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The International Ramifications of ECB QE
by Andrew Bosomworth of PIMCO,
By engaging in quantitative easing, the European Central Bank is pursuing its inflation mandate with a vengeance. Overall, we think the combination of quantitative easing, investment and lower oil prices will help eurozone growth reach approximately 1.3% in 2015. Global central bank balance sheets continue to expand: Although the Federal Reserve stopped purchasing assets in 2014, the Bank of Japan and now the ECB have stepped up buying bonds where the Fed left off.
All the Children Are Above Average
by Harley Bassman of PIMCO,
Many investment strategies are centered upon discovering a long-term (average) valuation framework to help in asset allocation and security selection. The term surface of various risk parameters often moves in such a manner that the discounted forward value will point toward this long-term average. If a secular shift has taken place - if all the children are above average, so to speak - then maybe the “average” has changed.
Commercial Mortgage-Backed Securities: Approaching the Later Innings of a Recovery
With the U.S. recovery as a supportive backdrop, PIMCO expects commercial real estate prices to rise 4%-6% in 2015. Commercial mortgage-backed securities issuance has increased for five years, and projections for 2015 are for growth of 20%-30%, driven largely by an increase in maturing loans on the supply side and the continued search for yield on the demand side. The growth in issuance does not come without concern: CMBS underwriting standards will likely continue to slip.
PIMCO Introduces the PIMCO Multi-Strategy Alternative Strategy
by PIMCO,
In a New Neutral environment that anticipates muted returns and heightened volatility, many investors have looked to liquid alternatives in an effort to boost returns and lower overall portfolio risks. Our approach seeks to efficiently combine a range of complementary liquid alternative strategies, offering the potential for diversification and higher return per unit of risk than a single strategy could achieve on its own. This strategy can play a central role in liquid alternatives allocations or be used as a stand-alone complement to traditional stock and bond allocations.
Opportunities and Risks for Investors After the Oil Price Slump?
by Daniel Lacalle of PIMCO,
What we are seeing now is that oil prices, when OPEC refuses to balance the market, test the marginal cost of production, and costs fall. Some of the costs of the largest components of oil projects – high-spec sixth-generation rigs, pressure pumping, seismic, completion – have fallen between 20% and 45% in the space of months as overcapacity became evident and capital expenditure was revised downward.
PIMCO Extends Its Dividend Suite With Two New Regional Strategies
by Brad Kinkelaar, Adam Muller of PIMCO,
As is the case with our other dividend strategies, we are unconstrained by benchmarks and focused on generating yield and capital appreciation by finding attractively valued companies that pay appealing dividends today and have an ability and willingness to grow dividends over time.
Municipal Market Update: What's Ahead in 2015
Municipal bonds ended 2014 as one of the best-performing asset classes - buoyed by investors’ search for yield in a low interest-rate environment. For 2015, we are positioned cautiously for greater volatility in the fixed income markets. We currently prefer revenue-backed bonds over most general obligation (GO) debt, as these sectors typically benefit from dedicated revenue streams and do not have the pension challenges that many state and local governments face.
Commodity Outlook 2015: Watching the Supply Response Across Markets?
Today?s low oil prices should allow for supply and demand to come back into alignment by year-end, led by a decline in the U.S. output growth rate and a modest increase in global demand. We expect continued oversupply to weigh on natural gas prices this year, but some semblance of balance may return to this market in 2016. Grain prices may experience pressure in 2015 as low oil prices pass through to corn prices, which may cause producers to switch to higher-priced crops. With production growth likely having peaked, we expect metals prices to stabilize this year.
Time to Get Off the Merry-Go-Round ??
by Jerome Schneider of PIMCO,
In 2014, many investors de-risked their portfolios by moving into shorter-duration passive approaches but the potential for capital preservation from these strategies may face challenges. Passive benchmarks and strategies with pre-specified, structural interest rate exposure may have little to no flexibility around their positioning and may push investors into the heart of the proverbial storm. Active strategies not constrained by benchmark limitations may be optimal for investors as they can seek to manage exposure to interest rates.
ECB Review: Blowing on the Embers of a Reflationary Fire
by Andrew Bosomworth of PIMCO,
?Not to pursue our mandate would be illegal? is how Mario Draghi ended his last press conference of 2014. Mr. Draghi?s first press conference of 2015 began with the announcement of a quantitative easing (QE) programme that pursues the European Central Bank?s (ECB) inflation mandate with a vengeance. And rightly so, for the disinflationary trends in the eurozone had become all the more precarious as economic output and the price of oil continued to fall.
U.S. Lodging: The Recovery Checks In for an Extended Stay
by Ray Huang, Amit Arora of PIMCO,
Relatively high occupancy levels should drive room rate growth in the hotel sector over the next several years, despite some supply entering the market. We see opportunities in certain segments, such as premium hotels and C-corporations, due to high barriers to entry and pricing power.
Wait and See at the Bank of England
UK growth looks to be sustainable, with encouraging domestic demand, though we need to see business investment continue to pick up. Although inflation hovering below the 1% lower tolerance band of the Bank of England (BOE) remains a concern, we think it actually gives the central bank welcome breathing room during a period of uncertainty for the global economy. Looking ahead, we see compelling investment value in the intermediate part of the UK yield curve, namely five- to 10-year bonds, as the BOE plays the waiting game.
What We Are Hearing From Asia-Pacific Investors: Five Themes for 2015
by Eric Mogelof of PIMCO,
Amid lower forward-looking returns, investors are focusing on multi-asset solutions, enhanced beta, income and alternatives in Asia-Pacific. PIMCO is prepared to address these themes, drawing upon our time-tested investment process that combines high-level macroeconomic views with thorough on-the-ground research.
The Swiss National Bank?s Unpleasant Experience of Sleeping Next to an Elephant
On 15 January 2015, the Governing Board of the Swiss National Bank (SNB) unexpectedly exited its minimum exchange rate regime, which it had adopted back in September 2011 when it was fighting sharp appreciation of the Swiss franc in the midst of the eurozone sovereign debt crisis.
Seizing Credit Opportunities When Oil Prices Are Sliding
by Mark Kiesel, David Linton of PIMCO,
?We believe we are moving into an extended period of lower oil prices, and we are actively managing our clients? energy exposure with an eye toward benefiting from recent events. Differentiation between the winners and losers across countries, sectors and individual companies is essential. We currently favor subsectors and companies with strong asset quality, high barriers to entry, solid production profiles and strong balance sheets and liquidity profiles.
The Long Growth Drag From Financial Market Tinkering?
by William De Leon of PIMCO,
Central bankers and regulators have greatly underestimated the negative impact their actions may have on the economic ?multiplier.? Over the next two to three years this miscalculation may settle into a permanent drag on global growth. Forget fears of bloated central bank balance sheets and their potentially inflationary effects ? rather than generating credit in the consumer sector, much of that ?liquidity? is being used to meet new capital requirements.
Recovery Gaining Momentum?
U.S. growth will remain robust over the cyclical horizon due to increasing consumption driven by the narrowing unemployment gap and increase in disposable incomes. The Canadian recovery should continue, though divergent forces ? including the U.S. recovery and oil price declines ? could have significant implications for the economy. Growth will be muted across Latin America, with some economies benefitting from U.S. growth, and others dragged down by the slowdown in the eurozone and China.
The Second Wind of Abenomics?
Mr. Abe now has up to four more years in power. While investors are likely to be patient in the near term, unless Abenomics gains a second wind the way a tired athlete finds the will to pick up the pace and finish strong there is a risk that this post-election market euphoria could be short-lived. The time for him to act is now.
Rising Insurance Premiums: A New Impetus for Voluntary Funding of Corporate Defined Benefit Plans
?The Pension Benefit Guaranty Corporation will hike variable-rate premiums on unfunded liabilities in corporate defined benefit plans in 2015 and 2016. The increases along with muted return potential on stocks and bonds and aging plan demographics could make borrowing to reduce or eliminate funding shortfalls less expensive than paying PBGC variable-rate premiums. For efficient execution, we believe it is important to consider appropriate investment strategies before any funding decisions are made.
A Rising Tide Lifts Most Boats
PIMCO expects global growth to accelerate in 2015, reaching about +2.75% year-over-year, with the majority of this improvement due to the (predominantly supply-driven) decline in oil prices. However, there will be large differences in growth dynamics among countries. While fiscal and monetary policies in most developed countries will stimulate growth in 2015, the U.S. Federal Reserve will attempt to break from the pack.
Testing the Limits of Monetary Policy Without Fiscal Union
Over the next 12 months, we expect eurozone growth to accelerate from the current annualised run rate of 0.5% to a still-very-weak pace of approximately 1%, while the ultra-low inflation tells us there is a demand problem. With the ECB set to expand its balance sheet over the cyclical horizon, the biggest risk to growth is if the ECB buys large quantities of government bonds but the governments do nothing. We expect to remain overweight European peripherals and overweight European corporate credit, with the focus on financials.
Outlook for the Global Credit Markets in 2015
by Mark Kiesel of PIMCO,
The combination of fundamentals, technicals, valuations and global central bank policies drives our overall constructive outlook for global credit in 2015. Economic growth dynamics, including an improving outlook in the U.S., along with likely changes in global central bank policies, continued energy price volatility and the potential for more shareholder-friendly actions by companies inform our credit views and strategies.
Strategy Spotlight: An Update on PIMCO'S Fundamental Index-Based Product Suite
The Fundamental IndexPLUS AR strategies combine the best of what passive indexing and active management aim to deliver: broadly representative, transparent equity exposure plus the potential for meaningful equity market outperformance.
Follow the ECB Compass
by Eve Tournier of PIMCO,
As the European Central Bank continues to expand its balance sheet to counter low growth and ?low inflation, we believe European duration should remain relatively well-anchored and European assets should be well supported. Looking ahead, in a world of low yielding European core rates, we believe credit will continue to attract investors. We continue to see spread compression opportunities in peripheral sovereign, fundamentally improving banks and high yield.
Designing Balanced DC Menus: Considering Equity Investments
by Stacy Schaus, Ying Gao of PIMCO,
Defined contribution investment lineups typically provide numerous equity choices but still may lack adequate diversification and return potential. Participants may benefit by accessing high-growth markets such as emerging markets and tapping in to dividend-paying stocks. Retirement outcomes could improve further by including portfolios structured using fundamental measures rather than market capitalization.
The Big Squeeze Begins
by Michael Story of PIMCO,
Current European Central Bank policies, along with the regulatory environment, are constricting the two primary investment vehicles available to store cash. As many money market funds have maxed out the risk they can take and some regional European banks have started to charge the equivalent of negative rates on deposits, large cash investors are left to ponder how to avoid the potential loss of capital. We believe PIMCO's approach to balancing three key cash management trade-offs may provide an attractive solution for investors.
Is the Oil Price Slump an Early Holiday Gift for Some Consumers?
With 60% of global GDP driven by consumers, the impact that sustained lower oil prices will have on the global economy is an important factor for investors to take into account. The benefits of lower oil prices will not be evenly distributed and it is important to think about countries that stand to benefit more because of higher consumption and/or less economic dependence on oil exports.
Getting More From Your Equity and Bond Benchmarks
by Ryan Blute of PIMCO,
Benchmarks have long served as a starting point, or anchor, for investors, representing the neutral point for an investment decision. They serve as the basic ingredients that combine to form an investors asset allocation and result in a desired risk/return profile.
The Great Escape??
by Tony Crescenzi of PIMCO,
Since the financial crisis, the Fed has engaged both conventional and unconventional tools in a colossal effort to smooth the deleveraging process, help put Americans back to work and boost wage growth. The Fed has achieved two out of three "escapes": 1) Escape from a liquidity trap: Get banks to lend. 2) Escape from quantitative easing: Stop the bond buying program. 3) Escape from the zero bound: Hike the policy rate above zero. Over the longer term, portfolios should be positioned for low policy rates not only in the U.S., but also in Europe and Japan.
The ECBs Shifting Regimes
by Andrew Bosomworth of PIMCO,
The European Central Bank (ECB) is likely to commence a broad-based asset purchase programme, i.e., quantitative easing (QE), in the first quarter of 2015. As it stands, the eurozone is stuck in a liquidity trap, the risk of deflation is rising and inflation expectations are deviating from their long-term anchor. With the private sector deleveraging and the policy rate near zero, additional easing will require expanded asset purchases.
Unintended Consequences of Staying Early Termination Rights
The topic of too big to fail has been an intense area of focus for policymakers and market participants, and for good reason: Everyone has a vested interest in avoiding a repeat of the 2008 financial crisis and its corresponding aftershocks.
The Tortoise and the ECB
by Harley Bassman of PIMCO,
It is curious that the ECB continues to slumber while the eurozones trading partners move steadily ahead. While not a certainty, it seems highly unlikely that the ECB will indefinitely allow its main trading partners to competitively devalue versus the euro. And since there is no reason to reinvent the wheel, Europes policymakers will likely unveil a familiar-looking and expansive QE policy designed to accelerate asset velocity and, in turn, reflate their equity market.
Time to Look at Long Credit?
by Mohit Mittal of PIMCO,
?Tactical decisions regarding the scaling of an LDI allocation cannot be based solely on Treasury market dynamics. Given recent underperformance of long credit relative to intermediate credit, LDI investors should consider increasing long credit exposure. A structured approach that combines rigorous top-down macroeconomic-analysis to take views on duration and credit sectors with equally thorough bottom-up credit research to identify companies where fundamentals are improving may deliver alpha that can help clients reduce their funding mismatch over time.
Investment Implications for UK DC Schemes in Light of Tax and Regulatory Changes
by William Allport of PIMCO,
With greater flexibility and choices available to DC savers in the latter stages of their career, we believe DC schemes need to reconsider their traditional pre-retirement approach to providing low-risk, income-orientated and pre-retirement investment portfolios. The primary immediate challenge for UK DC schemes is navigating the need for capital stability versus a portfolio that can generate a sustainable income stream for DC savers in retirement.
Hard to Hit Two Targets at Once: The ECB ABS Asset Purchase Programme
by Felix Blomenkamp of PIMCO,
We believe that reviving the asset-backed securities (ABS) market is a better near-term goal, and the primary target of the European Central Banks (ECB) buying programme should be the new issuance market. Sizeable purchases by the ECB in the European ABS market carry the possible risks of crowding out established investors and suppressing interest in this asset class. By not crowding out existing investors while making the asset class more attractive to issuers and investors alike, the ECB has an opportunity to reach its ultimate goal to spur lending.
Got Loans?
?We believe select investors looking to reposition portfolios may benefit from a move to senior secured floating rate loans.
CLOs have been an important source of demand in the market, and even with more strict risk retention rules just announced under Dodd Frank, we think demand will remain strong.
While the Fed has criticized some banks for not following their leveraged lending guidelines, Fed members themselves, in our view, do not appear concerned about loans having a major impact on financial stability.
Opportunities Amid Divergence
by Michael Gomez of PIMCO,
As in developed markets, the trends of increasing growth and policy dispersion will be borne out in emerging markets over the next 12 months. Brazil has some of the highest interest rates in the world, which presents an opportunity for investors, and we expect the next four years will be marked by a better mix of fiscal and monetary policy. Because our outlook for China has moderated somewhat, we are focusing attention on trade and financial linkages and how the ripple effects of a slower China might unfold.
Is the UK Getting Back to Business as Usual??
In light of the generally buoyant economy, we may start to see more normal conditions returning to the UK labour market and, importantly, upward movement in wage growth over the cyclical horizon. In turn, these developments are critical for the conduct and timing of monetary policy and the behaviour of the Bank of England's (BOE) Monetary Policy Committee. We believe investors may want to treat the BOE's interest rate cycle with caution in shorter-maturity bonds, while valuations offer more protection in intermediate bonds given PIMCO's New Neutral thesis of secularly low real interest rates.
Setting Global Standards for Central Clearinghouses
While a possible central counterparty (CCP) failure is a very remote event, there is no one single solution that alone will prevent it. However, PIMCO believes that if several conditions are met, including 1) a CCP is capitalized correctly and sufficiently with its own skin in the game, 2) segregation of client assets are consistent across cleared derivatives, 3) CCPs have a way to access cash easily to manage liquidity and 4) stress tests are consistently performed and reviewed, a CCP will be much more likely to recover than to be forced into a resolution process.
Practical Policy Prescriptions to Help Offset Geopolitical Uncertainties
by Scott Mather, Greg Sharenow of PIMCO,
We believe Europe should relax fiscal budget constraints to allow for fiscal stimulus to offset any economic drag, while maintaining extremely accommodative monetary policy. The U.S. and its relatively newfound energy renaissance can also play an important role in supporting Europe and the global economy by signaling its intention to compete for energy market share.
Can Anything Go Wrong for the Markets???
by Vineer Bhansali of PIMCO,
?Risk management in proper portfolio construction consists of a combination of dynamic risk balancing, diversified beta sources, explicit options-based tail hedging and a minimum amount of liquidity. Faced with a long and expanding list of things that could go wrong, uncertainties about the likelihood of each shock and the lack of dependable precursory indicators, it seems that a structurally sound portfolio construction methodology that uses all these tools is essential.
Our DNA
by Douglas M. Hodge of PIMCO,
Our investment process, which lies at the heart of the value we offer clients, is ingrained it is stamped into our DNA. Our culture of rigorous and open debate will continue to animate quarterly forums of our global investment and executive leadership, as well as the daily meetings of the Investment Committee. We remain a team-oriented organization. Indeed, it could hardly be otherwise in a firm which over many years has grown to nearly 2,500 investment professionals and staff stationed in 13 global offices, with nearly $2 trillion in assets and a full suite of strategies, including co
PIMCO Cyclical Outlook for the Americas: Recovery Remains Intact, Yet Uneven
U.S. growth can potentially exceed expectations over the cyclical horizon, in part bolstered by a healing consumer and a very accommodative Federal Reserve. While real growth in Canada has been modest in recent years, it increased to 3.1% in the second quarter and we expect that positive momentum to continue this year. In Latin America, we expect growth will pick up for the region as a whole with outperformance by smaller economies like Colombia and Panama.
Slower Growth in China and Japan Pressures the Region
Our forecast for the global economy is below consensus mainly because of our views for regions outside of the U.S., including Asia, the emerging markets and Europe, although higher growth in the U.S. should offset some of the slowdown we see coming from China. Japan made a kick start under so-called Abenomics with massive monetary and fiscal reflation policies, but the recent data suggest to us that the effectiveness of those cyclical policies are already challenged by secular and structural headwinds.
Europe’s Commercial Real Estate Deleveraging: ‘Not Too Fast, Not Too Slow’?
by Tareck Safi, Tom Collier of PIMCO,
As European bank deleveraging accelerates, we expect that commercial real estate (CRE) will continue to constitute a significant proportion of bank assets to be sold, albeit with a shifting geographical mix. We believe CRE opportunities remain in the form of single assets and complex structured transactions in particular; but a disciplined approach will be key given competition in specific types of assets and in certain jurisdictions. This will require flexible capital, local investment expertise and hands-on asset management, in addition to strategic sourcing capabilities.
Equities: Finding the Path to Value?
Going forward, earnings growth and stock selection - more than multiple expansion and beta - will likely play a bigger role in driving positive returns. Our research has uncovered numerous examples of stocks trading below our estimate of intrinsic value - notably in Europe and various special situations. Investors with the capacity for deep, fundamental research and a long-term unconstrained equity strategy may be positioned to capitalize on these opportunities.
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