PIMCO is advising clients to diversify out of euros to protect the value of their investment holdings amid a highly uncertain outlook in the euro zone, with emerging market currencies seen as an attractive alternative in the long term.
This strategy marks a shift from the conventional investment path for European money managers, who generally favour investments denominated in the currency in which they are based, thus limiting exposure to foreign exchange volatility.
PIMCO is one of the largest investment managers in the world with more than $232 billion of assets managed out of Europe and more than $1.35 trillion worldwide.
"As a European investor from France or Germany that has his base currency in the euro, when you don't know how the euro zone will look in five years, some kind of self-preservation is required to protect your purchasing power," Thomas Kressin, head of European foreign exchange and portfolio manager at PIMCO in Munich said in an interview on Wednesday.
Kressin is responsible for managing approximately $15.2 billion in assets.
"We generally advise our clients to diversify some of their money into other currencies," he said, adding the euro's recent bounce from 17-month lows against the dollar was driven mainly by a squeeze of short euro positions and some fresh money being invested at the start of the new calendar year.
The uncertain outlook for the euro zone, where concerns about peripheral countries' high levels of sovereign debt are affecting core economies, is also making investors from outside the bloc reluctant to invest in euro-denominated assets.
PIMCO sees that trend continuing.
"Real-money long-term investors will not come back very quickly. They will stay away from the euro zone for the time being and it will take time to bring money back into the euro zone," said Kressin.
"Restoring confidence is one precondition to solve the crisis by attracting new money into the markets. As long as you don't attract new real-money, neither the ECB or the IMF are able to solve this crisis."
Latest investment flow data from the European Central Bank shows foreign investors injected a meagre 2.4 billion euros into the euro zone in November compared to a 26.4 billion euro withdrawal in October. Large Japanese investors have been cutting exposure to euro zone assets in the past few months.
Attractive Emerging Markets
Kressin said the dollar, euro and yen were all unattractive prospects on a long-term basis, with emerging market currencies a healthier looking proposition, particularly given the pullback seen in the second half of 2011.
For example, the Brazilian real lost around 20 percent of its value against the dollar in the second half of 2011 as equity markets and risk sentiment declined. The Korean won and other Asian currencies such as the Malaysian ringgit and the Singapore dollar suffered similar setbacks and Kressin said they offered value.
"As a long term strategy for investors it makes sense to use weaknesses in these emerging currencies to add to your long-term portfolio." said Kressin.
"We strongly believe in the long run that emerging market currencies are the better place to be. They have their debt development going in the right direction, their growth projections are better than developed markets and most of their exchange rates are undervalued fundamentally."