Pimco Still Sees Value in Emerging-Market Local Currencies

 By Paulo Trevisani 
 

NEW YORK--Local currencies are still the best way to invest in emerging markets, despite the threat of rising interest rates in the developed world, said an executive from U.S. mutual-fund giant Pimco.

Emerging-markets have attracted billions of dollars in investment in the past few years, thanks in great part to the low-interest rate policy in developed countries, which left few options for investors seeking high yields.

But a growing feeling that the Federal Reserve and other central banks could be about to start reversing low-rate policies has sent jitters through the emerging-markets community, as it could redirect investment to larger, safer economies.

Many observers, however, believe there still are opportunities available in growing economies, and at least in some of them it may be the right time to get even deeper.

"Local bonds are one of the most attractive asset class" in these markets, said Ignacio Sosa, executive vice president at Allianz SE's fund-management firm Pacific Investment Management Co., or Pimco, in an interview on the sidelines of a Latin America growth-companies and high-yield forum Thursday in New York.

Mr. Sosa said that, among other factors, central banks in emerging countries are more likely to start using currency-appreciation as a tool to fight inflation, and that could benefit foreigners with investments in the local currency.

"Latin American currencies in general are attractive because of strong fundamentals and attractive carry," he said.

In fact, this year has seen a shift from last year's trend of investors favoring dollar-denominated debt from emerging markets, according to J.P. Morgan. As of last Tuesday, this year's total returns on local-currency emerging-market bonds was 1.2%, while debt in dollars had a negative return of -1.5%.

Even when buying dollar-denominated assets, though, investors have flocked to emerging markets to the point that some securities are now seen as overvalued by many analysts. Mr. Sosa said he believes that corporate debt could still be a better place to be, in particular bonds issued by large national champions, usually under government control.

"An investor can buy a very large state-owned bank for almost the same yield as Zambia" sovereign debt, he said, making the point that such a bank's bonds could also represent a lesser risk than the African country's issuance.

-Erin McCarthy contributed to this article

Write to Paulo Trevisani at [e-mail]

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