'China activity data continues to be a major sign for the market': Expert

Consumers are helping to push the economic recovery following the COVID-19 pandemic in China. The latest numbers show big-ticket purchases were up last month, while unemployment ticked lower. Pramol Dhawan, PIMCO’s head of emerging markets portfolio management, joins Yahoo Finance to discuss.

Video Transcript

BRIAN SOZZI: All right, Chinese consumers are helping push the economic recovery there. The latest numbers show big-ticket purchases were up last month as unemployment ticked lower. The country also is imposing new restrictions as the coronavirus spreads again there.

Let's talk more about emerging markets and what to make of what's happening in China and around the world with Pramol Dhawan, PIMCO's head of emerging markets portfolio management. Pramol, good to speak with you this morning.

We got that China data out this morning. It wasn't that good. I think the market is selling stocks off of that. What did you make of it?

PRAMOL DHAWAN: Yeah, I think the China activity data continues to be one of the major signs for the market. And then to-- in terms of trying to signal how they're dealing with coming out of the first kind of lockdown session. And I think that there are good lessons to learn in terms of the analogy for China and the rest of the emerging market economies.

I think the-- it showed us that the seconds waves are likely and that when lockdowns happen, that they're going to be more localized in nature, and that consumer economy and consumer sentiments are going to remain depressed on a relative basis, which I think is bad news for service-sector economies.

ALEXIS CHRISTOFOROUS: Pramol, where are you seeing opportunities right now, though, in the emerging markets? We're seeing Brazil suffer a number of cases of coronavirus, India as well. These were areas of opportunity pre-pandemic. How do you view them now?

PRAMOL DHAWAN: Yeah, I think it's firstly important to mention that the emerging markets don't have the liquidity benefit that the US has from the Federal Reserve or the ECB in Europe. And also, the health care systems are weaker, by and large, across the emerging markets. So I think we're going to be condition-takers across many emerging markets to see how developed market growth returns before emerging market growth can return.

So what you've seen is a lot of EM asset prices really kind of fall very, very quickly in line with the rest of markets but would be much slower to recover. But where this particular scenario is slightly different than what we've seen in previous instances of down markets and emerging market economies is the reaction function from the central banks. You've seen the central banks, around 15 emerging markets central banks now doing quantitative easing, taking rates to relatively new normal levels in terms of low policy rates.

And I think that that would work for the higher quality emerging market balance sheets, so those countries like Peru, Russia, India, China. But that same sort of policy mix doesn't work for those emerging market economies that are running more heterodox policy methods, such as a country like Turkey.

ALEXIS CHRISTOFOROUS: Now, I'm not sure how closely you watch the Greek stock market. But we know that their economy was slowly getting back on track, sort of emerging from the ashes, if you will. But recently, their stock market, the Greek stock market, has been caught up in all of the selling as well. What do you see for the outlook there?

PRAMOL DHAWAN: Yeah, we're not following that one too, too closely. But I think that to the extent that, you know, the Greek situation is one where you can see that they had a lot of bailouts and grants from the European Union, that that was able to support them in times of crisis and be able to restructure their economy, I think that that type of neutralization was very, very important for them. But that same benefit doesn't occur for many emerging market economies.

So I think that the reality is that whether you can make a kind of more broader-based data call in previous markets, now you have to be-- just be much more idiosyncratic, much-- have a much higher level of due diligence about the types of EM economies that you choose to invest in. And what we're seeing right now in this particular kind of COVID economy that we're in is that you're seeing a lot of black holes that are appearing, countries like Argentina, Lebanon, Ecuador, countries where bond prices have dropped, stock markets have collapsed, currencies have depreciated a lot. But they're not rallying back.

They're staying in these depressed levels. And I think until you find a solution in terms of the IMF coming in, and in terms of being able to deal with defaulted debt and restructure those economies, then they can't really kind of grow themselves out of this hole that they're in at the moment. So I think just investors have to be very, very careful in terms of the types of the exposure they take right now.

BRIAN SOZZI: How are you-- are you investing in those black hole countries? And if so, how are you doing it?

PRAMOL DHAWAN: Well, we discuss in a lot, the investment committees, particularly countries like Ecuador and Lebanon. But instead of seeing them as values, we see them more as value traps. You know, right now being an unsecured investor in these countries, it's just very, very difficult. You're subject to a lot of volatility, not only around asset prices but based on making assumptions about political shifts, which may or may not happen.

And I think, you know, politics in developed markets is particularly volatile right now. But in emerging markets, that's magnified by multiple factors.

BRIAN SOZZI: All right, we'll leave it there. Pramol Dhawan, PIMCO's head of emerging markets portfolio manager, good to speak with you this morning.

PRAMOL DHAWAN: Thank you very much.