Asset manager Pimco eyes opportunities in Asian local-currency bond markets amid US downturn
- Fed policy tightening and the recent banking-sector crisis are weighing on US economy, Pimco CIO Daniel Ivascyn says
- Asset manager views China’s growth prospects as ‘fairly strong over the near term’
“We’re not expecting the type of economic shock that we witnessed during the global financial crisis or during Covid-19, but a more moderate and extended, multi-quarter recession,” Ivascyn said. “But you certainly need to prepare investment portfolios for something worse, for a harder landing scenario.”
China remains one of the last few markets globally without an inflation problem, which means there is room for monetary easing to fend off an economic slowdown, Ivascyn said. Bond prices, which move inversely to yields, rise when interest rates are lowered, as the declining yield on new issues makes previously issued bonds more appealing.
“China has a decent amount of growth momentum,” he said. “We think China’s growth prospects look fairly strong over the near term.”
Ivascyn, 53, correctly forecast a recovery in mortgage-backed securities after issuance plunged in the wake of the 2008 financial crisis. He replaced “bond king” Bill Gross to become the company’s CIO in 2014, and currently oversees more than US$300 billion in total assets.
03:54
Beijing denounces US and South Korea plans for nuclear submarine
The US$120 billion Pimco Income Fund, the world’s largest actively managed bond fund, has returned an average 3.4 per cent annually over the past decade, according to Bloomberg data. That ranks the fund in the top 3 percentile of 220 funds with assets worth at least US$1 billion.
China’s economic data in April “broadly and significantly” missed market expectations, Goldman Sachs said in a note to clients on Tuesday. Some persistent weaknesses in key parts of the economy, such as the property sector, and issues around youth unemployment and tepid consumer confidence are weighing on the growth momentum, the US bank said.
The MSCI China Index has almost lost all of its 18 per cent rally in 2023, erasing US$6.5 trillion in market value from a peak on January 27. As investors sought the safety of government bonds, China’s benchmark 10-year bond yield declined 7 basis points in April, its biggest monthly drop since October, and fell deeper to a six-month low this month. These notes yield 80 basis points less than US Treasuries.
Ivascyn said Pimco has reduced some of its exposure to higher quality Chinese bonds such as government bonds, and has taken a “significantly” more defensive position on Chinese interest rates versus the rest of the world after the outperformance. Last year Chinese 10-year government bonds fetched as much as 110 basis points more than their US counterparts.
“If we were to become more constructive on economic growth … we would certainly look to explore and target some of the higher yielding sectors and segments of the China market, but also Asia more broadly,” he said.
11:05
China housing: Can the world’s biggest housing market boom again?
China is unlikely to see the spectacular growth rates it has posted over the past two decades as it is now going through a middle income transition.
And one of the most important growth engines, the property sector, which at one point accounted for half of the Asian credit bond market, has started to sputter, Ivascyn said.
Pimco’s portfolio managers are also eyeing local currency-denominated bonds from Australia, Indonesia and India, as they diversify their holdings away from US dollars.
To be sure, uncertainties such as geopolitical tensions between the US and China are still some of the biggest concerns for investors. The middle income transition that China is grappling with will stoke volatility and inject stress in certain sectors.
“But China and the rest of Asia are likely to continue to grow at rates faster than most other areas of the world,” Ivascyn said.
“Their economies will grow in a relative sense … it will continue to be a reasonable source of diversification.”
