Brazil, South Africa and Mexico are the best emerging markets to buy local-currency bonds because they offer higher yields than the debt of developed nations, according to Pacific Investment Management Co., manager of the world’s biggest bond fund.
“Some of our largest investments in emerging local- currency debt are in these three countries,” Ramin Toloui, Pimco’s global co-head of emerging markets portfolio management, said in an interview in Singapore today. “In an environment where global growth rate is very slow, and where core industrialized yields are very low, there tends to be a strong force of gravity that pulls those rates down over time. That’s why these are our favorites.”
Global investors have plowed $25.3 billion in new money into emerging-market bond funds this year through September, compared with $17.3 billion in 2011 and $53.6 billion in 2010, according to data compiled by Cambridge, Massachusetts-based research company EPFR Global. Newport Beach, California-based Pimco managed $1.82 trillion at the end of June.
“You can get 9 percent yields in investing in Brazil, 6 percent in South Africa and more than 5 percent in Mexico,” Toloui said. He oversees four funds, including the $7.9 billion Pimco Emerging Markets Bonds Fund that returned 19 percent in the past 12 months, according data compiled by Bloomberg.
Brazil’s 10-year bond yield has declined 156 basis points, or 1.56 percentage points, in the past six months to 9.79 percent, according to Bloomberg data, while the similar measure in Mexico fell to 5.32 percent from 6.35 percent. In South Africa, the 10-year yield dropped to 6.99 percent from 7.56 percent at the end of June.
The flows into emerging-market debt will likely be sustained in 2013, said Toloui, as global investors continue to reallocate their assets from industrialized economies following the latest rounds of bond-purchase programs from central banks in the U.S., Europe and Japan to revive economic growth.
“There are three reasons for this; the debt levels in emerging markets are much lower, yields are higher and the existing investor allocations are very lopsided for industrialized countries,” he said. “Just a process of creating a balanced global bond portfolio tends to increase the flows into emerging market countries.”
Local-currency sovereign bonds in emerging economies rose 10.7 percent this year through yesterday, according to JPMorgan Chase & Co.’s EMBI Global index, a pace that put the market on course for its best year since 2002. Dollar-based debt advanced 15.2 percent so far this year versus 8.5 percent in 2011.
Europe’s debt crisis, which has fueled a global economic slowdown, remains the main risk to the gains, according to Toloui. Pimco forecasts the U.S. economy will expand by 1 percent to 1.5 percent in 2013 while China’s growth slows to 6.5 percent to 7 percent rate in the coming year as the “new normal” for the country.
“The biggest risk to global asset markets continues to be the situation in Europe,” he said.
Still, Pimco expects the Chinese yuan to keep appreciating after the currency touched a 1993 high last week as Asia’s biggest economy runs a trade surplus. South Korea’s bonds will benefit from a possible decline in interest rates and capital inflows from sovereign-wealth funds, according to Toloui.
The Bank of Korea will decide on Oct. 11 whether to cut interest rates for the second time this year to counter risks posed by Europe’s debt crisis and a slowdown in China. Data released in the past week showed exports fell for a third month in September and industrial production dropped more than expected in August.
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