PIMCO Sees Opportunity in Emerging Markets Bonds

The big story in the currency realm has been the spiral of the U.S. dollar, up 11.4% against a basket of leading currencies, during the Federal Reserve’s tightening campaign. But to PIMCO, other opportunities beckon—namely, in emerging markets, whose economies and currencies have had a wild ride amid the pandemic, the Russia-Ukraine war and rampant inflation.

Nevertheless, not all of them are promising, according to a report from Pramol Dhawan, who leads the asset manager’s emerging markets portfolio management, and Lupin Rahman, head of EM sovereign credit portfolio management. There’s a “case for relative value opportunities within EM investing,” they wrote, which “may offer opportunities for portfolio diversification.”

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Investors would benefit by favoring bonds from nations whose central banks have robustly ratcheted up interest rates to fight inflation, in PIMCO’s estimation. These bonds will do the best going forward, the firm said.

EM nations differ in their approach to fighting inflation, the report notes. The most energetic is Brazil, where the central bank has hiked its benchmark to 13.25%, from 2% at the start of 2022. This appears to be having an effect: Inflation ticked down to 10.1% in July, from a high of 12.1% in April.

In Poland, though, the hiking has been relatively low-key. The central bank’s benchmark has gone up to 6.5% recently, from 2.2% to start this year. Inflation is still on the rise, hitting 15.6% last month, from 9.4% at the year’s start.

The two nations have different inflation drivers. For Brazil, the global fall of commodities prices has been a problem. But that situation appears to be easing; the Dow Jones Commodity Index has dipped 14% from its June high.

For Poland, the proximity of the Russia-Ukraine conflict has taken a toll, with no end in sight. The war, the report says, “has had an outsized effect on refugee inflows, supply chains, spending pressure and commodity prices.”

In currency terms, however, the contrast is stark. Brazil’s real has leapt up 11% this year compared with the dollar. The Polish zloty has slipped 8.3% against the buck.

The PIMCO paper notes that the EM overall economic picture remains unclear. Going all-in on EM fixed income generally would require an obvious trend to justify the exercise, it argues, “particularly in the wake of past false starts.” So for now, the answer is to be choosy. Once more Brazils are in place, as opposed to Polands, the report advises, “it could mark a major break from the past decade of U.S. dollar dominance.”

Meanwhile, the report sees “reason for caution now given the uncertain influence of global risk factors, such as those stemming from the war in Ukraine.” The present climate suggests “shying away from local Polish bonds and instead emphasizing local Brazilian bonds.”

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Tags: Brazil, central banks, Commodities, Emerging Markets, Federal Reserve, Inflation, Interest Rates, PIMCO, Poland, Ukraine

The Canada Pension Plan Investment Board’s investment portfolio lost 4.2% during its fiscal year 2023’s first quarter, which ended June 30, as its net assets fell to C$523 billion ($405.6 billion) from C$539 billion at the end of the previous quarter.

The C$16 billion decrease in net assets for the quarter consisted of a net loss of C$23 billion and C$7 billion in net transfers from the Canada Pension Plan, according to a CPPIB release.

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The pension fund, which includes the combination of the base CPP and additional CPP accounts, also reported five- and 10-year annualized net returns of 8.7% and 10.3%, respectively.

“Financial markets experienced the most challenging first six months of the year in the last half century, and the fund’s first fiscal quarter was not immune to such widespread decline,” President and CEO John Graham said in a statement. “However, our active management strategy – diversified across asset classes and geographies – moderated the impact on the fund, preserving investment value.” Graham added that “we expect to see this turbulence persist throughout the fiscal year.”

The fund’s quarterly losses were led by its public equity investments, which it attributes to the broad decline in global equity markets, the CCPIB release says. It also notes that private equity, credit and real estate investments contributed modestly to the losses, while investments related to external portfolio managers, quantitative trading strategies and energy and infrastructure contributed positively to the results and helped offset some of the losses. The release also says the fund experienced losses in fixed income due to higher interest rates set by central banks aiming to curb inflation. The losses were offset by foreign exchange gains of C$3.1 billion as the Canadian dollar weakened against the U.S. dollar.

“Looking ahead, I remain cautiously optimistic,” Graham said. “Cautious on the markets but optimistic and confident about CPP Investments’ ability to navigate markets and add value.”

The CPPIB announced in the release that the current position of senior managing director and chief financial and risk officer will be divided into two separate senior management positions—a chief risk officer and a chief financial officer. The move comes after Neil Beaumont stepped down from the role of chief financial and risk officer at the end of July.

Meanwhile, Deborah Orida, senior managing director, global head of real assets and chief sustainability officer, left the organization in mid-August to become CEO of C$230.5 billion pension fund PSP Investments, according to the release. During her 13 years at CPPIB, Orida led private equity Asia, active equities and real assets before becoming CSO.