By Alexander Ragir Feb. 17 (Bloomberg) — Pacific Investment Management Co., manager of the world’s biggest bond fund, posted its best year in emerging markets by loading up on Brazilian debt ahead of the 2002 presidential elections. Eight years later, the company is using a similar tack. Pimco is a “consistent” buyer of Brazilian bonds in part as a bet the winner of October’s vote will match the success of President Luiz Inacio Lula da Silva in orchestrating economic growth while containing the budget deficit, said Michael Gomez , the firm’s co-head of emerging markets. In 2002, Pimco added to its Brazil holdings as the country’s benchmark bonds sank to as low as 42 cents on the dollar amid concern Lula would default after taking office. Those bonds trade at $1.33 today. “We have every comfort that the policy in Brazil will remain sound,” Gomez said in a Bloomberg Television interview on Feb. 11 from Munich. “It doesn’t really matter who the president is in the next election as long as the policy is taken care of. We are fans of local debt markets in Brazil.” Pimco is boosting its holdings as Bank of America Corp., the largest U.S. bank, says asset valuations in the country suggest investors are underestimating the risk that the new government may crimp central bank independence. Itau Unibanco Holding SA , Brazil’s biggest non-state bank, said in a Jan. 26 report that there’s “growing political risk” and advised clients to hedge their equity investments in the derivatives market. Rousseff, Serra Dilma Rousseff , supported by Lula to be his successor, is trailing Sao Paulo Governor Jose Serra by 7 percentage points, according to a poll conducted last month by Sensus for Brasilia- based National Confederation of Transport. The poll, which surveyed 2,000 people from Jan. 25 to Jan. 29, has a margin of error of 3 percentage points. Serra, a former health minister who lost to Lula in 2002, held a 19-point lead in a November poll by Sensus. Serra, who once pushed pharmaceutical companies to cut prices by threatening to break their AIDS drug patent, and Rousseff, a one-time Marxist guerilla fighter, “are clearly risks,” said Nicholas Field , who helps manage about $11 billion in emerging-market assets for Schroders Plc in London. He has a “neutral” position on Brazilian equities. “Either way, as a global investor, making firm predictions about one country’s politics is generally a bad idea on the grounds that it’s not very predictable,” Field said. Brazilian markets have been among the world’s best performers after the country led Latin America out of the global recession last year. The central bank forecasts the region’s biggest economy will grow 5.8 percent in 2010 after expanding 0.2 percent in 2009. ‘Great Value’ The Bovespa stock index has jumped 96 percent in the past 12 months in dollar terms, the 16th-biggest advance among the 93 primary indexes tracked by Bloomberg. The real advanced 23 percent against the dollar, the sixth-most among 26 emerging- market currencies. And the government’s local bonds returned 9.2 percent, almost double the 5.3 percent gain overall on local emerging-market debt, according to JPMorgan Chase & Co. indexes. Gomez said yields of about 12.5 percent make local Brazilian bonds a “great value.” The country’s international bonds are more of a “stable” investment after their yields plunged as global financial markets recovered last year, he said. The country’s dollar bonds on average yield 2.16 percentage points more than U.S. Treasuries, down from 4.51 points a year ago, according to JPMorgan. Brazilian debt is one of the “core holdings” in Pimco’s emerging-market asset portfolio, Gomez said. He declined to provide more specifics. Outperformance In 2002, Pimco kept buying Brazilian debt — taking holdings to about $1 billion as of mid-2002 — as others dumped the securities amid concern Lula, a former union leader, would swell spending and sink the country into default. Lula instead cut government expenses upon taking office in January 2003, helping trim the deficit to the equivalent of 2.8 percent of gross domestic product by 2004 from 4.4 percent in 2002. Lula has held the deficit under 4 percent of GDP every year since then, helping the country earn investment-grade credit ratings from Standard & Poor’s and Moody’s Investors Service. A Lula spokesman who asked not to be named in accordance with government policy declined to comment for this story. Brazil dollar bonds returned 70 percent in 2003, more than double the 26 percent gain for emerging-market debt overall, according to JPMorgan’s EMBI Global Index. That rally pushed Pimco’s Emerging Markets Bond Fund up 33 percent, the best year since its inception in 1997. The fund gained 31 percent last year, topping the 28 percent return on the EMBI Global. ‘Frightened’ Mobius “We’ve had a very sanguine view of Brazil over the last decade,” said Gomez, 37, who joined Pimco in 2003. “It’s clear that that’s worked out pretty well.” Mohamed El-Erian , who is now co-chief investment officer at the Newport Beach-based company, managed the emerging-market funds during the 2002 elections. El-Erian’s strategy that year put him at odds with investors including billionaire George Soros and Templeton Asset Management Ltd.’s Mark Mobius . Soros, chairman of Soros Fund Management LLC, said in October 2002 that he saw more than a 50 percent chance Brazil would “have to reorganize its debt.” Mobius put the odds of default at 90 percent that September. “We were all very frightened,” said Mobius, who manages $34 billion in emerging-market assets. Mobius is in agreement with Pimco this time. He said he’s betting on a victory by Rousseff and would see any “correction” in share prices as a buying opportunity. “It’s going to be more of the same” in economic policy, Mobius said in a Feb. 11 phone interview from Buenos Aires after a week-long trip to Brazil. “Frankly, I don’t think we have anything to be concerned about.” To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net ;
