When Pimco moves in, you know there’s money to be made.
Amid signs of both currency appreciation and economic recovery among various Asian countries, Bloomberg reports on Friday that Pacific Investment Management Co., better known as Pimco, is planning to set up its first dedicated Asian-currency bond fund in Japan as it increases bets on the region’s “stable” economies.
The report quotes Pimco’s chief 0perating officer Douglas Hodge, who notes growing demand for Asian fixed-income among Japanese investors — particularly in emerging markets — and said Pimco may open a fund to meet that demand “in the next couple of months”.
Pimco, which manages about $842bn in assets, bought US Treasuries in September and cut its US mortgage bond holdings to the lowest level since 2005 after declaring that the US recession would lead to a period of less-than-average growth.
Indeed, Pimco chief Bill Gross is not known for lacking a sense of timing. There are already clear signs of economic recovery, led by Australia which this month became the region’s first country to raise interest rates since the onset of the financial crisis. Meanwhile, Bloomberg reminds us, South Korea’s economy expanded 2.6 per cent in the second quarter, the fastest pace in almost six years, and China is expected to grow 9.5 per cent next year after expanding 8.3 per cent in 2009.
In fact the rationale for the latest push into Asian fixed-income can be seen in the words of Pimco chief Bill Gross, writing in last month’s Pimco Investment Outlook:
As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:
1. Global policy rates will remain low for extended periods of time.
2. The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
3. Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
4. Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
5. The dollar is vulnerable on a long-term basis.
Among a growing number of economists and strategists, CLSA’s Asian strategist Christopher Wood is also upbeat on the region — for now.
He observes in his latest Greed & Fear newsletter on Friday that investors in Asia “do not have to worry about monetary policy gaining traction, or liquidity traps, since there are no bad debt-related structural constraints in local banking systems”. He continues:
Indeed if anything the tactical concerns will increasingly be about a return of “inflation” given the base effect mentioned above. Thus, China’s CPI is likely to turn positive in December while India could be reporting WPI inflation of 6.0% by the end of March, according to CLSA’s economics team. This will bring renewed focus on how pre-emptive Asia will be in terms of tightening ahead of the US. As mentioned here earlier, India and Korea are the central banks most likely to tighten first in Asia excluding Australia, which clearly has already started its tightening process.
However, Wood warns that any such tightening moves in Asia “will be highly incremental”. The reality is that “monetary policy is already way too easy in Asia since it is being driven by Western central banks worried legitimately about liquidity traps”. That is why, in Wood’s view, the most plausible outcome, based on a two to five year view, is still an Asian asset bubble with China at its epicentre.
For Pimco however, two to five years would allow plenty of time for its latest scheme to reap handsome profits.
Related links:
Japan’s JGB dilemma – FT Alphaville
Investment Outlook – Doo-Doo Economics – Pimco
Asian local currency bonds enjoy boom times - FT