Emerging markets
Interview: PIMCO---El-Erian, Mohamed--Fund Manager
>> welcome back. the world trade organization ruled that $3 billion in u.s. cotton subsidies are illegal. the group is upholding a flarmey decision from earlier in the―a preliminary decision from earlier in the year. the loss may force some u.s. cotton farmers to plant other crops. brazil brought the complaint to the w.t.o. our next guest that says he’s bullish on emerging markets for the rest of the year. he said that most of the fed activity has been priced in. he is mohamed he’ll-erian and he joins us from―el-erian, and he joins us from his offices. when you look to the emerging market world, what is most appealing to you right now?
>> there’s a couple that look appealing. one on the high volatility, high return side, brazil has the most attractive characterics. russia is benefiting enormously by the higher prices for energy prices.
>> there has been a dearth of bond sales in the second-quarter. tell us if you agree and, if so, why that is.
>> we just come from a period of intense market financial vol tilt yifment when there is -- volatility. when there is a lot of volatility, many stay on the sideline.
>> brazil, you’re saying you consider it more attractive in terms of the higher yielding government bond. what are they yielding? and what are the characteristics of the brazilian economy?
>> they’re yielding about a .5%. you can get up to 12%. that is an attractive yield for a country that continues to improve economically and financially. we believe not only look at an attractive yield, but there is also potential for price depreciation.
>> brazil had problems a few years ago. help investors understand why that no longer pertains.
>> that has to do with a political transition in the change of government. there was concern if brazil would stay on course. and the government has kept the country on course. and has continued to build the policy momentum.
>> let’s turn to china. i understand sthraw looked at those bonds. the chinese government committed to reducing the economic growth in that country. something that may concern investors. what do you think?
>> china is a very important importer right now. it is helping to push commodity prices higher. so a soft landing in china is important.
>> you mentioned commodity prices. and i wanted to mention russia, because i understand that you believe it is benefiting from the high oil prices that we have seen of late.
>> their reserves have increased by another 600 million to 86 billion. they are running twin surpluses. and a lot of that has to do with the the fact over 50% of exports are energy. >> what are the yields on russian government bonds?
>> they’re lower. you can pay 7%. but then you get a lot less volatility.
>> let me ask about ecuador. you said of the companies that have not defaulted, they are yielding the highest of any government bonds out there.
>> that’s correct. ecuador, you get the advantage of the oil trade.
but the disadvantage of a politically unstable place. so you do get paid a lot of yield, but you are taking a lot of risks.
>> i wanted to ask about what percentage you think that an american investor in their bond portfolio should have committed to emerging markets . where does this fit in to a bond strategy?
>> it fits in the part of the portfolio that is subject to a lot of volatility. we tend to think in the 5% to 10% range of a typical portfolio.
>> tell us about u.s. interest rates policies and how that affects your thinking. is there much of an effect of u.s. interest rates policies on the emerging market bonds?
>> there has been. people priced in the higher u.s. rates, there has been an unwinding of the global carrier trade. when people borrow money cheap in the u.s. there was an initial very negative impact the we are seeing the positive impact which is why interest rates are going up. that is because growth is picking up around the world that is a good thing.
>> give us one sentence. what is your fund returning to investors so far this year?
>> so far this year we have negative 3.5%. annualized we have been at 19%. plus 19%, so you’re looking at a volatile area that will tend to have ups and downs.
>> thank you mohamed el-erian. we’ll be right back.
