Kiesel: Finding the Survivors in Energy and Emerging Markets
When venturing into these beaten-down bond sectors, investors should target names with fundamentally strong balance sheets, says PIMCO's Mark Kiesel.
Sumit Desai: Another area where the market has really punished investors is in emerging markets. This is an area in which you have some exposure across the various funds that you manage. Can you talk a little bit about your expectations for emerging markets and how they might be similar to or different from the U.S.?
Mark Kiesel: Sure. First of all, as we've spoken about for the last several years, PIMCO was really early on in reducing energy, reducing metals and mining. This year, we reduced a lot of emerging-markets exposure. The reality is that what remaining emerging-markets corporate-credit exposure we have is in what we call "idiosyncratic stories," such as Petrobras, Gazprom, Spiritbank--names like that. This is really a technical issue; what you had was a situation which was really unprecedented. You have a $120 billion this year of fallen angels--that's basically going to be a record. Petrobras was $41 billion; Gazprom was $17 billion. These companies were investment-grade; they were in investment-grade-rated benchmarks. They've now fallen into below investment-grade. High-yield buyers are saying, "I don't know if I want to buy this." You literally went from 5% to 6% on these investments a year ago to now 12% to 15%. They've literally fallen in a vacuum. Some of these bond prices are trading at $0.60 on the dollar.