Asset manager PIMCO said on Wednesday it was time to actively engage in emerging markets again and highlighted the Russian ruble and Mexican peso as examples of assets that offered potential gains.
PIMCO’s head of asset allocation for EMEA, Geraldine Sundstrom, said commodity prices appeared to be hitting a bottom, Chinese growth was stabilizing and the dollar was no longer on an uptrend.
“The landscape in emerging markets has been steadily improving over the last few months… With this in mind, we are beginning to redeploy capital to EM where we can find good value,” Sundstrom said in a note.
She said several emerging currencies such as the ruble and Mexican peso offered high yields and had weakened significantly. On local bonds, she highlighted yield curves such as those in Mexico and South Africa as attractive, “as we believe investors have priced in too many interest rate hikes”.
PIMCO also expects negative earnings momentum in emerging markets to end soon and noted that free cash flow yields in emerging markets were higher than in the developed world.
“From a portfolio perspective, there has been little incentive to venture out of developed markets in recent years,” Sundstrom wrote, adding that equities as well as bonds had provided strong returns thanks to low interest rates and central banks’ bond buying.
“Now, however, valuations in the developed markets fully reflect the benefits of a lower discount factor. The tailwinds of accommodative central bank policies are fading and may even be disappearing.”