Reallocation To Emerging Markets Can Reduce Global Imbalances -Pimco
April 17 2012 - 8:14AM
Dow Jones News
Global portfolio managers need to shift their investments into
emerging markets and away from "excess" developed-country assets to
help balance the global economy, giant bond-fund manager Pacific
Investment Management Co., or Pimco, said Tuesday.
A shift in capital flows toward emerging markets is crucial to
global economic rebalancing, since finance "played a key role in
creating imbalances" originally, said Ramin Toloui, Pimco's co-head
of the global emerging markets portfolio management team, in a
report.
"Heavily indebted industrial countries must consume less while
high-potential, low-debt emerging market countries must consume
more," he said.
Portfolio allocations reflect a similar imbalance. Emerging
markets represent about 4% of the equity portfolios of U.S.
investors, even though these economies represent about 36% of
global output and 68% of global gross domestic product growth,
Toloui said, adding that representation in bond portfolios is even
less.
That leaves room for a potential massive reallocation of
portfolios, he said.
"A redirection of financial flows to emerging markets has
another key influence on global rebalancing, but potentially
generating appreciation of emerging market currencies versus those
of industrial countries," Toloui said.
Stronger emerging-market currencies would help those economies
reduce their dependence on exports and encourage consumers to buy
more imported goods from the developed world, he said. In addition,
more investment capital reaching emerging markets would reduce
capital costs, helping to improve investment, hiring and labor
income--all of which would strengthen the consumer base, he
said.
Shifting allocations toward emerging economies has been visible
already with Asian central banks, who have diversified away from
U.S. and German government bonds to invest in bonds of their
emerging-market neighbors, for example. Meanwhile, increased
adoption of GDP-weighting for bond indexes--which weighs a country
according to its national income, not its national debt as many
indexes do currently--will also likely contribute to portfolio
rebalancing, Toloui said.
"A multi-year reallocation by global investors away from excess
developed country assets into emerging markets facilitates both
global economic and portfolio rebalancing," he said, adding that
this shift is "poised to be a global phenomenon."
However, changing the current dynamic of portfolio flows--where
higher-debt, slower-growth developed economies see the bulk of
allocations--will take some time, Toloui warned. Many
emerging-market countries are used to export-led growth, with some
policy makers even taking some steps to curb large capital inflows
that could strengthen their currencies significantly, he said.
Policy makers also have to deal with the challenge of improving
domestic markets' capacity to absorb more foreign capital flows, he
added.
-By Erin McCarthy, Dow Jones Newswires; 212-416-2712;
erin.mccarthy@dowjones.com @djfxtrader