El Erian sees EM bargains as outflows continue
The EM selloff has led to buying opportunities across the asset class, Pimco's CEO says
A sharp selloff in emerging markets has led to buying
opportunities across the asset class following a "severe
technical adjustment" that is likely to have run its course,
Pimco CEO and co-CIO Mohamed El Erian has said in an interview
Markets must nevertheless brace for an extended period
of volatility as investors realign credit risk amid uncertainty
over US monetary policy and continued global economic weakness,
"I don’t see growth in the advanced world
taking off, nor do I see it collapsing, but I see a lot of
financial volatility ahead because people like us will be
repricing the liquidity paradigm," El Erian said.
His comments come amid mounting fears that a selloff
could herald an unraveling of the emerging market investment
case. Last week marked the eighth consecutive week of aggregate
outflows from emerging market debt funds, now totally 6.3%, in
anticipation of an end to the US Federal Reserve’s
bond buying program.
But El Erian said that the retreat of crossover
investors from global emerging markets had led to investment
opportunities, especially in local currency and rates markets.
"What happens still in Latin America is the minute you have a
technical dislocation in the global markets the crossover
investors look to get out. At that point liquidity evaporates
and you get a massive technical selloff. That selloff makes the
less informed people think these are the bad old days. But the
more informed people see this is a great thing, a time for
differentiation, and they see this as opportunity," he
El Erian said that while he "wouldn’t go
out and buy the [EM] index," emerging markets had become "a
very differentiated story."
"History tells you that unless bad technicals lead to
bad fundamentals this technical phase is often temporary and
reversible," he said, citing Mexican local rates as being of
Asset markets will nevertheless remain "much bumpier
than the real economy because you’re going to
shake out crossover investors."
El Erian said that global economic weakness posed the
gravest risk in Latin America to Argentina. "In this
environment, there are certain countries that will tip.
Argentina will tip," he said.
Meanwhile Brazil faces the risk of "policy incoherence"
in the face of slowing growth and a global re-pricing of risk.
"I would put Brazil nearer to Mexico than Argentina, but
it’s not Mexico. Mexico has benefitted from the
institutional anchor that Brazil is still developing. In the
absence of institutional anchors people will go back to old bad
habits," El Erian said.
Global asset markets have been overvalued in recent
years following "aggressive, experimental and unconventional
policies" by developed nation central banks.
"Everything has been overvalued. We’ve had
artificial pricing everywhere, starting from the US Treasury
market all the way out: whatever risk factor you want to look
at, be it credit, liquidity, equity, everything was overvalued.
And what you’ve had is an adjustment," the
Emerging market debt was hit especially hard by recent
market turmoil because of the pullout of crossover
"Emerging debt suffered more than it should have because
of the phenomenon of the tourist dollars and the lack of a big
enough dedicated investor base," he said. "People exited simply
because they didn’t want to be caught with
off-benchmark exposures and there was very little appetite
among the broker-dealer community to take down
He warned that markets were overestimating the capacity
of developed economies, principally the US, to return to
meaningful growth in the short to medium term.
"There simply isn’t enough strength in the
underlying economy allowing [central banks] to exit but they
will start adjusting because of the costs and risks and the net
impact will be bumpiness," El Erian said.
The full interview with El Erian will appear in
LatinFinance’s 25th Anniversary edition,
published next month. See the LatinFinance
25th Anniversary for details.