Three Minutes With PIMCO's Naki Nartey, Senior Vice President, Emerging Markets Strategist

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Where are banks on their ESG journey?

The banks are on a journey, and I think you can see how in the future they will continue to be the conduit for policies and for regulatory change within the ESG sector. Just as capital has improved over the last 10 years, driven by regulation, you can see how the sustainability policies that are driven by the regulator will be facilitated into the real economy via the banks. If we think there is EUR 4.7 trillion of spending needed over the next 10 years to meet the 2030 targets, EUR 3.5 trillion of that will come through the private sector, and the banks will play a huge part in that.

What are some of the challenges?

One of the biggest challenges is that emerging markets is a very broad and diverse asset class, so there’s a lot to keep track of. Understanding individual country dynamics is critically important, and you can’t look at all of EM from a single perspective. For example, some countries, particularly commodity exporters, are doing quite well in the current environment. Others, which are more exposed to commodity and food imports, and which have low cash reserves, are much more vulnerable. As an active manager, PIMCO is able to take more exposure in the countries and sectors we expect to do well, while reducing or completely eliminating exposure to the areas we think might struggle.

One of the biggest challenges is that emerging markets is a very broad and diverse asset class, so there’s a lot to keep track of

This year has produced the worst EM fund outflows on record

Why is now a good time to invest in emerging markets?

Valuations currently look attractive in EM after the losses suffered so far this year. Spread levels on EM dollar debt are around their 90% percentile looking over a 20-year period. That means spreads have only been 10% wider over the last two decades. However, spreads can still widen from here, and reach new highs, but for a longer-term investor, the entry point does look relatively attractive. The fundamental side of things is more nuanced. While there are a large number of small or frontier emerging market countries that are showing signs of distress, for the most part, the larger, systemically important countries in the asset class are doing ok. So, while there may be defaults or credit events on the horizon for some issuers, we are not expecting this to cause a ripple effect across the asset class. However, emerging markets remain susceptible to technical factors. This year has produced the worst EM fund outflows on record, and the asset class remains vulnerable as the U.S. Federal Reserve and other central banks raise interest rates in an attempt to fight inflation. Nevertheless, EM does tend to perform well once the path for Fed rate hiking becomes clearer. It may take some time for that to happen in this cycle, but we think EM is in a good position to outperform once that occurs. For these reasons, at PIMCO we are constructive on emerging markets, but cautiously so for the near term.

You can watch the interview here or read her views below

The global financial order is evolving. Rising interest rates and global supply chain shifts are causing many investors to recalibrate their portfolios and look to new markets for returns. Naki Nartey, Senior Vice President, Emerging Markets Strategist, PIMCO, explores the landscape for investing in emerging markets and how they identify opportunities while maintaining downside protection.

INTRODUCTION | VIDEO INTERVIEW | EM Outlook | The Challenge |PIMCO Offering

THE CHALLENGE

EM Outlook

VIDEO INTERVIEW

INTRODUCTION

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Three Minutes With

PIMCO, on accessing opportunities in EM while guarding against market volatility

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THE FUND

ASSET CLASS

INTRODUCTION

What are some of the challenges?

However, emerging markets remain susceptible to technical factors. This year has produced the worst EM fund outflows on record, and the asset class remains vulnerable as the U.S. Federal Reserve and other central banks raise interest rates in an attempt to fight inflation. Nevertheless, EM does tend to perform well once the path for Fed rate hiking becomes clearer. It may take some time for that to happen in this cycle, but we think EM is in a good position to outperform once that occurs. For these reasons, at PIMCO we are constructive on emerging markets, but cautiously so for the near term.

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Credit and Default Risk A decline in the financial health of an issuer of a fixed income security can lead to an inability or unwillingness to repay a loan or meet a contractual obligation. This could cause the value of its bonds to fall or become worthless. Funds with high exposures to non-investment grade securities have a higher exposure to this risk. Currency Risk Changes in exchange rates may cause the value of investments to decrease or increase. Derivatives and Counterparty Risk The use of certain derivatives could result in the fund having a greater or more volatile exposure to the underlying assets and an increased exposure to counterparty risk. This may expose the fund to larger gains or losses associated with market movements or in relation to a trade counterparty being unable to meet its obligations. Emerging Markets Risk Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk. Investments in these markets may expose the fund to larger gains or losses. Liquidity Risk Difficult market conditions could result in certain securities becoming hard to sell at a desired time and price. Interest Rate Risk Changes in interest rates will usually result in the values of bond and other debt instruments moving in the opposite direction (e.g. a rise in interest rates likely leads to fall in bond prices). Mortgage Related and Other Asset Backed Securities Risks Mortgage or asset backed securities are subject to similar risks as other fixed income securities, and may also be subject to prepayment risk and higher levels of credit and liquidity risk. For professional use only The services and products described in this communication are only available to professional clients as defined in the Financial Conduct Authority's Handbook. This communication is not a public offer and individual investors should not rely on this document. Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. For Professional Investors Only. PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. (C) 2022, PIMCO Past performance is not a guarantee or a reliable indicator of future results.

INTRODUCTION | VIDEO INTERVIEW | EM Outlook | The Challenge |PIMCO Offering

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THE CHALLENGE

EM Outlook

VIDEO INTERVIEW

INTRODUCTION

How can PIMCO help?

At PIMCO, we have a broad range of emerging market strategies for clients to invest in. One of the most interesting funds we have is our Emerging Markets Opportunities Fund, or EMOF. EMOF is a blended strategy, investing in both hard currency and local currency EM debt across sovereigns, quasi sovereigns and corporates. It can be thought of as a one-stop-shop for global EM exposure. The fund is a single vehicle that includes all of our highest conviction trades across EM, and it has an explicit aim of downside protection. The fund is constructed in such a way that it should capture most of the upside in a rallying market, but far less of the downside in a sell-off. This means that over time, EMOF has the potential to outperform the market, especially in volatile environments like the one we are in at the moment.