Pacific Investment Management Co., the world’s biggest bond manager, sees opportunities in Russia after investors sold out of the country during the standoff with Europe and the U.S. over Crimea. It’s throwing in the towel on Turkey.
Russia is “a beaten-up market and there is some value there,” Andrew Bosomworth, Pimco’s Munich-based managing director and head of portfolio management in Germany, said in an interview. “It’s a question of return and risk. Five or six percent total yields relative to the risks I think are OK, and it’s hard-currency yields with euro and mainly dollar securities.”
The Micex Index, Russia’s benchmark equity gauge, headed for its first weekly drop since mid-March as the U.S. threatened tougher sanctions over Russia’s annexation of the Crimean peninsula in Ukraine in March. Escalating tension in Ukraine’s east in the past week triggered a sell-off in Russian assets and led the government to cancel a bond auction.
“There clearly was an exit by investors out of the Russian complex owing to the risks there,” said Bosomworth, who previously worked at the European Central Bank, the former Merrill Lynch & Co. and New Zealand’s Debt Management Office before joining Newport Beach, California-based Pimco in 2001.
“Our baseline is that there isn’t going to be a further escalation of Russia entering eastern Ukraine or eastern Ukraine trying to get back into Russia, and therefore that the re-pricing is not warranted.”
Bosomworth, who once had the flag of Turkish Prime Minister Recep Tayyip Erdogan’s AK Party in his office, obtained “by pure chance” during a visit to the party’s headquarters in Ankara almost 10 years ago, can’t say the same for the Mediterranean country that straddles Europe and Asia.
“We are steering largely clear,” Bosomworth said. “I put the flag away almost a year ago because of the overwhelming signs of corruption. I don’t think it’s acceptable to say that as long as we deliver growth, corruption is OK. There are morals to doing business and that’s a worrying development.”
International capital flight accelerated after an investigation targeting Erdogan’s government came to light on Dec. 17. The prime minister responded with a purge of the police force and judiciary.
He blocked YouTube and Twitter last month after they were used to disseminate recordings purportedly showing him and his inner circle discussing graft and embezzlement. Erdogan has said the recordings are doctored and montages.
Turkey’s lira weakened the most in three weeks today, while bonds and stocks fell, as Moody’s Investors Services lowered the nation’s credit-rating outlook to negative, citing “increased pressure on the country’s external-financing position driven by heightened political uncertainty and lower global liquidity.”
Moody’s follows Standard & Poor’s, which reduced Turkey’s credit outlook to negative in February, citing the risk of a “hard economic landing” as foreign-currency reserves decline and policy makers spar over interest rates.
While “election results clearly show Erdogan has a very strong domestic support,” investors are going to demand higher interest rates in the future to continue financing the country’s foreign account deficit, Bosomworth said, referring to March 30 local elections that saw the AKP win 44 percent.
Pimco, where Bill Gross runs the $232 billion Total Return Fund, is majority-owned by Munich-based Allianz SE, Europe’s biggest insurer. Pimco manages over $2 trillion in assets. The Total Return Fund suffered its 11th straight month of withdrawals in March as clients withdrew an estimated $3.1 billion, according to an April 1 e-mail from Morningstar Inc.