Pimco: Emerging Markets Will Outperform

Here are the key takeaways from Pimco’s recent piece on Emerging Market debt:

Key Points:

• Global economic conditions and structural factors remain supportive for the emerging markets to “run fast,” and for the U.S., Canadian and Australian economies to “run faster” on a relative basis than most other developed economies in 2011. This is in sharp contrast to the outlook in Europe and the U.K., where fiscal tightening and lingering sovereign credit issues suggest these regions are set to “run slow.”
• This large economic differentiation leads to significant credit implications for investors. Investors should favor investing in companies tied to economies with the strongest fundamental outlook. Given longer-term structural and near-term cyclical factors, the emerging markets and the U.S., Canada and Australia present the most attractive credit opportunities today for investors.
• In terms of specific sectors, investments in emerging market corporate bonds, U.S. banks, secured debt, select municipal BABs and high yield bonds offer compelling opportunities. Investors should take advantage of the improving fundamental trends in select bonds in these sectors as economies in these issuers’ regions run fast.
• Healthy economic growth in emerging markets and solid cyclical growth in the U.S., Canada and Australia should lead to improving credit fundamentals for numerous companies and issuers in these areas as the global economic expansion is extended due to accommodative monetary and fiscal policies in many parts of the globe. Investors who embrace “running fast” and have an appreciation for the near-term positive cyclical implications for credit fundamentals should prosper.

Remember, Pimco is talking about debt here, not equity.  If you think back to Pimco’s “Running Fast” earlier in the year, the theme had to do with the deteriorating fundamentals of developed economy sovereigns.  Emerging markets are doing relatively well on the other hand with only one significant downgrade of late, Vietnam.

Here are two graphs that lead to this conclusion:

The question though goes to outperformance.  Emerging markets are in better shape relative to the OECD but for the debt to outperform, you have to expect either a. the fundamentals will continue to diverge in favour of EM or b. the relative prices of bonds are not now fully reflective of the fundamentals.

Pimco thinks the answer is A and expects the emerging markets to continue running fast. You can get a more in-depth view on Europe, the US, EM and a lot more – replete with charts. Read Full Article Here.