PIMCO, the world's biggest bond investor, picks the Indian rupee and offshore Chinese yuan as pure currency bets and sees value in the bonds as well as the currencies of Brazil and Mexico, a manager of the fund's emerging markets portfolio told Reuters, recently.
Ramin Toloui, co-head of PIMCO's global emerging markets portfolio management team, also reckons the Bank of Japan has, through its aggressive policy easing, given markets a green light to short-sell the yen. And the beneficiaries of that additional monetary easing are likely to be global investment grade credit instruments, emerging market credit and emerging market currencies, he said at a Reuters FX summit.
"We have been ahead in terms of advising our clients to make dedicated allocations to emerging market local currency assets and by using off-index positions in emerging market currencies in our strategies that are dollar-denominated or primarily developed market," Toloui said. The Newport Beach, California headquartered Pacific Investment Management Company led by Bill Gross had $2.04 trillion of assets under management at the end of March. Of the 45 percent of those assets which are outside the United States, Asia takes up a third whereas Europe takes up two-thirds.
Toloui said PIMCO manages to get precise exposure to either the bonds or the currency or both, in markets, by using interest rate swaps, hedges in currency forwards and outright purchases of bonds. PIMCO has exposure to both the local bonds as well as the currency in Brazil and Mexico. In South Africa, however, PIMCO is long the bonds but has hedged out the currency exposure.
Barring the rupee and the offshore yuan, PIMCO is broadly neutral on other Asian currencies, Toloui said. The fund has about $82.4 billion of assets in its emerging markets strategy. "Asian currencies face a number of headwinds this year, one of them is slower growth globally and another is depreciation of the Japanese yen, which is a headwind for many Asian currencies but not all," Toloui said. "We're taking a more targeted approach in our Asian currency exposure this year."
Toloui's bullishness on the rupee comes from belief that it is cheap considering its high yield and expectations of progress on domestic policy. The rupee, now around 54 per dollar, has been undermined by India's wide current account deficit and is down 18 percent since August 2011. "The rupee has almost a 6 percent yield in the NDF (non-deliverable forwards) and it's a currency that has been beaten down quite severely in terms of valuation by the market," he said.
The rupee also looks attractive on a yield per unit of volatility metric, Toloui said. The yuan, on the other hand, has a low yield of around 2 percent but exceptionally low volatility too, he said. The yen would be a good funding option for emerging market positions, Toloui said. And, by refraining from talking about any restraint or the costs of its aggressive monetary easing, the Bank of Japan was encouraging yen-selling, he said.
Yet, the volatility in Japanese government bonds (JGBs) since new BOJ Governor Haruhiko Kuroda stunned markets on April 4 with his massive stimulus reflected market unease about the impact of such policy, and investors would be conservative about underweights or overweights in yen assets, he said. "Our greatest comfort is with JGBs inside of 10 years, particularly inside of seven years, which we think are going to be anchored by the BOJ buying programme and by the zero interest rate policy.
"And we think the longer-end is more vulnerable to potential success of the reflation policy." Referring to excessive volatility in gold prices, which has spilled over to other commodities and broader financial markets, Toloui said this reflected the discomfort market participants were having with the two opposing forces: weak global growth and the abundant liquidity provided by central banks.
It was natural that there would be bouts of volatility when investors got worried about the first reality, that of weaker economic fundamentals, interrupting market rallies spurred by the second reality, the cheap cash sloshing around, he said. "That's why our strategy is primarily oriented around finding things that offer great carry and have relatively attractive valuations.
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