Pictet Favors India, Brazil and Mexico as Fed Unleashes Dollars

Pictet Asset Management Ltd. is betting on gains in the Indian rupee, Brazilian real and Mexican peso as bond buying by the Federal Reserve prompts investors to chase higher returns in emerging markets.

Simon Lue-Fong, global head of emerging-market debt at Pictet Asset, part of Switzerland’s largest privately held bank for the wealthy, said he had “gone long” on the three currencies in a Sept. 18 interview in Singapore. The Dollar Index (DXY), which tracks the greenback against six major trading partners, has lost 0.7 percent since Sept. 12, a day before the Federal Reserve announced open-ended purchases of $40 billion of mortgage debt per month.

The European Central Bank unveiled a plan this month for unlimited buying of government bonds, while the Bank of Japan increased its asset-purchase fund yesterday. The rupee and the real are the two worst performers over the past year among 25 emerging-market currencies tracked by Bloomberg. Within eight months of the Fed unveiling $300 billion of note buying in November 2010, the real rallied to the strongest level since 1999 and the rupee and the peso reached three-year and 30-month highs, respectively.

“Pictet has a bias for these currencies as they all benefit from reflation and growth,” said Lue-Fong, who oversees $22 billion of emerging-market debt in London. “The real and the rupee have been laggards, so valuation-wise look cheaper. Mexico, given its proximity to the U.S. liquidity bazooka, is sure to do well.”

Economic Growth

The rupee weakened 12 percent in the past year to 54 per dollar, followed by an 11 percent slump in the real to 2.025. The peso rose 2.4 percent over the same period to 12.818.

India’s economy will expand 6.1 percent this year, Mexico’s will grow 3.9 percent and Brazilian gross domestic product will increase 2.5 percent, according to estimates published in July by the International Monetary Fund. That compares with the Washington-based lenders’ forecast of 2 percent growth in the U.S. and a 0.3 percent contraction in the euro area.

Malaysia’s ringgit, South Korea’s won and China’s yuan will also perform better as reflation and growth boost exports, said Lue-Fong, who has been an investment manager since 1991, working for Standard Asset Management and Invesco Ltd. before joining Pictet in 2005.

Pictet’s $10 billion Emerging Local-Currency Bond Fund (PFEMGDP) returned 11 percent this year, beating a 9.8 percent gain in JPMorgan Chase & Co’s index of developing-market local-currency debt. Its Global Emerging Dollar Debt Fund (PFIFGEA) rose 12.8 percent, trailing a 14.1 percent advance in comparable dollar bonds tracked by JPMorgan.

‘Outside Asia’

Lue-Fong said he favors local-currency debt from Mexico, Poland, South Africa and Turkey, saying central banks in those nations are likely to lower borrowing costs.

“The bond story in Asia is less interesting as the yields are already low and because there is some inflationary pressure, which prevents central banks from cutting rates,” he said. “If you’re looking for capital gains and huge decreases in rates, you have to look outside Asia.”

The rupee and Indonesia’s rupiah have come under pressure recently due to growing current-account deficits. India’s shortfall widened to a record 4.2 percent of GDP in the year through March, from 2.7 percent in 2011, official figures show. Indonesia had a $6.9 billion deficit in the second quarter, the largest since Bloomberg began collecting the data in 1997.

“We are in the process of increasing risk within our portfolios,” Lue-Fong said. “Promotion of growth in the world will help rebalance countries’ balance of payments. That’s good for currency appreciation, particularly in Asia.”

‘Diversification and Returns’

The Fed stimulus will “provide liquidity, shore up confidence, and reflate asset prices” in the emerging-debt markets, Lue-Fong said. Even if there’s a question mark about the long-term effects on the global economy, the move is good for fixed-income asset prices in the short run, he said.

Emerging-market bond funds have attracted more than $36 billion this year through Sept. 12, more than double the $17.3 billion for all of 2011, according to data from research firm EPFR Global.

“The scarcity of growth, yields and safer assets will continue to push investors into emerging markets,” Lue-Fong said. “Big investors such as sovereign wealth funds and pension funds have woken up to the fact that developing-market debt assets are potentially part of the solution for them in terms of diversification and returns.”

To contact the reporters on this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

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