Pimco Bullish on Brazil Debt

Emerging markets are due for a pullback in tandem with most risk assets after their three-month surge, but Brazilian government and corporate debt still look attractive, a leading emerging markets portfolio manager said on Wednesday.

Mike Gomez, who oversees more than $5 billion of emerging market assets at the world's biggest bond manger, Pacific Investment Management, has a "relatively sanguine outlook" for all four of the so-called BRICs — Brazil, Russia, India and China.

"Within that we certainly have quite sizeable investments in Brazil, particularly in the local fixed income side," he told Reuters Television.

PIMCO is buying primarily Brazilian sovereign bonds, with an increasing number of its investments moving onshore to Brazilian real-denominated bonds.

Gomez touted Brazil's five-year sovereign bond, with a yield of more than 11 percent, as "among the highest in the world," despite Brazil's roughly 5 percent inflation rate.

Bonds denominated in reals offer "significant opportunities" on good prospects for Brazil's currency and expectations for a decline in domestic interest rates, he said.

Pimco has also invested in Brazilian corporate debt, including bonds by so-called "market champions" such as mining giant Vale and steelmakers Gerdau and CSN, Gomez said.

Pimco's flagship Emerging Markets Bond Fund, which has $1.92 billion assets under management, has delivered a total return of nearly 14.15 percent year to date, according to fund tracker Lipper.

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That compares with a total return of 4.13 percent so far this year for emerging market bonds as measured by J.P. Morgan's ELMI+ index.

Emerging market equities are up more than 32 percent this year, as measured by the MSCI Emerging Markets Index.

Both emerging market bonds and stocks have retreated since notching highs for the year in early June.

Gomez prefers to stay at the higher end of the capital structure, noting that PIMCO doesn't need to invest in riskier credits in this region to deliver strong returns.

Also bolstering Brazil's local debt are an economy that's developed in nature, an investment grade rating, and a proven ability to navigate the global downturn, the executive said from his office in Munich.

His comments followed the first-ever summit of the four BRIC countries in Russia on Tuesday. The four concluded their meeting with a statement demanding more influence in international financial institutions.

Leading up to the summit, a series of comments from Russian officials critical of the U.S. dollar's standing as the world's reserve currency had jolted currency markets. The communique, however, was silent on the dollar.

Even without a formal statement of their intent, Gomez said the BRIC nations will likely keep looking for alternatives to investments in dollars.

"The reserve currency status for the dollar is with us now and will be with us for some time," Gomez said.

"But I think it's fair to say that on the margin, countries, companies, economic entities are looking for alternatives and I think that's going to continue," given the problems in the U.S. economy and headwinds facing the dollar over the long-term.

Data released earlier this week by the U.S. Treasury showed that three of the four BRICs cut back their holdings of U.S. Treasurys during April.

India was the only one of the four to add to its position.

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