Pacific Investment Management Co. says investors should buy company debt in Russia, Brazil and other emerging markets where rising wages and relatively low public and private debt will help borrowers weather accelerating inflation.
The manager of the world's biggest bond fund is buying debt of “rising stars” linked to nations with expanding wealth because they will more easily be able to pass on higher materials costs, Mark Kiesel, Pimco's global head of corporate bond portfolio management, wrote in a report today on the firm's website. At the same time, he's avoiding companies dependent on growth in Europe, the U.S. and Japan that will struggle amid stagnant wages and debt-laden governments and consumers.
“Companies which are tied most directly into the strong economic growth engine in the emerging markets should have the most pricing power and ability to either pass through rising costs or absorb them without a significant margin hit,” Kiesel wrote. Those more tied to growth in developed nations, he said, “will likely have less pricing power and be more negatively affected by rising prices for both food and energy.”
Pimco, based in Newport Beach, California, expects gross domestic product, adjusted for inflation, to grow 5.5 percent to 8.5 percent in the next year in emerging markets such as Brazil, Russia, India, Mexico and China. The firm forecasts growth of 1 percent to 3.5 percent in developed economies, he wrote.
The developing countries, with faster-growing and younger populations, are benefiting from improving education, infrastructure and productivity, he said, bolstering the purchasing power of their consumers.
The best buys for corporate bond investors will be the debt of companies that are both located in those nations and sell their products into other emerging markets, he said. Those include firms in the energy, pipeline, metals and mining and banking sectors, Kiesel wrote. He didn't name specific companies in the report.
For the same reasons, the fund manager said he's less favorable toward bonds of corporate borrowers more tied to developed economies and less likely to offset higher food and energy prices, such as retailers, airlines, automakers and parts suppliers and the food and beverage industry.
“Retailers are going to be very exposed because they're going to face higher wages in China and also higher cotton input prices,” Kiesel said in a telephone interview. “Food and beverage companies are going to be very exposed to higher commodity costs. Airlines and autos are going to be exposed to higher gas prices and energy prices.”
“This pipeline of inflation is starting to hit globally,” he said.