Pimco cuts Asia risk while being Bullish on India, Indonesia

[MUMBAI] Pacific Investment Management Co, which runs the world's biggest actively-managed bond fund, is shifting to investment grade from high-yielding dollar assets in Asia, expecting a period of global uncertainty.

The possibility of the Federal Reserve surprising markets and the US presidential election are among risks, Luke Spajic, the head of portfolio management for emerging Asia at Pimco, said last week.

A "disorderly" devaluation of the Chinese yuan and sharp moves in crude oil prices can also hurt global markets, he said.

Most Asian currencies and sovereign bonds have declined this month as futures show there's around a two-thirds chance the Fed will tighten by December. Adding to the selloff has been concern over a slowdown in China. Pimco said last week that the US central bank may raise rates two or three times by the end of 2017.

"We are going into a period of uncertainty so we are raising cash equivalents," said Singapore-based Spajic, whose firm oversees about US$1.5 trillion in assets globally. While the money manager has trimmed its holdings in India, the nation, along with Indonesia is its "biggest overweight," he said.

"The assets which have done well recently, we are dialing them down. We are underweight Thailand and the Philippines."

The money manager's overweight position in Indian corporates and quasi-sovereigns contributed to the positive performance of the PIMCO GIS Emerging Asia Bond Fund in August, according to monthly commentary on its website. The fund also benefited from an overweight in Korean credits and a preference for Indonesian quasi-sovereigns over the sovereign.

The Bank of America Merrill Lynch Asian Dollar Investment Grade Index has delivered a total return of 8.5 per cent this year, lagging the 13.7 per cent handed by the BofA Merrill Lynch Asian Dollar High Yield Index.

Sub-zero rates in several developed nations have driven global funds to Indonesia and India, which offer the highest 10-year sovereign yields among major Asian markets. Policy makers' success in improving public finances, spurring economic growth through monetary easing and accumulating foreign-exchange reserves to shield against external shocks has further boosted investor confidence.

Asia is poised to withstand higher US rates, with risks of capital outflows and weaker currencies exaggerated, according to the Asian Development Bank.

"Emerging markets especially in Asia, have relatively robust, strong economic and structural fundamentals," Donghyun Park, ADB's principal economist in Manila, said in an interview last week. "I'm quite optimistic that the effect will be subdued and muted."

Republican presidential nominee Donald Trump's election rhetoric has included talk of erecting trade barriers, which could hurt the outlook for Asia. Regional economies are already struggling to adjust to the slowdown in China that has seen its policy makers tinker with the yuan's fixing. The Pimco Total Return Fund's US$84.4 billion in assets make it the world's biggest actively run bond mutual fund, based on data compiled by Bloomberg.

The yield on India's benchmark 10-year sovereign bonds fell two basis points to 6.72 per cent in Mumbai on Tuesday. Its close of 6.67 per cent on Oct 5 was the lowest since June 2009. The yield on Indonesian notes due in a decade rose two basis points to 7.11 per cent.

The rupee climbed 0.3 per cent to 66.6950 per dollar. The currency has weakened 0.1 per cent this month, following a 1.4 per cent advance last quarter, which was the biggest since the three months ended March 2014. The rupiah is up 0.1 per cent for October in Asia's best performance, after rising for four straight quarters.

"Currency wise, we like India and Indonesia," Mr Spajic said, adding that the Indian rupee is a "favored currency. We are long rupee."

BLOOMBERG