Pimco's Crystal Ball （zt）

何鸿燊

By Don Dion

12/3/2009 10:54 AM EST
URL: http://www.thestreet.com/p/rmoney/etf/10637874.html

I don't share Pimco's outlook on China's currency, but Poland looks attractive.

In its most recent emerging-market missive, the investment giant said it believes that, with the issues facing Dubai and Dubai World, investors should be conscious of the many risks that come with playing the impressive run-up in the global equity markets. Although they are cautious about the longevity of the global rally, they do appear particularly optimistic concerning both China and Poland.

The bullish outlook on China stems from Pimco's belief that Beijing will soon ease its grip on its currency. If this happens, investors holding the WisdomTree Dreyfus China Yuan Fund (CYB) would get a nice boost -- but I take Chinese Premier Wen Jiabao at his word when he recently called demands for China to allow the yuan to appreciate "unfair."

Traditionally, China has held its currency at an artificially low level to spur exports. Pimco's co-head of emerging markets, Michael Gomez, believes that, in order to participate in a market-based economy, China needs a free-floating currency, which would allow it to reduce the risk of asset bubbles and focus on domestic demand, among other things.

China isn't buying it, and investors should mind the words of the Chinese leadership. Consider that China's refusal to revalue the yuan during the Asian financial crisis back in the late 1990s was ultimately a stabilizing factor, while countries with free-floating currencies imploded one after the other amid speculative attacks. Furthermore, potential asset bubbles in China and other emerging markets are more likely to be the result of U.S. Federal Reserve policy, rather than their own initiatives.

Besides China, Pimco is confident in the future performance of Poland. Recently, investors got their first chance to play the Polish markets with the Market Vectors Poland ETF (PLND) . Poland's resilience in the face of the global recession has made it an attractive destination for investors. While the rest of Europe has contracted, Poland is expected to post GDP growth for 2009.

Poland looks attractive because it has a positive story. It should outperform the rest of Europe in a recovery, though it doesn't compare as well against better performing ETFs, such as Market Vectors Russia (RSX) and iShares Brazil (EWZ) . It would, however, be a good addition to tilt a portfolio's European exposure east.