Ex-Pimco Manager Says EM Traders Should Fear Slowdown, Not Taper

Ex-Pimco Manager Says EM Traders Should Fear Slowdown, Not Taper

Decelerating global growth due to the pandemic is a bigger risk for developing-nation assets than the unwinding of the Federal Reserve’s stimulus, according to Francesc Balcells, chief investment officer for emerging-market debt at FIM Partners.

The spread of the delta variant is a key threat to the world economy, and the emergence of other strains would be another headwind especially as the impact of fiscal spending fades, London-based Balcells said. In contrast, the odds of a 2013-like Fed taper tantrum are slim as U.S. policy makers have telegraphed their message well ahead of time, he said.

Recent data from China and the U.S. have highlighted the toll from the delta strain, as the falters and cools. This may foreshadow a broader slowdown and endanger the rally in developing-market stocks and currencies, which have climbed on the optimism fueled by a reopening of economies. 

“The market is pricing in more reflation than a global growth deceleration,” Balcells, a former fund manager at Pacific Investment Management Co., said in an interview. “That would catch the market off guard. That’s a scenario that is not particularly good for EM as EM is very growth dependent.”

Fed tapering is also less of a threat as investors are not heavily positioned in long-maturity bonds, which are more sensitive to interest-rate increases, Balcells said.

FIM Partners, which manages $2.5 billion in emerging and frontier assets, is enhancing returns with high-carry positions in the currencies of less-developed economies such as the Uganda shilling and Egyptian pound via their bonds and bills, he said.

Balcells left Pimco in July 2019 after more than seven years and was an executive vice president at the investment company.

Spread of delta variant is a key risk for developing markets

Odds of a repeat of 2013 taper tantrum are slim, Balcells says