Real interest rates in the world’s second-biggest emerging market have fallen to about 2 percent, pushing money managers accustomed to earning returns of five or six percent just by investing in overnight rates to search for yield in other assets, said Douglas Hodge, Pimco’s chief operating officer.
“We have moved to a new paradigm in terms of interest rates,” Hodge, 55, said during an interview in Rio de Janeiro for the opening of Pimco’s first office in Latin America and its 11th overseas. “This is where we think there is an emerging business opportunity for us.”
The Newport Beach, California-based Pimco, which oversaw $1.92 trillion of assets as of Sept. 30 including more than $60 billion in Latin America, announced in April it was opening its first regional office in Rio. The firm, a unit of Allianz SE (ALV) known for its bond funds run by Bill Gross, began expanding into other asset classes including stocks three years ago.
Rio is Pimco’s first office in a BRIC market; an office in Hong Kong helps manage its business in China. One of the city’s draws is its pension funds, including the country’s biggest, Previ. As interest rates in Brazil fall, the 596 billion reais ($285 billion) pension industry is beginning to reallocate resources after funds won permission in 2009 to invest up to 10 percent of their assets abroad.
Brazilian policy makers have cut the benchmark rate 525 basis points since August 2011, more than any Group of 20 nation, to 7.25 percent, in a bid to revive a flagging economy that is forecast to grow at half the pace of the U.S. this year and less than the world’s biggest emerging markets.
While a weak global economy, especially a slowdown in China, is to blame for much of Brazil’s poorer performance this year, policies by President Dilma Rousseff’s administration are also a factor in damping investment, Hodge said. Among them is the government’s plan to cut utility rates, he said.
Companies “are becoming more conservative, partially as a result of external conditions, partly from more interventionist government policy, and it is just not clear where the boundaries of that policy will be set,” he said.
Still, Brazil’s economy is better suited than other emerging markets to withstand a prolonged period of “tepid” global growth because of its expanding middle class, strong consumption trends and one of the world’s lowest debt levels, Hodge said.
Those same trends helped Pimco profit after it tripled its Brazil holdings in 2002 at a time investors were dumping the nation’s debt on concerns then-presidential candidate Luiz Inacio Lula da Silva, a former union leader, would default if elected.
Pimco stayed invested after Lula took office and prices recovered as he went against longstanding policies of his Workers’ Party and reined in public spending. Brazil’s 11 percent bonds maturing in 2040 have tripled to 126 cents on the dollar as the yield declined to 8.51 percent since Pimco increased its holdings a decade ago.
“We are still very bullish on Brazil,” Hodge said, adding that growth next year should surpass 3 percent. “The Brazilian economy is more resilient than perhaps some of the other emerging economies.”