PIMCO: Emerging Markets in 'Goldilocks' Moment

Emerging markets are enjoying a "Goldilocks" moment, heavyweight bond fund PIMCO told Reuters, as U.S. President Donald Trump's policy moves push the dollar down and send investors away from U.S. assets.

"This is the most prominent capital rotation we have seen for the best part of two decades ... and we still think we are in the early innings of this," said Pramol Dhawan, PIMCO's head of EM portfolio management, outlining the $2 trillion asset manager's second-half view on emerging markets, where the firm holds some $70 billion in assets.

"We are very constructive on the asset class, we think it is a Goldilocks-type backdrop for EM assets," he said, pointing partly to investor overexposure to the U.S. and a weakened dollar.

PIMCO is the latest asset manager to warm to emerging market assets with EM local currency debt enjoying record inflows in recent weeks.

The rotation is driven by import tariffs, rising concerns over U.S. debt levels and some loss of confidence in the government there, Dhawan said. Parts of Europe, Asia, and Latin America are the preferred destinations. The dollar index is down 10% year-to-date while emerging currencies have gained nearly 7%.

"Flows have been very strong for the first time in a number of years," Dhawan said.

Flows to local currency assets outstripping money headed for emerging market hard currency ones was "a sign of investors' willingness to embrace the dollar depreciation story and think more internationally around a search for yield."

Emerging stocks are outperforming the S&P 500 so far this year by 10 percentage points, while local currency bonds have returned more than 11% this year in dollar terms.

U.S.-based investors did not have sufficient exposure to and were trying to figure out if this rally has durability, Dhawan said.

"EM is in a good position where the underlying fundamentals are pretty healthy and robust," he said, adding that he did not expect capital flows to stop.

Net capital inflows from non-residents to emerging markets are estimated at $887 billion in 2025, up from $852 billion in 2024, and forecast to hit $935 billion next year, according to the Institute of International Finance.

Investor interest was also more broad based, Dhawan said, adding that the institutional investor base had become more established in emerging markets.

Dhawan dismissed the risk of a policy reversal under Trump that could trigger a spike in the dollar.

"These capital flows are genies that can't be put back in the bottle because they are irrespective of what the U.S. does now, there's been some loss of confidence in the administration."