Emerging markets buffer Euro risk

Emerging market economies may help buffer the global economy from Euro zone risks — but they also present their own risks, according to the Pacific Investment Management Company ().

Emerging market fixed interest is an asset class, which is becoming a clear driver of total returns across all of PIMCO’s strategies according to Michael Gomaz, PIMCO executive vice president in its Munich office, portfolio manager and co-head of PIMCO’s emerging market management team.

Overwhelmingly strong fundamentals have resulted in credit ratings upgrades for many emerging markets and more than 55 per cent of this asset class is now rated investment grade or above, Gomaz said in a PIMCO/Equity Trustees teleconference emerging markets update.

For managers, moving into local markets investment in these emerging markets rather than investing in US dollars further improves yield and reduces duration, all with a higher credit quality, he said.

But with opportunity comes risk, and much as emerging market opportunities start with China, so do the risks, according to Gomaz.

These include the risks of asset bubbles from inappropriate demand allocation of capital and from difficulties in tracking and managing credit growth. There is also a need to balance high levels of growth and a risk of overheating.

Looking ahead, emerging markets have ample room to inflate balance sheets and call on more debt in the event of a second downturn, Gomaz said.

Emerging market economies are best positioned to have continued rapid growth in the “new normal” global economic environment, while balance sheet concerns will constrain ability of developed economies to grow and use policy tools to combat further headwinds, Gomaz concluded.