Pimco Optimistic 2015 Is as Bad as World Gets; Stays Short Yuan

  • Fund manager bullish on dollar though says correction possible
  • Yuan to be `much weaker' within 12 months, Spajic says

An improvement in global economic growth next year may help markets weather an increase in interest rates by the Federal Reserve, according to Pacific Investment Management Co.

Purchasing managers indexes and trade numbers appear to be bottoming out, with many emerging nations recording big trade surpluses after sharp currency declines, Luke Spajic, head of portfolio management for emerging Asia at Pimco, said in an interview Tuesday. While the dollar may correct lower near term, Pimco still expects U.S. rate increases to drive further gains in the greenback against Asian currencies and the yuan in particular, he said.

“A lot of healing is taking place right now and if this is a global bottoming, a true global bottoming in growth -- and we are seeing the worst of it -- then maybe the world can live with slightly higher U.S. rates,” Spajic said. “I think 2015 might just be a bottoming in the numbers, it may be suggestive of macro numbers beginning to improve next year.”

A slowdown in emerging markets driven by weak commodity prices forced the International Monetary Fund in October to cut its outlook for global growth in 2015 to 3.1 percent, the lowest since 2009. The downgrade was the latest in a series as policy makers remain unable to spur synchronized economic expansions with robust U.S. growth at odds with a slowdown in a number of other nations.

That may be changing. The Citigroup Economic Surprise Index for emerging markets and a gauge for the four largest developing economies are near their strongest levels since April, while a eurozone index has climbed to a two-month high. China’s exports are outpacing imports by a record, while trade surpluses beat estimates in Brazil and Russia. Indonesia’s breached $1 billion for a second straight month in October.

Recovery Signs

The stabilization has helped some of the worst-hit currencies rally even as an index of 20 emerging-market peers remains 12 percent weaker year to date. The Indonesian rupiah has led gains among 31 major counterparts this quarter, strengthening 7 percent. Brazil’s real has appreciated 6.7 percent since Sept. 30, followed by a 5.2 percent advance in the Turkish lira and a 4.7 percent climb by Malaysia’s ringgit.

“We are still dollar bulls, but after the first or second Fed hike there has tended to be, historically, a correction in the dollar,” Spajic said. “There may be room for profit-taking in the Asian currencies. There may be room for some people to say, we’ve been long dollars for so long, we may trim a bit here and I think that’s a sensible thing.”

In emerging Asia, the fund manager highlighted the Indian rupee as one currency “we really like.” Spajic said he prefers being short China’s yuan because the nation’s authorities wouldn’t have gone through the trouble of devaluing the currency, dealing with capital outflows and pressing for its inclusion in the IMF’s reserve basket, if they didn’t want room for further weakness.

The People’s Bank of China cut its daily reference rate for the yuan by a record 1.9 percent on Aug. 11, triggering the steepest depreciation in more than two decades, and said that it was shifting to a more market-driven system of setting the fixing. The IMF’s executive board votes Nov. 30 on whether it will add the yuan to its Special Drawing Rights alongside the dollar, euro, pound and yen.

“The China call for us is still one where, on a 12-month basis, we think it will be weaker -- much weaker than what’s priced in,” Spajic said. “Given our currency view, we are long dollar versus being short Chinese currency: that doesn’t lend us to naturally want to have a lot of local currency assets.”

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