(Bloomberg) -- Pacific Investment Management Co. is standing by its bullish position on emerging markets, even as a rout in the asset class deepens on concern over global interest rates and the plight of China’s economy.

In the past two weeks, developing nation stocks gave up the last of their gains for the year, while currencies posted their lowest close since February. Local- and hard-currency fixed income indexes are heading toward their worst quarterly returns since the third quarter of 2022, according to data compiled by Bloomberg.

Yet money managers at Pimco, the California-based bond manager with $1.7 trillion in assets, remain undaunted.

“It’s not been anything of true concern, we haven’t seen any EM-driven panic,” said Pramol Dhawan, Pimco’s head of emerging-market debt. “This has just been a broader risk-asset selloff.” 

Pimco’s optimism stretches back to at least February, when Wall Street was split on the path forward for emerging markets with some investors warning of a selloff. Pimco was broadly positive on the asset class then, saying that emerging markets appeared positioned for stronger performance in 2023. The outlook ran contrary to some calls from banks including Citigroup Inc. and JPMorgan Chase & Co. 

Dhawan said there is a “disconnect” now between what the market is pricing in regarding recession probabilities, and Pimco’s views. According to economists surveyed by Bloomberg, the US faces slightly more than a fifty-fifty chance the economy will slide into recession over the next year. Traders in the market for fed funds futures, meanwhile, have now pushed back the timing of a first rate cut from the Federal Reserve to the middle of next year.

The disinflation process for emerging markets is “very well entrenched,” Dhawan said. They didn’t have the same levels of fiscal stimulus as developed markets such as the US, the UK and the euro area, so there isn’t a “sort of clouding effect over consumer disposable income.” 

“There’s a warranted view of a cautious overall tone, but within pockets where we like risk, we think there are collective EM opportunities,” he said. “We like EM currencies within that spectrum.” 

Some major points of concern are the potential US government shutdown, week economic activity in Europe and rising oil prices, he said. Some of the market angst has caused investors to park themselves in short-dated cash and long duration assets, backing away from riskier assets, he said. 

And while the asset performance has been “a little bit challenged” in the past quarter, looking back over a year or so, there’s still been “significant outperformance of local markets,” according to Dhawan. 

“EM has delivered for clients, yet it hasn’t necessarily been the recipient of client flows,” he said. “And I think that that’s been really a little bit of the angst. People tended to think the flows were going to come and the flows never really came.”

--With assistance from Carter Johnson.

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