By Paulo Trevisani
NEW YORK--Local currencies are still the best way to invest in
emerging markets, despite the threat of rising interest rates in
the developed world, said an executive from U.S. mutual-fund giant
Pimco.
Emerging-markets have attracted billions of dollars in
investment in the past few years, thanks in great part to the
low-interest rate policy in developed countries, which left few
options for investors seeking high yields.
But a growing feeling that the Federal Reserve and other central
banks could be about to start reversing low-rate policies has sent
jitters through the emerging-markets community, as it could
redirect investment to larger, safer economies.
Many observers, however, believe there still are opportunities
available in growing economies, and at least in some of them it may
be the right time to get even deeper.
"Local bonds are one of the most attractive asset class" in
these markets, said Ignacio Sosa, executive vice president at
Allianz SE's fund-management firm Pacific Investment Management
Co., or Pimco, in an interview on the sidelines of a Latin America
growth-companies and high-yield forum Thursday in New York.
Mr. Sosa said that, among other factors, central banks in
emerging countries are more likely to start using
currency-appreciation as a tool to fight inflation, and that could
benefit foreigners with investments in the local currency.
"Latin American currencies in general are attractive because of
strong fundamentals and attractive carry," he said.
In fact, this year has seen a shift from last year's trend of
investors favoring dollar-denominated debt from emerging markets,
according to J.P. Morgan. As of last Tuesday, this year's total
returns on local-currency emerging-market bonds was 1.2%, while
debt in dollars had a negative return of -1.5%.
Even when buying dollar-denominated assets, though, investors
have flocked to emerging markets to the point that some securities
are now seen as overvalued by many analysts. Mr. Sosa said he
believes that corporate debt could still be a better place to be,
in particular bonds issued by large national champions, usually
under government control.
"An investor can buy a very large state-owned bank for almost
the same yield as Zambia" sovereign debt, he said, making the point
that such a bank's bonds could also represent a lesser risk than
the African country's issuance.
-Erin McCarthy contributed to this article
Write to Paulo Trevisani at paulo.trevisani@dowjones.com
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