Global Investment Opportunities: Fit And Focused by PIMCO
We listen to our clients’ input on a wide range of topics – including about our investment commentaries. Some clients have suggested I add a little more color, as when I wrote about my own experiences with the housing market in “For Sale” (2006) and “Back In” (2012). With that in mind…
One of our senior managing directors used to joke that he knew he had influence around here when he was able to have a clock installed in our large conference center in our previous office in Newport Beach. Well, just under a year ago, a few of the firm’s “fitness nuts” were consulted about what time the gym should open in our current building. So, it’s 2 a.m. (And, yes, we do use it that early!)
In fact, we have been focusing on health throughout PIMCO. In addition to the gym, our employee cafeteria now offers more healthy options and, on a personal level, I am working with a nutritionist to customize a diet that promotes maximum energy. I needed to “step up” – I sit next to a fourth- degree black belt and two-time World Cup winner in Karate and am surrounded by several serious athletes and former decathletes. This is PIMCO!
How does health relate to investing? Investing is a marathon, not a sprint. I strongly believe that, as dedicated and focused global investors, we need to stay fit and focused to capitalize on the significant investment opportunities available today.
Early birds get the worm
We also set our alarm clocks early to attend video calls and meetings with our colleagues in North and South America, Asia and Europe to make sure we are capturing all the significant top-down and bottom-up investment opportunities around the world. Here are some of the topics and questions we discuss:
- What are the best investment opportunities in North and South America – particularly in the U.S., given that the Federal Reserve will likely be tightening monetary policy this year?
- Where are the opportunities in Europe given that the European Central Bank’s (ECB) significant quantitative easing (QE) program has begun?
- Are there opportunities in China given the government’s need to rebalance the economy’s growth model and the anti-corruption measures that have slowed growth?
- What are we expecting in terms of future monetary policy in China, and will potential easing from the People’s Bank of China (PBOC) lead to investment opportunities?
- How should investors position themselves to benefit from the Bank of Japan’s (BOJ) aggressive QE program?
Focusing on the big picture
We attempt to answer these questions by summarizing the main top-down macro themes that are driving financial markets. Today, as well as over the past several years, many powerful forces are driving markets and asset prices, but global monetary policy, technicals and fundamentals stand out.
Global monetary policy
Central banks are increasingly going “all-in” to help offset global deflationary pressures, the absence of fiscal policy in most developed markets and weak overall aggregate demand growth. In many developed economies, central banks have been aggressively expanding balance sheets, ramping up QE programs and moving short-term interest rates lower in a “race to zero” (see Figure 1). These policy actions have led to aggressive foreign exchange movements.
Other consequences: Investors all over the world are taking more risk by extending durations, buying longer-maturity bonds they suspect central banks may be buying in the future, and moving into what we call at PIMCO the “outer- perimeter” risk assets, including corporate bonds, high yield bonds, equities and real estate (see Figure 2). Guess what? This investment strategy has been working for years! And, it shouldn’t be surprising because global central banks collectively have reduced left-tail risks by pushing out the next recession and helping to prolong the economic expansion. Investors who have recognized this trend have been rewarded as global central banks, combined with a gradually improving private sector, are pushing up most asset prices. Lower long-term interest rates are also boosting real estate as well as equity prices.
Market technicals are essentially the supply and demand of bonds. Simply put, there is more demand for high-quality income-producing assets than there is supply of those assets. Why? Savings exceeds investment globally. We continue to have a global savings glut and a lack of “animal spirits” for new investment. While the world continues to lack global aggregate demand, central banks are pushing excess savings into outer-perimeter assets by lowering the return on cash and, in fact, now causing safer, shorter-maturity debt and government bond yields to go negative across many areas of Europe and in Japan.
Meanwhile, investors have taken note and many are moving into other areas. Given government-bond market technicals, where some central banks are on track to buy more than the net issuance in some markets, investors are likely to continue to move more assets into stocks and corporate bonds. These global investment flows should support the prices for equities and higher-yielding corporate bonds, particularly in companies that pass our five fundamental screens:
- Strong barriers to entry (see Figure 3)
- Solid cyclical or secular growth
- Pricing power
- Superior assets
- Healthy balance sheets and liquidity
Top down/bottom up
How healthy are countries and companies around the world? It turns out, public and private sector fundamentals vary dramatically. This is why we are constantly focused on coordinating across our global team of 260 portfolio managers and 61 analysts around the world.
Given the continued presence of deflationary forces in some regions, we are increasingly determined to play good defense through discipline in our bottom-up and top-down investment reviews. Risks are increasing over both the cyclical and secular horizons, including the potential for a hawkish surprise with Fed tightening as well as a substantial slowdown in growth in China. In addition, energy and commodity price volatility could have significant consequences for a select group of countries and companies. Finally, many companies today lack strong barriers to entry, solid cyclical or secular growth, pricing power or superior assets.
Fortunately, our active management of these risks could add to our overall alpha generation as we attempt to avoid these companies while focusing our attention on the areas of the world and specific investment opportunities that not only pass our fundamental investment screens, but also offer attractive risk/reward trade-offs (e.g., have favorable downside risk protection).
Global investment opportunities
Given these big-picture themes, where are we finding the most attractive investment opportunities today? Some of the largest factors driving asset prices – global central banks, technicals and fundamentals – remain supportive for credit and equity markets across many regions, and especially so for select companies in the U.S., Europe, China and Japan across many sectors.
The Federal Reserve is likely to begin the first step in removing policy accommodation this summer by raising the fed funds rate off zero. We expect the pace of rate hikes will be gradual due to headwinds from the global economy and a strong dollar. The Fed wants to see more wage inflation as well as continued strong job creation. With support from aggressive monetary policy, the private sector – including consumers, companies and banks – continues to heal and improve.