El Erian sees EM bargains as outflows continue
The EM selloff has led to buying opportunities across the asset class, Pimco's CEO says
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 with LatinFinance.
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, he added.
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.
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.
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 said.
said that while he “wouldn’t go out and buy the [EM] index,” emerging markets
had become “a very differentiated story.”
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 particular appeal.
markets will nevertheless remain “much bumpier than the real economy because
you’re going to shake out crossover investors.”
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.
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.
asset markets have been overvalued in recent years following “aggressive,
experimental and unconventional policies” by developed nation central banks.
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 investor said.
market debt was hit especially hard by recent market turmoil because of the
pullout of crossover investors.
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 inventory.”
warned that markets were overestimating the capacity of developed economies,
principally the US, to return to meaningful growth in the short to medium term.
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.
interview with El Erian will appear in LatinFinance’s
25th Anniversary edition, published next month. See the LatinFinance 25th Anniversary
for details. LF