Pimco Bets on Asia as U.S., Europe Risk Policy Error (Update1)

By Shelley Smith
March 23 (Bloomberg) -- Investors should buy Asia-Pacific bonds rather than European and U.S. debt on the region’s faster economic growth and lower risk of policy changes that would damp the recovery, according to Pacific Investment Management Co.
"Politics are going to play a very important role in how an investor looks at asset classes over at least the next 12 months," Brian Baker, Pimco Asia Ltd.’s chief executive officer, said in an interview in Hong Kong. "As policy makers withdraw from their fiscal stimulus, and as regulations are put in place in the financial system in the developed world, we run the risk of a policy mistake" that may weigh on markets, he said.
Withdrawing measures designed to stimulate the economy or raising interest rates too quickly, burdensome regulation and protectionism all threaten to choke off growth in developed markets, Baker said. The economic recovery in Asia, on the other hand, will be "sustainable" and investors should seek to benefit from the development of the region’s financial markets, he said yesterday.
The Asian unit of Pimco, manager of the world’s biggest bond fund, is focusing on Australian, Indonesian, Philippines and South Korean debt, Baker said. The Newport Beach, California-based firm recommends bonds of Asian companies with stable cash flows and of governments in the region that have adopted "prudent" fiscal and monetary policies to spur growth.

Under Pressure

Baker made his comments at a time when many governments of developed economies are under pressure to reduce budget deficits while increasing regulation of a banking sector widely blamed for worsening the deepest financial crisis in 70 years.
All the Group of Seven developed countries, except Canada and Germany, will have debt-to-gross domestic product ratios close to or exceeding 100 percent by 2014, John Lipsky, first deputy managing director of the International Monetary Fund, said in a speech in Beijing on March 21.
"In many cases an emerging market sovereign has a better balance sheet than a developed market sovereign that has a higher credit rating, given the fiscal spending that’s gone on in the developed markets," Baker said. This shift "will continue over the next several years and is one that we think investors need to be aware of."

Ratings Risk

The U.S. and U.K. have moved "substantially" closer to losing their top AAA credit ratings as the cost of servicing their debt rises, Moody’s Investors Service said this month.
Standard & Poor’s boosted Indonesia’s rating to the highest level in 12 years and the Philippines will meet with S&P and Fitch Ratings next month to seek an upgrade reflecting its economic stability, record foreign reserves and accelerating growth, central bank Governor Amando Tetangco said today.
Emerging economies will expand between 11 percent and 13 percent within the next year while the U.S. economy will grow by no more than 3 percent, according to Pimco estimates.
U.S. dollar-denominated bonds in developing Asian countries returned an average 36 percent in the last 12 months compared with an average 8 percent for U.S. government and company notes, Bank of America Merrill Lynch index data show.