Emerging Markets Offer Promising Returns as Fed Eases

According to Pacific Investment Management Co.PIMCO predicts that local currency debt from emerging markets will yield high returns when the Fed cuts interest rates. Domestic bonds have underperformed compared to hard-currency ones due to emerging-market policymakers’ cautious stance on easing. With the Fed expected to lower borrowing costs soon, investors will seek returns beyond U.S. equities, money markets, and private credit, says Pramol Dhawan from PIMCO.

Dhawan’s Insight on Emerging Markets

Dhawan remarked in an interview that local markets present the greatest value. He elaborated that the initial stages of easing by emerging-market central banks, which are anticipated to follow the Federal Reserve’s actions, offer the most promising opportunities. Consequently, this perspective underscores a shift in focus toward emerging markets as a crucial investment avenue.

Dhawan highlights emerging markets as key investment opportunities, emphasizing their value in the early easing stages, according to wsj digital subscription.

Strong Performance in August

The asset class is already gaining traction, as evidenced by a Bloomberg index tracking emerging-market local currency debt, which delivered returns of over 2.3% in August. This marked the best monthly performance for the asset class this year. The gains closely mirrored those of sovereign bonds, indicating a positive shift in investor sentiment towards local currency debt.

Latin America and Currency Considerations

Dhawan notes that Latin America presents significant value due to anticipated declines in high real rates. However, he acknowledges potential challenges with currencies like Mexico’s peso, which has underperformed and may face additional pressure if rate cuts continue. The interplay between currency performance and interest rates remains a critical factor in investment decisions.

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South Africa and Turkey: Key Markets

PIMCO’s emerging markets local currency and bond fund, valued at $1.3 billion, has outperformed 98% of its peers. This performance has been consistent over the past year. Dhawan also highlights South Africa and Turkey as favorable markets. In these countries, significant central bank cuts are anticipated once easing cycles commence later this year. These expectations further bolster the appeal of emerging-market local currency debt.

Investment Strategy Moving Forward

As the Federal Reserve prepares to reduce interest rates, the focus is likely to shift towards emerging-market local currency debt. This strategy aligns with broader investment trends seeking higher returns outside traditional U.S. asset classes. Investors and analysts alike are watching closely as these developments unfold, shaping the future of global investment opportunities.

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