Bloomberg — US corporate bond investors seeking shelter from potential credit stress following the US regional bank crisis could add debt from certain middle-income emerging countries, according to Pacific Investment Management Co.
Money managers should look at debt from nations like Mexico, India, Vietnam and Indonesia, which have “good business models that should stand the test of time” through political and economic cycles, said Pramol Dhawan, the firm’s head of emerging-market debt.
There’s little risk of default, and unlike US corporations, they have a broader set of tools to deal with financial stress, including borrowing in local or reserve currencies or from the International Monetary Fund, Dhawan said in an interview.
“I think that for a handful of EM countries, they propose very viable alternatives to US corporates,” he said. “They stand as good investments in their own right.”
Pimco, which oversees $1.8 trillion in assets, is looking at global trends ranging from nearshoring to population shifts among factors to pick favorites in the developing world. After the industry suffered $90 billion in outflows in 2022, emerging-market funds have seen additions of just $1.5 billion so far this year, according to data for the industry put compiled by JPMorgan Chase & Co.
“If we do get into that sort of credit crunch and a subsequent default cycle,” Dhawan said, “there is a logical question for investors to ask: Have we been overallocated to US corporate credit and are we underallocated to other forms of investment-grade credit?”
Top Four
Among those countries, Mexico benefits from strong remittances and stands to win big from plans by Tesla Inc. and other companies to build factories closer to US consumers, a trend known as nearshoring. The nation is “invariably a local currency story,” supported by high interest rates at 11.25% and a credible central bank.
Meanwhile, India and Vietnam both offer alternatives for companies looking to reduce production in China amid geopolitical tensions with the US and other western governments, he said. India also benefits from the so-called “demographic dividend” as its population — in contrast to China’s — is set to grow over the coming decades. Just last month, India overtook China as the world’s most populous country, according to the United Nations.
Indonesia, the country with the world’s largest nickel reserves, is working to become a key player for the electric-vehicle industry as it exports the materials needed for the transition to renewable energy. The country also has a strong institutional framework, making it appealing to foreign investors, Dhawan said.
Local Currency
For Pimco — one of the largest bond managers in the world — now is the best time to jump into emerging-market bonds denominated in local currency, Dhawan said.
Policymakers in developing countries started lifting interest rates sooner and more aggressively than their developed peers. “The central banks are telling you that they need currency appreciation to help bring down what’s a very sticky, and persistently sticky headline inflation,” he said. “All the stars are aligning to underwrite local currency debt.”
Emerging-market local-currency bonds have returned 6.9% this year, compared to just 2.6% in an index of dollar debt from the asset class.
Developing-world currencies remain cheap, while the US dollar is still overvalued, according to Pimco’s models, Dhawan said.
The rally in Latin American currencies, which are among the biggest winners against the greenback this year, still has room to run, he said. Asian currencies trade closer to fair value.
Still, some countries warrant caution. Investors should be mindful of places like Brazil where the government has started to “poke fingers” at the central bank.
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