Pimco Adviser Boosts Bet on Emerging Markets as Trade of Decade

(Bloomberg) -- The long-term bull case for emerging-market equities just got even more compelling, according to Research Affiliates, a sub-adviser to money managers including Pacific Investment Management Co.

Developing-nation shares will return an average of 11% annually in the next decade, more than any other asset class, the Newport Beach, California-based firm said on its website. That’s up from its March forecast of 9%.

Research Affiliates is dialing up a prediction it made in February 2016, when the firm called emerging markets the “trade of a decade.” That proved prescient initially as stocks surged 75% over the following two years. But it’s been bumpier ever since, with the U.S.-China trade war and now the pandemic and oil-price war reducing risk appetite. MSCI’s emerging-market equity index has tumbled 23% this year amid big sell-offs from Brazil to India and Poland.

“Many companies will go bust, dividends will be slashed, many investment-grade bonds will morph into junk, foreign borrowers may default on their dollar-denominated debt and so forth,” Jim Masturzo, the firm’s head of asset allocation, wrote in a report. Yet surviving companies “will face less competition and a clearer runway to take off in the aftermath of the crisis.”

Despite the bullish long-term outlook, Masturzo flagged several potential concerns in the coming months:

• Yield: In the high-yield bond market, peak spreads may encourage investors to reach for yield. That’s risky at a time when defaults could be looming for some issuers, especially energy companies.
• Inflation: If Americans spend their stimulus checks on a similar basket of goods, heavy demand may eventually push up prices.
• Defaults: Some non-U.S. companies that issued dollar-denominated debt may have a hard time making payments.

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