Pimco's Balls Says U.S. Rate Rise Should Boost Emerging Markets

Andrew Balls, Pimco’s chief investment officer for global fixed income, says his top pick to buy is Brazil. ENLARGE
Andrew Balls, Pimco’s chief investment officer for global fixed income, says his top pick to buy is Brazil. Photo: PIMCO

For many investors, the prospect of the U.S. Federal Reserve finally raising rates is a troubling one that could send prices of some assets downward, especially in emerging markets that have benefited from a prolonged period of easy money.

Andrew Balls, who oversees 50 portfolio managers and approximately $ 460 billion in assets globally at Pacific Investment Management Co., thinks otherwise.

An increase in U.S. interest rates for the first time in almost a decade will initially trigger volatility but it will also be the moment to buy emerging markets again, says one of the world’s largest bond investors.

“There’s now much less risk in emerging markets than in the previous two years,” Mr. Balls said.

“If the Fed hike happens and the world doesn’t stop turning, then you remove a big source of event risk that is weighing on the broad emerging markets complex,” he said in a series of recent interviews with The Wall Street Journal, adding that a rise in U.S. rates will “be a positive for emerging markets.”

Emerging markets have been badly beaten up this year. J.P. Morgan Chase JPM 0.09 % & Co.’s benchmark Government Bond Index-Emerging Markets, which tracks local-currency debt, has recorded a total return of minus 9.4% so far this year as of Oct. 16.

Mr. Balls’s top pick to buy is Brazil. The Brazilian real is down 32% against the dollar in 2015 following collapsing commodities prices and political unrest, while the yield on 10-year local currency government debt is around 16%.

He holds a small position, but said he would buy more on signs of greater political stability. Mr. Balls also said the central bank could intervene to strengthen the currency and cut interest rates, which should boost bonds.

He already has large bets the Indian Rupee will strengthen—reasoning that India should benefit from lower commodity prices and the country’s economic fundamentals are improving—and Mexican local-currency debt.

Mr. Balls, a 41-year-old former journalist, joined Pimco in 2006. He was promoted to chief investment officer for global fixed income in September last year—one of six top executives who oversee investment decisions—after the departure of Pimco co-founder Bill Gross.

Mr. Gross filed a lawsuit in Orange County, Calif.’s Superior Court against Pimco and its parent company Allianz SE ALIZF 0.65 % earlier this month, alleging “a cabal” of Pimco managing directors plotted to drive him out of the firm. The suit also alleges Mr. Balls undermined Mr. Gross’s position at the firm.

Mr. Balls declined to comment on the lawsuit. Pimco has previously said the lawsuit lacks merit.

“It’s a big event Bill leaving the firm, but as soon as he left we’re not doing anything differently” in terms of the investment process, said Mr. Balls.

“Bill had stepped back from a lot of the day to day” before his departure, said Mr. Balls.

Mr. Balls’s Euro Bond Fund and Global Bond Fund have both beaten 85% of their peers over the past five years, according to Morningstar Inc. MORN 0.72 % The two funds have recorded annualized returns of around 1.4% and 2.1% over their benchmark indexes respectively over that period, according to Pimco.

Mr. Balls, whose brother, politician Ed Balls, held positions in two Labour governments in the U.K., sees political risks in Europe falling, particularly if economic growth continues to pick up. The European Commission expects Spain’s economy to grow by 2.8% this year, for instance, compared with a contraction of 1.2% in 2013.

On the U.K., the Pimco executive says he “can’t see any prospect” of a Labour government under the party’s new left-wing leader Jeremy Corbyn and said there are few obvious implications for investors.

But Mr. Corbyn’s rise to power raises uncertainty over the U.K.’s referendum on European Union membership, he said. Some political analysts believe Mr. Corbyn opposes EU membership.

Earlier this year, Mr. Balls sold short-dated credit-default swaps that would have paid out if Greece defaulted on its debt—a bet that Greece’s left-wing government would reach a deal with its international creditors. A deal was eventually hammered out.

If somebody thinks that fixed-income valuations are totally crazy and there’s a bond-market bubble, they must have different assumptions to us

—Andrew Balls, Pimco’s chief investment officer for global fixed income

“That was a few sleepless nights,” Mr. Balls said, adding that it was a “really good trade” in the end.

Mr. Balls says corporate bond markets will perform well thanks to the prospect of extended monetary stimulus.

“If somebody thinks that fixed-income valuations are totally crazy and there’s a bond-market bubble, they must have different assumptions to us,” he said.

He bought across credit markets during the recent selloff in corporate bonds. Among his biggest positions are U.S. banks’ senior debt and a riskier form of European bank debt that regulators can impose losses on if the financial institution falters.

He also owns U.S. Treasury inflation-protected securities, judging that inflation in the U.S. will bounce back more than the market expects to around 2% over the next 12 months.

“We don’t think inflation is dead,” he said.

Write to Christopher Whittall at [email protected]

WSJ.com: Markets

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