Pimco: Go long on emerging markets companies, and US bank debt

Pimco, has their 2011 investment focus, and it has contained very few surprises, for any reader of this humble publication.  Economic growth will take place in the emerging markets.  This will continue for at least all of 2011.  There are additional longer-term structural factors in the developing world that remain constructive for economic growth

The biggest factor by far is the unfunded liabilities embedded in the balance sheets of sovereigns.  The Dallas Fed, for example, has estimated the US unfunded liabilities of social security, medicare and medicaid at $104 TT.  Most emerging markets by contrast have a very low level of unfunded liabilities.  In fact, I was on a recent trip to Africa to do some consulting work the government social security fund.  Several emerging markets economies, have assets behind their pension obligations.  Although I cringe at government control over large sectors or the economy, ultimately it is a more sustainable model than what they have in the US and Western Europe.   

Emerging markets also have demographics and lower levels of public and household debt in their favor.  This large economic differentiation leads to significant credit implications for investors. Investors should favor investing in companies tied to economies with the strongest fundamental outlook.  Via Pimco
  • Global economic conditions and structural factors remain supportive for the emerging markets to “run fast,” and for the U.S., Canadian and Australian economies to “run faster” on a relative basis than most other developed economies in 2011. This is in sharp contrast to the outlook in Europe and the U.K., where fiscal tightening and lingering sovereign credit issues suggest these regions are set to “run slow.”
  • This large economic differentiation leads to significant credit implications for investors. Investors should favor investing in companies tied to economies with the strongest fundamental outlook.
  • In terms of specific sectors, investments in emerging market corporate bonds, U.S. banks, secured debt, select municipal BABs and high yield bonds offer compelling opportunities.
  • Healthy economic growth in emerging markets and solid cyclical growth in the U.S., Canada and Australia should lead to improving credit fundamentals for numerous companies and issuers in these areas

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