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Emphasize Barriers to Entry?
by Mark Kiesel of PIMCO,
We see many bottom-up investment opportunities in the global credit markets, particularly in industries with high barriers to entry. We view healthcare, lodging, Asian gaming, master limited partnerships/pipelines, energy, wireless telecom, cell towers, cable, satellite, media and U.S. banks as attractive industries. Companies unique patents, licenses, brands, content and intellectual property, among other advantages, can help support investment returns in both bull and bear markets.
Distressed Corporate Credit: A Tale of Two Markets?
by Sai S. Devabhaktuni of PIMCO,
Middle market distressed credit may be an attractive source of higher returns in an overall low yield environment for investors able to access these opportunities. However, the higher return potential comes with greater risks. Imbalances in middle markets are building. ?Investors looking toward distressed credit markets should focus on companies that will likely be able to withstand periods of economic inertia, to undertake careful valuation practices and to strictly adhere to the absolute priority rule (in which senior creditors are paid in full before junior creditors).
Will Russia Derail the Eurozone Recovery?
by Nicola Mai of PIMCO,
Geopolitical tensions from Ukraine and the evolving trade war with Russia are threatening what is already a weak recovery in Europe, and could shave approximately 0.3%0.4% off eurozone growth. Should the situation escalate, we could expect an even greater drag with potential to push the eurozone back into recession. Looking ahead, we see attractive opportunities in peripheral bonds and favour an underweight currency position in the euro.
Congress Will Go Out With a Whimper, But the Next Could Come In With a Roar
by Libby Cantrill of PIMCO,
A government shutdown is highly unlikely this year, and most need-to-pass bills will likely pass either before the election or during the "lame duck" session of Congress. Should Republicans take the Senate, we should expect heightened policy uncertainty around issues such as the debt ceiling increase in 2015.
For Wonks Only???
by William Gross of PIMCO,
A credit-based financial economy (as opposed to pure cash) depends on an ever-expanding outstanding level of credit for its survival. Without additional credit, interest on previously issued liabilities cannot be paid absent the sale of existing assets, which in turn would lead to a vicious cycle of debt deflation, recession and ultimately depression.
Late, Not Lost: The Economic Drag From the Millennial Generation
We believe concerns of a student debt "bubble" and perpetual financial weakness among Millennials are largely overstated. Understanding Millennials' financial trajectory is critical to our secular (3-5 year) outlook for home prices and the broader economy. We expect Millennials' financial position to improve, and pent-up demand could result in longer-term strength in housing and housing-related assets.
Share and Share Alike??
by Richard Clarida of PIMCO,
Labor compensation as a share of national income fell sharply in 20092010 and has remained depressed: The share of national income at the end of 2013 was the smallest slice paid to labor in at least 60 years! During the last three U.S. business cycles, the rise in labors share that commenced during the expansion phase of the business cycle was not accompanied by a material rise in PCE inflation.
Australia’s Terms of Trade: Implications For Credit Investors
by Tracy Chin, Aaditya Thakur of PIMCO,
Australia is contending with a multi-year decline in the terms of trade and a rebalancing toward the non-mining sectors of the economy. For companies, the macroeconomic consequences of a downswing in the terms of trade provide both challenges and benefits. For investors, it is important to find companies that have a clear, demonstrated understanding of the macro environment and can navigate the headwinds through operational efficiencies, cost control, market positioning and balance sheet management.
Principled Populism?
by Paul McCulley of PIMCO,
In the years before retiring from PIMCO in 2010, I often interviewed candidates for professional positions here, usually at the end of the process, after they had been thoroughly vetted through several rounds of interviews. My task was not so much to test candidates qualifications as to take their measure and for them to take mine!
Strengthening the Euros Governance Structure?
by Andrew Bosomworth of PIMCO,
?Todays relative tranquillity in eurozone financial markets owes largely to the ECBs willingness to hold the single currency together. However, history suggests the eurozones citizens ultimately will have to choose between returning to a regime of flexible exchange rates or retaining the single currency and deepening political and fiscal integration.
Money Market Reform: Reflections on This Critical Inflection Point for Cash Liquidity Investing
by Jerome Schneider of PIMCO,
Under the SECs new regulations, institutional prime and institutional municipal money market funds will transition to a floating net asset value. All money market funds (except government-focused funds) are required to impose liquidity fees and may use redemption gates if liquid assets fall below certain levels. Investors, both institutions and individuals, should view this industry inflection point as an opportunity to revisit their approach to cash investing. Actively managed short duration strategies are a compelling solution.
Is Timing Everything? Practical Implementation of Tail Risk Hedging??
Just in time hedging is nearly impossible: By the time an investor decides to hedge, the market may already price in the significant risk of a tail event. Instead, hedges could be included as a permanent part of an asset allocation: what we might call just in case hedging. An optimal strategy may involve averaging into a hedging allocation. In addition, using a broader set of hedge instruments may help lower the costs. We believe that tail risk hedges have a place in any portfolio that has a substantial allocation to risk assets. ?
The New Neutral: Investment Implications for Insurance Companies
by David Braun of PIMCO,
Low rates are unhelpful to an industry with legacy long-term liabilities containing rigid embedded credited rates; they exacerbate asset-liability mismatches and pressure earnings margins. Insurers may want to recalibrate their expectations of future interest rates, as well as broad bond and equity market returns. In The New Neutral, with beta from stocks and bonds likely to be relatively low, insurers should look to enhance buy-and-hold return potential via active management.
Are Prices Too High in U.S. Commercial Real Estate??
by John Murray of PIMCO,
The recovery in commercial real estate (CRE) has been driven more by low rates than improvements in fundamentals. However, fundamentals are improving and capitalization rates should remain low amid low New Neutral policy rates. We expect capital flows in both debt and equity to CRE to continue to increase, and we see opportunities for investors resulting from capital flows, demographics, loan maturities and regulatory reforms. ?
Choosing Winners in Asian Credit: Key Trends and Themes
Key trends include Asian credit supply, which is on track for another record year in 2014, and China's priority to promote cleaner and more efficient energy. Our bottom-up research and careful risk assessments informed by macroeconomic perspectives have us favoring select investments in several sectors of Asian credit markets, including state-owned enterprises in China and Korea, investment grade new issues and Basel III Tier 2 bank capital bonds. ?
One Big Idea??
by William Gross of PIMCO,
?Investing and business success can often depend on one BIG idea and its timing. The peaking of short-term interest rates at 20% in the early 1980s and the bursting of the DotCom and NASDAQ bubble 20 years later were excellent examples of big ideas that made or broke investment portfolios.
Could Events in Iraq Shock Your Portfolio?
by Greg Sharenow of PIMCO,
We expect a relatively small impact on oil prices for the rest of the year once the dust settles and sectarian lines are drawn. These events call into question Iraqs ability to keep increasing oil production, which will likely support elevated prices in the years to come. We believe owning oil as a portfolio defense presents an interesting opportunity. ?
Designing Balanced DC Menus: Considering Inflation-Hedging Strategies????
by Stacy Schaus, Ying Gao of PIMCO,
Inflation-hedging strategies are fundamental to DC investment lineups and participants? need to build and preserve purchasing power in retirement. Plan sponsors should evaluate these assets separately and in combination before adding them to core lineups and target-date strategies. Selected assets or blends should be designed to deliver the primary benefits of inflation responsiveness, diversification relative to stocks, volatility reduction and downside risk mitigation.
Getting in Gear for The New Neutral – What Does It Mean for Investors?
by William Benz of PIMCO,
Smart beta is increasingly important when returns are likely to fall short of what most investors need and expect. Active managers can use multiple tools to help generate higher returns. With outcome-oriented strategies, investors can align their portfolios toward meeting specific risk and return objectives. Investors with more aggressive income or return needs may benefit from bespoke, multi-asset solutions. ?
Euro-Sterling Credit: Yield and Spread Still Appeal
by Ketish Pothalingam of PIMCO,
Framed by ongoing renormalisation in Europe and stronger UK growth, euro-sterling investment grade credit markets are in a favourable part of their respective cycles as corporates continue to deleverage, default rates are expected to remain low ahead and market liquidity has improved across Europe. We believe the sterling credit market provides a more balanced credit market and offers investors the opportunity for better total carry versus euro and global investment grade credit markets.
Unconstrained Bond Investing in The New Neutral
by Mohit Mittal, Saumil Parikh of PIMCO,
At our recently concluded Secular Forum, PIMCO investment professionals from around the globe gathered in Newport Beach to discuss and debate the secular outlook for major world economies. With insight from guest speakers and new MBA/PhD hires, PIMCO coined the phrase The New Neutral to define its secular three- to five-year outlook for the world economies. In his most recent Investment Outlook, Bill Gross further elaborated on The New Neutral.
Time (and Money) in a Cellphone
by Bill Gross of PIMCO,
Our modern age is becoming more virtual than physical, which I find increasingly depressing if only because Ive failed to keep pace. I dont even own a cellphone. Still, it doesnt take a Boomer to observe that the reality outside as opposed to inside a computer or a cellphone should be the preferred experience. Scientists claim we are all just bits of information with billions of 1s and 0s, glued together to form a beating heart. Even so, Im sticking with live chirping as opposed to Angry Birds for now. Virtual reality seems just a tad UNreal to me.
Multi-Asset Investing: Is Now the Time for Emerging Market Equities?
by Mihir Worah of PIMCO,
Although emerging markets (EM) will continue to grow faster than developed markets (DM), we believe the difference may be lower than what has been seen over the last five years. Higher earnings yields in EM equities offer partial compensation for risks, but careful analysis is warranted to assess the true valuation differential. A modest allocation to EM equities may be warranted based on relative price-to-earnings multiples and our expectation that policy rates will stay lower for longer than markets expect, which makes higher-yielding EM assets more attractive.
Is There a UK Housing Bubble????
We see the UK experiencing a very traditional monetary cycle involving lower mortgage rates, higher house prices and then hopefully higher transactions. The Bank of England can address rising house prices either by raising financing costs via the banking system or by raising interest rates. Markets will watch BoE activity closely. Our expectation is for a gradual and modest interest rate cycle, with low rates in the UK economy for years to come. Housing may be an overvalued asset, but one that is secularly supported by low rates.
The Crimean Conflict Has Affected Commodities Markets, Just Not Where You’d Expect
Since the end of February, when the Crimean crisis started to escalate, grain prices have responded to nearly every up and down of the crisis. Wheat is up 21%, and corn is up 10%. We believe investors looking to take a view on the future price of wheat or corn should do so through the options market. In this case, we think being long puts on wheat is an attractive way to implement our short wheat view.
Five Things Your Credit Manager Shouldnt Be Doing (But Probably Is)
by Christian Stracke of PIMCO,
Questionable behavior among credit managers is back, but the good news is that we believe the credit markets still offer plenty of opportunities to potentially generate attractive returns. Smart, rational credit investing that avoids some managers nave reach for yield, and sticks instead to a deep focus on the long-term sustainability of companies balance sheets, may still reap rewards.
What's the Game Changer for Gold?
by Douglas M. Hodge of PIMCO,
In the coming days, PIMCO will publish its annual Secular Outlook. A cornerstone of our investment process, it sets the direction for how we will invest our clients assets over the coming three to five years. Of course, we revisit our outlook and investment conclusions each year to ensure their continued resonance and efficacy. Similarly, we have a regular strategic business planning process and conduct intermittent reviews. And, like our secular process, we often invite an outside expert or two to spark our thinking and challenge our priors.
Europe, Not Too Hot, Not Too Cold Sweet Spot for Credit Investors
by Eve Tournier of PIMCO,
European economies are improving, yet the regions low growth and low inflation will keep the central bank engaged. As such, European duration should be safer versus other major developed economies. Given recent European Central Bank comments pointing to a further easing bias, we believe it makes European assets relatively attractive, especially in sectors with deleveraging fundamentals, positive technicals and attractive valuations.
Managed Futures: Positive Trends Ahead??
Trend-following, the primary approach used in managed futures strategies, seeks positive returns by capturing momentum across major asset classes. Despite exceptional performance in the 2008 financial crisis, trend-following strategies were less successful in subsequent years, in part because massive central bank interventions increased market correlations, suppressed volatility and curtailed left-tail events.
The ?Whites of Their Eyes?: The Fed?s Changing Reaction Function
by Scott Mather, David Fisher of PIMCO,
While the unemployment rate has historically been one of the Federal Reserve?s key measures of spare capacity, and thus inflation risk, those eagerly awaiting each month?s employment report for signals on the Fed?s likely response may be barking up the wrong tree. The central bank still attempts to estimate the natural rate of unemployment, but conflicting signals from the labor market have clearly made the Fed less willing to trust its models. The result: Inflation will be more important than employment in the Fed?s decision-making process.
Achoo!
by William Gross of PIMCO,
There?s nothing like a good sneeze; maybe a hot shower or an ice cream sandwich, but no ? nothing else even comes close. A sneeze is, to be candid, sort of half erotic, a release of pressure that feels oh so good either before or just after the Achoo! The air, along with 100,000 germs, comes shooting out of your nose faster than a race car at the Indy 500.
De-Risking Pensions in a Time of Tapering
by Rene Martel, Markus Aakko of PIMCO,
Despite improved funding in corporate defined benefit pension plans, some sponsors concerned about rising rates may be tempted to delay glide path prescriptions to boost fixed income allocations. For these sponsors, a better approach might be to break de-risking into two steps, potentially allowing for significant risk-reduction benefits yet preserving tactical flexibility in timing purchases of long-duration bonds. Any reduction in equity and other return-seeking assets should be implemented in short order to lock in recent market gains. ?
Henny Pennies
While the Fed?s qualitative guidance may have increased uncertainties over monetary policy, volatility will likely remain contained by powerful short- and long-run forces related to the economic outlook. In the UK, we should at least respect the risk of a hike late in the first quarter of 2015, earlier than what is currently priced in. In Japan, we believe the BOJ will remain full throttle on its current monetary easing for some time.
Designing Balanced DC Menus: Considering Diversified Fixed Income Choices
by Stacy Schaus, Ying Gao of PIMCO,
Sponsors of defined contribution plans face a dual challenge: They must present investment options appropriate for plan members and design menus that encourage selection of well-structured portfolios. We believe that actively managed strategies designed to potentially reduce risks, invest globally and enhance yield relative to the index may improve diversification and lower concentration risk in fixed income offerings. Plan sponsors may consider a range of return and risk measures as they evaluate current and prospective fixed income offerings.
Credit Availability Underpins Recovery in Commercial Real Estate Prices, But Also Poses Risks to CMB
Credit availability, low interest rates, limited new construction and improving economic conditions have contributed to the recovery in commercial real estate (CRE) prices. We expect a strong 2014 in the commercial mortgage-backed securities (CMBS) market, which has been a primary source of CRE credit expansion. Increasingly aggressive loan underwriting is a concern. CMBS investors need to speak with their wallets and push back on either valuations or underwriting standards if recent trends continue.
Uncovering Opportunities in Emerging Markets
by Mark Kiesel of PIMCO,
Emerging markets have underperformed expectations, but the longer-term secular outlook remains constructive for many regions. Highly negative investor sentiment and outflows have sharply reduced prices, significantly improving relative value in emerging markets. We see opportunities in emerging markets in interest rates, sovereign credit and select companies for investors with a longer-term investment horizon. ?
Can You Have Your Cake and Eat It Too?
Many insurers would like to optimize both total return and book yield income, which may be seen as competing and divergent goals. In fact many insurers fall somewhere on the spectrum between these goals or shift their objective based on business and market conditions. While it has long been an accepted practice to track manager performance with regard to total return, tracking book income has been more elusive: PIMCO has an innovative and unique solution to help manager?s track alpha generated by active managers.
Assuage Your Fears of Rising Rates with Global Diversification
by Julie Salsbery of PIMCO,
?Although PIMCO believes interest rates are fairly anchored in the near term, we think investors can position their fixed income portfolios more defensively. Global diversification across developed and emerging markets can offer a defense against rising U.S. rates by reducing the concentration of risks within a portfolio, while also potentially lowering volatility and enhancing returns.
Avoiding Losers Is as Important as Picking Winners in High Yield Markets Today
by Andrew Jessop, Hozef Arif of PIMCO,
Although high yield bonds span a broad range of sectors, industries and individual credits, their yields today tend to fall within an increasingly narrow range. Narrow dispersion means portfolio decisions that target outperformance should now be guided by avoiding deteriorating credits as much as by selecting the most attractive rising stars. Strategies for picking the rising stars can extend to CCC rated credits where agency ratings lag the improvement in the underlying credit profile.
Moving Forward With the Normalization of Yields
by Scott Mather, Michael Story of PIMCO,
One response to yield normalization is to consider retaining core bonds and diversifying the specific risk factor of concern, in this case duration. In the past, global bonds have captured most of the upside but avoided a significant amount of the downside relative to domestic-only bonds. Generating capital gains from bonds in a rising yield environment requires defining concretely what yield normalization means ? where yields are going and when they will get there ? and setting these expectations against forward market pricing, country by country.
Warning Signs in Leveraged Credit?
by Elizabeth (Beth) MacLean of PIMCO,
Though leveraged credit markets are less levered than they were pre-crisis, signs of more lenient, issuer-friendly terms are prompting regulators (including the Fed) and investors to voice concerns.
Regulators have tightened lending guidelines, but strong demand versus supply means the market is able to find ways around such guidance.
Detailed bottom-up credit analysis with an emphasis on long-term fundamentals and loss avoidance remains crucial to investing in leveraged credit today.
Bob
by Bill Gross of PIMCO,
PIMCO recommends overweighting credit and to a lesser extent volatility and curve. Underweight duration. Although credit spreads are tight, they are not as compressed as interest rates, which are now in the process of normalization. While PIMCO agrees with Janet Yellen that such normalization will be a long time coming (the 12th of Never?), probabilities suggest that as the Fed completes its Taper, the 5?30 year bonds that it has been buying will have to be sold at higher yields to entice the private sector back in.
Signs of Life??
by Adam Bowe, Robert Mead of PIMCO,
As mining investment in Australia tapers, improvements in other sectors of the economy recently have allayed some concerns of a collapse in domestic demand. We share the cautious optimism but stop well short of expecting higher policy rates this year. Australian bond yields remain highly correlated to global developed market bond yields, and without a near-term domestic catalyst to cause that correlation to break, Australia?s yields are more likely to gradually rise, particularly in the longer end of the yield curve, which isn?t supported by anchored policy rates. ?
U.S. Growth Offers a Tailwind for the Region
PIMCO expects growth in the U.S. to improve due to a reduction in fiscal drag, although the Federal Reserve?s tapering and slowing growth in China are risks. While higher U.S. growth should offer a boost to exporters, Canada will likely face headwinds from a housing correction and drop in consumption. Latin America has fared relatively well amid the recent volatility in emerging markets, but differentiation across credits and markets continues to increase.
Why Key Long-Term Trends Matter to Stock Pickers
by Virginie Maisonneuve of PIMCO,
The combination of demographic changes, climate change and the ongoing shift in emerging markets over the next 30 years will have long-term consequences for supply and demand factors and business sustainability for many companies. The impact of these long-term trends must not be underestimated. It is crucial for equity investors to not only be attuned to them, but also to understand how companies are adapting to the shifts in the global corporate operating environment. ?
?Mind the Gap?: Adapting to a Post-Crisis World in Transition
by Virginie Maisonneuve of PIMCO,
??Barring any sharp deterioration in global geopolitical risk, the medium term outlook for equities is quite positive in an environment where we see subdued growth and inflation amid healing economies. From a markets standpoint, valuations are not very expensive ? they?re not cheap, but they?re not expensive versus historical standards for the market overall.
A Sustainable Recovery??
Early signs indicate that the long awaited increase in business investment is underway. In turn, that bodes well for real income growth and the sustainability of the economic recovery. Given the improved economic prospects and the change in rhetoric at the Bank of England, the central bank could well be an early adopter of tighter monetary policy. We expect the BoE to hike rates ahead of the US Federal Reserve. While we beli?eve the British pound has already reflected the BoE?s guidance for official rates to rise by mid-2015, the bond market has yet to fully reflect the new environment. ?
Results 1,051–1,100
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