Mohamed A. El-Erian, whose company runs the world’s biggest mutual fund, favors investments in emerging markets on expectations they’ll outpace developed economies in growth and wealth.
Brazilian sovereign bonds and Chinese yuan non-deliverable forwards are attractive, El-Erian, co-chief investment officer at Pacific Investment Management Co, said in Sydney during an interview yesterday. Greece needs outside help as it tackles the EU’s largest budget shortfall, he said.
Pimco portfolio managers are reducing their riskiest positions, he said. Debt strains in Greece, Portugal and Spain, along with the emphasis on non-developed markets, underscore Pimco’s view that this year will see slower-than-average growth and a shrinking global role for the US economy.
“We have been moving up in quality, which has meant certain sales of high-yield names,” said El-Erian, 51, who is author of the book When Markets Collide. “We’ve been very selective on which sovereigns we are exposed to.”
The next six months will be healthy for the US economy, though the expansion may slow after that, El-Erian said during a trip to Sydney for a symposium sponsored by the Reserve Bank of Australia.
Pimco, based in Newport Beach, California, has about US$1 trillion in assets under management. It is a unit of Munich, Germany-based insurer Allianz SE.
RAISING COSTS
Brazil is poised to be Latin America’s first major country to raise borrowing costs after leading the region out of the global recession last year, surveys of economists showed.
Pimco prefers Brazilian debt over that from “much of the G7” countries in part because of the central bank’s “hawkish” inflation stance, Michael Gomez, a co-head of emerging markets, said in an interview last Thursday.
Gomez also said China would loosen currency controls this year and allow the yuan to gain, in a separate interview on Dec. 10. International investors use forwards — agreements to buy and sell assets at current prices for delivery at a future specified time and date — to bet on the yuan. Non-deliverable contracts are settled in US dollars.
China’s economy will grow 6 percent or more in the coming years, El-Erian told reporters at a separate briefing.
Greece is trying to persuade financial markets it can restrain its budget shortfall without outside assistance, while borrowing costs are also climbing for Portugal and Spain. Credit-default swaps on the debt of all three countries rose to records last week.
Credit-default swaps are contracts designed to protect against or speculate on default.
PLAYING CHICKEN
“It’s going to take years to sort out the sovereign balance sheet issue,” El Erian said at the briefing. “Europe has become a huge game of chicken, whereby the Greeks are waiting for help from outside and donors are waiting for Greece to take a step forward.”
Greece, which had the EU’s widest budget deficit at 12.7 percent of output last year, has struggled to convince investors it can bring the budget shortfall within the bloc’s limit of 3 percent.
Pimco’s Total Return Fund, run by Bill Gross, handed investors a 15.1 percent gain in the past year, beating half of its competitors, data compiled by Bloomberg showed.
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