none more so than emerging market currencies. Local currency emerging market debt already offers yields close to 5%; an additional layer of capital gains on the back of
CHEVRON SPLIT SCREEN: Text on left: Turn in the dollar cycle may offer investors an attractive investment opportunity, B-roll on right: Traders at desk, trade floor ticker
Split screen with chevron: TEXT ON LEFT – Turn in the dollar cycle may offer an attractive investment opportunity, IMAGE ON RIGHT – People at desks, trade floor ticker above
currency appreciation against the dollar would offer investors an attractive opportunity while also diversifying one’s overall portfolio.
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Local currency emerging market debt yield based on the JPM GBI-EM GBL DIV Index.
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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Private credit involves an investment in non-publically traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. Diversification does not ensure against loss.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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