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Leveraged Finance Outlook: Riding the Low Default Wave
Following strong performance in 2013, we expect low (1%-3%) defaults in leveraged finance markets this year. Issuance should remain healthy, and continued slow but steady growth in the U.S. economy should offer further stability to these companies. However, careful credit selection and monitoring of sector trends remain imperative. Investors with low tolerance for volatility and more interest rate sensitivity may emphasize loans, while investors with greater risk tolerance and a more benign outlook for rates may look to high yield.
New Maestro, Seasoned Band
by Tony Crescenzi of PIMCO,
The process by which the Fed carries out its duties is institutionalized, firmly rooted and unlikely to change - no matter who is at the helm. The core personal consumption expenditures (PCE) price index will be one of Janet Yellens most important guiding lights for future Fed policy.
Most 'Medieval'
by William Gross of PIMCO,
Unlike today, when most believe that animals were put on this Earth for humanitys pleasure or utility, most people in the Middle Ages believed that God granted free will to Adam, Eve and all of His creatures. Animals were responsible in some strange way for their own actions and therefore should be held accountable for them.
High Yield in 2014: Where Can You Look for Upside in a 'Medium Yield' Market?
by Andrew Jessop, Hozef Arif of PIMCO,
Default rates and credit losses in high yield markets remain below their long-term averages, and we believe default rates will remain low in 2014 and 2015 as well. Investors should consider positioning for better convexity via exposure to sectors with favorable industry dynamics and positive event risk from M&A or equity offerings, potential upside from price recovery in high quality bonds trading below par and exposure to select new supply from former investment grade companies.
All Things in Moderation, Including Housing
In our view, the cooling housing market and other domestic factors will keep Canadian growth at a modest 1.75%-2.25% in 2014, despite a boost from higher U.S. growth. While we expect a correction in Canadas housing market to begin this year, the macroeconomic environment and the availability of mortgage credit suggest a housing crash is unlikely. In this environment, we think the Canadian dollar should remain attractive, 10-year bonds should offer the potential for gains, and provincial bonds will likely outperform federal government and corporate bonds.
2014 Oil Outlook: How Slick Is the Oil Slope
by Greg Sharenow of PIMCO,
While the supply outlook tilts the balances toward bearish in 2014, an improving global economy is a positive for oil demand and a support for prices. With roll yields positively contributing to returns, investors ultimately could be paid to hold a security that hedges both global event risk and any resulting shock to inflation. Growth in shale oil has been a powerful moderating force for prices by both filling an important gap in global supply and demand and by anchoring the back end of the futures curve.
Demystifying Gold Prices
by Nicholas Johnson of PIMCO,
What is it about gold prices? Many people seem to believe they are impossible to predict, or even understand. At her Senate confirmation hearing in November, Janet Yellen said, "I dont think anybody has a very good model of what makes gold prices go up or down." Ben Bernanke also said last year that "nobody really understands gold prices, and I dont pretend to understand them either." While many factors influence the price of gold, PIMCO believes there is one that can explain the majority of changes in gold prices over the past several years: changes in real yields.
Rummaging for Yield - The Case of the Insurance Investor
by Eugene Dimitriou of PIMCO,
Since the height of the global financial crisis in 2008, insurance companies have faced three key challenges: First, insurance companies urgently needed to address new critical risk management issues as banking sector and peripheral sovereign credit risks significantly increased in Europe. Second, the prospects of longer-term low yields forced insurers to identify alternative sources of meaningful yield. And third, insurance companies needed to prepare for pan-European insurance regulation Solvency II.
Ordem e Progresso
by Michael Gomez of PIMCO,
Amid stagnant growth and high inflation in 2013, Brazils equity market was one of the worst performers, the real was a chronic underperformer and the corporate sector struggled. Brazil needs to anchor economic policy around a stringent and credible primary surplus target rather than run the current mix of loose fiscal policy, subsidized public credit and ever tighter monetary policy. Valuations are attractive, but unless an effective policy mix is restored, the outlook for order in Brazils financial markets is less certain.
Kansas
by Jerome Schneider of PIMCO,
In the coming year, traditional money market strategies, long viewed as safe havens, will be challenged by new regulations, near 0% returns and a lack of investable assets. Short-term bond strategies could provide the right balance between risk-taking and liquidity management, and offer the potential for positive returns. Active managers have a distinct advantage because they can manage interest rate volatility and potentially source assets by identifying underappreciated sectors.
U.S. Inflation Outlook 2014: Signs of Life
We expect headline CPI to rise to around 2.0% year-over-year in 2014, with our base case oil forecast in the $105-$110 per-barrel range and expectations for food prices to be stable. PCE, in our view, will likely remain below the Feds 2% target, around 1.5%. Individuals will get some relief at the supermarket, but they will feel a pinch from landlords, who will likely raise rents.
Seesaw Rider
by William Gross of PIMCO,
Theres 50 ways to leave your lover and maybe more than that to lose your money or "break the buck," as some label it in the money markets. You can buy the Brooklyn Bridge, bet on the Cubs to win the World Series or have owned 30 year Treasury bonds in 2013, to name just a few. But bridges and baseball aside, what youre probably interested in hearing from me is how to avoid breaking your investment buck in 2014.
Waiting for the Great Pumpkin
by James Moore of PIMCO,
Shortly before Thanksgiving, I had the privilege of being on an investor panel at Bank of Americas Debt Capital Markets and Derivatives Conference. On the panel before me was a trio of BofAs chief strategists, among them Michael Hartnett, their chief investment strategist. Mr. Hartnett reminded the audience that he was the man who coined the phrase "The Great Rotation" and after much anticipation, at long last, it was here.
China's Consumer Stocks: Opportunities Despite Slower Growth
by Richard Flax of PIMCO,
A weaker macro environment and curbs on spending by government bureaucrats have hit a range of consumer businesses and, in some cases, forced a reassessment of expansion plans. While Chinese consumption may be challenged in the near term, we think the impact will be felt most in the retail sector where slowing demand is compounded by oversupply. We see opportunity in other sectors that benefit from secular demand growth and constrained supply or strong brands, notably casinos and luxury sectors.
PIMCO Cyclical Outlook for the Americas: Riding the Cross-Currents of Higher U.S. Growth and the Fed
In the U.S., lower fiscal drag and the possibility of higher consumer and corporate spending should drive growth higher in 2014. Supported by higher U.S. growth and stabilization in Europe and China, Latin America is set to grow 3%-4% on average, but with a large dispersion across countries. Canada should benefit from the U.S. recovery but will likely lag U.S. growth due to lower consumption and residential investment.
Coal in the Fed's Stock-ing
Forward guidance has become an increasingly common practice among global central banks. Communicating a possible change in the policy rate could have a large effect on long-term interest rates. Capital has moved literally around the globe as a result of central bank activism in developed countries. Looking ahead, we expect 2014 to be a year of increased differentiation across emerging markets in terms of economic fundamentals, policy reactions and market outcomes.
Australia Inc.
by Adam Bowe, Robert Mead of PIMCO,
In 2013, real growth in business investment in Australia outside the mining sector slowed to almost zero, in part due to the high exchange rate. While some sectors of the economy such as housing appear to be improving, we continue to expect sub-trend growth in 2014 due to the subdued outlook for business investment. The RBA will most likely have to keep interest rates low for an extended period to ease the transition away from mining-assisted growth and encourage a weaker exchange rate.
PIMCO's Cyclical Outlook for Asia: Growth Is Stabilizing but Not Stellar
In China, near-term economic performance will be dominated by the dialing back and forth of credit conditions by policymakers, while long-term reform progresses incrementally. Japans GDP growth will slow in 2014 due to a consumption tax hike but will still be above the countrys potential growth as it is assisted by reflationary policies. The pace of Australias growth will slow due to weakness in manufacturing and mining, reflecting tempered growth in China.
Settling In
by Mark Kiesel of PIMCO,
An improving outlook for U.S. housing will be constructive for consumer spending, confidence and jobs. There are many ways to invest directly and indirectly in companies that should benefit from higher housing prices, a pickup in home repairs and remodeling, and residential investment spending. We continue to favor select investments in homebuilders, building materials, appliance manufacturers, lumber, home improvement, banks, title insurance, mortgage origination and servicing, and non-Agency mortgage-backed securities.
A Much Better Dilemma
While the UK economy is likely to avoid reverting to growth levels of recent years, it must transition into a more durable recovery involving business investment, higher productivity and stronger real wages. However, headwinds for domestic demand look significant and the banking system appears to favour secured lending to consumers over businesses. We believe that much of the rise in bond yields is already behind us. With clearer value in shorter bonds, our preference lies in short and intermediate gilts.
PIMCO Cyclical Outlook: Synchronized Optimism
by Saumil Parikh of PIMCO,
In the U.S., the abatement of fiscal policy tightening combined with steady improvements in labor market demand and higher asset valuations is likely to drive an increase in real growth. The eurozone should finally emerge from recession in 2014, and Japan is likely to continue to grow with the continued assistance of extraordinarily expansive policies. In China, external demand will likely improve, but domestic demand will likely slow somewhat.
Muddling Through: The 'Realpolitik' of the Eurozone Crisis
by Andrew Bosomworth of PIMCO,
The long-term cost of Europes economic recovery is likely to challenge social tolerance and political will to achieve a fully integrated fiscal and political union. Although able to exploit the untapped potential of European treaties, the soon-to-be-elected 8th European Parliament looks more likely to continue to muddle through. We see low medium-term risk for government and corporate bonds with maturities of up to three years, but caution may be required for securities with longer maturities and lower down in the capital structure.
On the Wings of an Eagle
by William Gross of PIMCO,
Ive always liked Jack Bogle, although Ive never met him. Hes got heart, but as hes probably joked a thousand times by now, its someone elses; a 1996 transplant being the LOL explanation. Hes also got a lot of investment common sense, recognizing decades ago that investment managers in composite couldnt outperform the market; in fact, their alpha would be negative after fees and transaction costs were factored in.
Guidance Counselors
Forward guidance is an explicit communication by a central bank that provides information today about the timing for specific policy tools in the future. There are at least three types of forward guidance: calendar-based, outcome-based and optimal control. Since 2011 the Fed has deployed both calendar-based and outcome-based guidance. We expect the Yellen Fed to enhance the current outcome-based guidance to convey more information about the timing and pace of policy moves.
DC Plan Design for the Bumpy Road Ahead
by Mohamed El Erian of PIMCO,
In late October, PIMCOs CEO and Co-CIO Mohamed A. El-Erian presented the keynote speech at Pensions & Investments West Coast Defined Contribution Conference. He also spoke with P&I about top-of-mind concerns for retirement plan providers and sponsors. The Q&A below is based on that conversation.
When Flexibility Meets Opportunity in the European Commercial Real Estate Market
by Laurent Luccioni of PIMCO,
The pace of asset sales by European banks has been slower than many anticipated due to the fragile economic, political and regulatory environment across the continent. A complex CRE landscape and the pervasive effects of cognitive bias, capital rigidity and the unintended consequences of regulation mean mispricing can occur frequently. Unlocking value in this environment requires a flexible approach to investing across the capital structure and the resources to source, underwrite, structure, service and operate commercial real estate assets.
Sovereign Ambitions to Develop Infrastructure Benefit Emerging Asia's Utilities Sector
The scope for infrastructure development in emerging Asia is tremendous, and the utilities sector has potential to contribute to and benefit from that growth. In general, we have found that state-owned utilities benefit from a range of operational advantages, partly as a result of the governments vested interest. PIMCOs bottom-up research allows us to analyze evolving company- and sector-specific factors within the greater macroeconomic picture to identify the best investment ideas in Asias utilities sector.
Scrooge McDucks
by William Gross of PIMCO,
With the budget and debt ceiling crises temporarily averted, perhaps a future economic priority will be to promote economic growth; one way to do that may be via tax reform. How to proceed depends as always on the view of the observer and whether the glasses are worn by capital, labor or government interests.
Positioning for Municipal Market Volatility
We do not anticipate a significant increase in the frequency of municipal defaults, but there are pockets of credit stress in U.S. municipalities and territories, particularly those with unfunded pension obligations and unsustainable budget imbalances. Large concentrations of exposure to Puerto Rico within subsets of the municipal market will likely lead to an increase in spread volatility across other municipal sectors in the coming quarters.
Connecting the DOTs: The Role of North America's Emerging Markets' in Achieving Energy Independence
by John Devir of PIMCO,
The midstream energy sector is likely to grow more quickly than the overall U.S. economy over the next several years, creating the potential for attractive investment opportunities. North Dakota, Oklahoma and Texas, or the DOTs for short, stand to disproportionally benefit from strong growth in onshore U.S. oil and gas shale development. PIMCOs approach is to identify and invest in the companies, including pipeline operating companies, favorably positioned to benefit from prolific oil production.
Watch for the Signals on Policy Direction Out of Washington
by Libby Cantrill of PIMCO,
As expected, the deal that passed Congress on October 16 is another short-term, kick-the-can package. The big question is whether we will have to endure yet another saga next year, when Congress is once again forced to address the debt ceiling and fund the government. We are skeptical on the outlook for the bipartisan budget conference committee: The main obstacles to a grand bargain that have existed for the past two years continue today.
The Squeeze Play
by Jerome Schneider of PIMCO,
Reductions in Treasury bill and commercial paper issuance compounded by developments on the demand side mean the squeeze play is on for many short-term portfolios. Investors should consider the potential for substantive changes to liquidity conditions as banks contend with increases in capital requirements due to updated Basel III regulations. Active management of short-term investments is important: Dont rely on static regulatory frameworks or traditional indexes to determine a portfolios unique liquidity needs.
Getting Serious About Investing Responsibly
by Luke Spajic, Josh Olazabal of PIMCO,
To date, much of ESG-related investing has focused on negative screening, but we believe there is a better approach. This approach rests on three pillars: identifying and analyzing key ESG issues facing a given investment sector, engaging with the issuers of securities, and supporting the development of markets for ESG investments.
Taper Time - Mining, That Is
by Adam Bowe, Robert Mead of PIMCO,
Recent data suggest that mining investment is tapering, with the sector detracting from real growth in the first half of 2013. We see three possible growth scenarios: a handoff to the corporate sector; no handoff, with demand continuing to slow; or a handoff to the highly levered household sector, which would create long-term risks. Until we see meaningful signs of a growth handoff from the mining sector to a new balance sheet that has the capacity to expand, our base case calls for sub-trend growth and low interest rates, supporting bond prices over the cyclical horizon.
The New Normalization of Fed Policy
by Tony Crescenzi of PIMCO,
The Fed is sending a message that the unwinding of its extraordinary accommodation will be done with great care and patience, and will take time - a long time. In delaying a taper, not only did the Fed show markets it has little tolerance for any tightening of financial conditions, it also strengthened its forward guidance considerably. The Feds decision to delay a taper will likely relieve some of the upward pressure on longer-term interest rates.
After Detroit: Rigorous Research and Credit Selection Is the Key to Investing in Municipal Bonds
by David Hammer, Sean McCarthy of PIMCO,
Detroit recently declared bankruptcy, setting off the largest municipal Chapter 9 proceeding in history. There has been and will continue to be a lot of noise in the media, underscoring challenges but also presenting opportunity for experienced investors. PIMCO has long favored special revenue essential service bonds over GO bonds. Detroit Water and Sewer bonds are payable by a pledge of and statutory lien on net revenues of the water or sewer system, and as such benefit from provisions in the federal bankruptcy code ensuring that the pledge is not affected by the petition.
Washington's Prolonged Saga and the Market's Reaction
The federal government shutdown represents yet another self-inflicted wound to already modest growth. While the market seems to be mostly sanguine about the government shutdown, a breach of the debt ceiling which we feel is highly unlikely would be incredibly negative for financial markets.
Survival of the Fittest?
by William Gross of PIMCO,
I hate crows and my wife Sue hates bugs, but like most married couples we have learned to live with our differences. Crows eat bugs though, and bugs eat bugs, and that scientific observation sets the context for the next few paragraphs of this months Investment Outlook.
PIMCO Cyclical Outlook for the Americas: A Slow-Moving Fed Benefits Economies on Both Continents
PIMCO expects the U.S. economy to grow 2.0%2.5% over the next year. However, a continued government shutdown would be a drag on growth. In Latin America, we see growth picking up to 3.0%3.5%, but the outlook varies by country. Mexico should fare well, but Brazils story is more mixed. In Canada, we believe the housing correction will be less severe than many are predicting, and we expect GDP to grow 1.5%2.0% over the cyclical horizon.
Investing In Corporate Bonds: The Compelling Case For Active Management
by Ed Devlin, Michael Kim of PIMCO,
Passive investment returns in the Canadian corporate bond market have been unimpressive because of the way corporate bond indices are constructed and factors unique to the Canadian market. Unconstrained by these limitations, active managers with global reach may provide superior returns. The current environment presents an attractive opportunity for Canadian investors to implement a wide discretion, active approach to managing corporate bonds.
PIMCO Cyclical Outlook for Europe: Near-Term Recovery, Long-Term Risks
by Andrew Balls of PIMCO,
While Europe has emerged out of recession, the relative tightness of monetary policy means the eurozone is still struggling to get back to potential pre-Lehman growth rates. The European Central Bank should be able to maintain stability over the cyclical horizon while policymakers continue to address outstanding issues as they look to build a less vulnerable monetary union. We are selective in our approach to regional credit and remain neutral on the euro, balancing our cyclical outlook with longer-term secular concerns on the eurozone outlook and valuations.
Secular Trends in Asian Credit Markets Shape Long-Term Investment Themes
by Robert Mead, Raja Mukherji of PIMCO,
The next several years will likely see many Asian corporate issuers to come to the market for financing, whether to pursue long-term business plans or to employ traditional corporate finance and leverage strategies. Rigorous credit research, flexible resources, experienced local portfolio management and strong relationships with local stakeholders are all crucial to uncovering attractive opportunities while monitoring volatility in Asias credit markets.
The Euro Tug-of-War
by Thomas Kressin of PIMCO,
Faced with lingering economic stagnation, record unemployment and continued political strife in the region, the common consensus for a depreciation of the euro seems only natural and very much required to counter the weak cyclical position of the eurozone. The rising current account surplus in combination with net long-term capital inflows point to a stronger euro that could stay with us for an extended period; such a development could potentially undermine the fragile social consensus to continue with the necessary structural and fiscal reforms.
U.S. Commercial Real Estate: Will the Good Times Last?
by Devin Chen of PIMCO,
The CRE market has experienced a gradual recovery in asset pricing since the 2008 financial crisis. Despite the duration of the recovery, there continues to be dislocation in the CRE market that astute investors can capitalize on. We believe certain properties in non-major markets look attractive for acquisition, and have been acquiring residential land on an opportunistic basis.
Growth and Rising Stars
by Mark Kiesel of PIMCO,
While developed market growth in several regions is picking up cyclically from low levels, overall global economic growth should remain subdued over the next several years. We believe credit spread tightening and rating upgrades are most likely for specific companies in industries and areas with strong growth. We see these "rising star" companies in the U.S. and European auto sector, the gaming, energy and chemical industries and in sectors tied to the U.S. housing market.
A Fine Balance in the Global Profits Cycle
by Saumil Parikh of PIMCO,
In the U.S., we expect growth to accelerate over the cyclical horizon, but to disappoint elevated consensus expectations. In Europe, we also expect growth to accelerate, but just barely, and also below consensus. In Japan, we expect growth to remain heavily reliant on aggressive fiscal and monetary policies. And in emerging markets, we expect a stabilization in growth assisted by central banks regaining control of currency and financial market conditions. The outlook for global corporate profits is a key measure of success in determining the handoff to self-sustaining growth going forward.
Is the Commodity Supercycle Dead?
While commodity price appreciation wont likely mirror the supercycle, this shouldnt necessarily imply a negative view on commodity returns going forward. We believe commodity prices are at reasonable levels from a long-term valuation perspective. In addition, the roll yield from investing in commodities is the highest its been since 2005. The outlook for commodity returns today seems broadly consistent with historical returns, and commodities remain an important tool for hedging inflation risk.
What's Happening to Bonds and Why?
by Mohamed El-Erian of PIMCO,
To say that bonds are under pressure would be an understatement. Over the last few months, sentiment about fixed income has flipped dramatically: from a favored investment destination that is deemed to benefit from exceptional support from central banks, to an asset class experiencing large outflows, negative returns and reduced standing as an anchor of a well-diversified asset allocation.
Seventh Inning Stretch
by William Gross of PIMCO,
They say that reality is whatever you wish it to be and I suppose that could be true. Just wish it, as Jiminy Cricket used to say, and it will come true. Realitys relativity came to mind the other day as I was opening a box of Cracker Jacks for an afternoon snack. Thats right I said Cracker Jacks! I cant count the number of people who have told me during the seventh inning stretch at a baseball game to make sure I sing Cracker Jack (without the S) because thats what the song says. I care not. No one ever says buy me some potato chip or some pea
Policy Uncertainty on the Rise
Congress seems to be digging in and ramping up the rhetoric in advance of a possible government shutdown, a debt ceiling increase and a probable selection of a new Fed chair. We think it is likely policymakers will agree to a short-term deal to fund the government and avert a shutdown, and also cobble together a resolution on the debt ceiling, although neither is likely until the last minute. The Fed chair debate will likely continue to sway markets over the next few months, leading to greater uncertainty and greater market volatility.
Results 1,101–1,150
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