Tags: Brazil | bonds | currency | Pimco

Pimco Turning Bullish on Brazil's Bonds as Strength Overlooked

Monday, 14 April 2014 03:58 PM

Pacific Investment Management Co., which manages the world’s largest bond fund, is turning bullish on Brazil’s bond markets, saying investors are ignoring the “long-term strength” of South America’s biggest economy.

Inflation-adjusted yields are among the highest in the world, Mark Kiesel, deputy chief investment officer at Pimco, said in a research note on the company’s website following a trip to Brazil. Kiesel is one of the six portfolio managers promoted to deputy CIO in January in a management overhaul following the resignation of Mohamed El-Erian as co-CIO.

“The global credit team left Brazil more bullish, a significant change from the past few years,” Kiesel wrote. “Our main conclusion was that sentiment was so negative that markets had likely overshot and could improve from depressed levels given that relative value had finally become attractive.”

Kiesel’s comments came three months after Bill Gross, Pimco’s CIO and co-founder, said Brazil was no longer a preferred emerging market amid concern that an expansionary fiscal policy is fueling an increase in the country’s debt burden. Standard & Poor’s cut Brazil’s credit rating one step to the lowest level of investment grade last month in the first reduction in more than a decade.

The $5.9 billion Pimco Emerging-Market Bond Fund held 25 percent of its assets in Brazil as of March 31 in the largest country allocation after Russia, according to the Newport Beach, California-based company’s website.

‘Less Traveled’

“Simply put, there comes a point to take the road less traveled, when a lot of bad news is priced in,” said Kiesel

Gross said Brazil was no longer a preferred emerging market at the 2014 ETF Virtual Summit in January after the firm was hurt by a wrong-way bet on the nation last year. A decade ago, Pimco bought Brazilian bonds as they plunged before presidential elections in 2002, a wager that proved prescient and burnished the reputation of El-Erian.

Brazilian credit markets have trailed their peers in Europe in recent months. It costs investors 0.39 percentage point more to insure against the risks of bond defaults in Brazil for five years than similarly rated Spain securities, according to credit default swap data compiled by Bloomberg. As recently as October, it was more expensive in Spain.

The underperformance makes Brazil relatively cheap because the country has lower external debt and higher foreign reserves, according to Kiesel. Bonds sold by Petroleo Brasileiro SA, Latin America’s largest company by sales, are also attractive because the government will probably raise gasoline prices after the October presidential election, helping improve the company’s cash flow, he said.

Rate Outlook

Interest-rate swaps showed that investors are betting that the central bank will raise the target lending rate by 2 percentage points to 13 percent by June 2015 even as policymakers signaled they may be done with raising borrowing costs.

The market is “pricing in rate hikes that are unlikely to materialize over the next few years,” said Kiesel. “This provides an opportunity for investors who are focused on the fundamentals in Brazil, which suggest growth is slowing, and that the current level of real rates is too high given a long-term and still-positive secular view of the country.”

Stock Rally  

Brazil’s stock and currencies have rebounded over the past few weeks on speculation that President Dilma Rousseff’s government may change its policies after her approval rating declined ahead of the election. The real has gained 8.9 percent since the end of January, the most among 31 major currencies tracked by Bloomberg, while the Ibovespa index of stocks has jumped 15 percent from a five-year low set on March 14.

A survey published in March by CNI-Ibope showed Rousseff’s approval rating dropped for the first time since July, when street protests triggered by a bus fare increase pushed her popularity to a record low.

“The government approval ratings had deteriorated so much as a result of protests over rising prices, poor public services, a deteriorating fiscal deficit and government overreach that negative opinion polls could be a positive catalyst for change,” Kiesel wrote.

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Pacific Investment Management Co., which manages the world's largest bond fund, is turning bullish on Brazil's bond markets, saying investors are ignoring the "long-term strength" of South America's biggest economy.
Brazil, bonds, currency, Pimco
Monday, 14 April 2014 03:58 PM
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