- Many powerful forces are driving markets and asset prices; chief among them are global monetary policy, technicals and fundamentals.
- We use rigorous top-down and bottom-up analysis to identify the best sectors and companies around the world.
- We see opportunities in the U.S. (cyclical consumer and housing sectors), Europe (equities, bank capital securities, high yield bonds and corporate hybrids), China (property, technology and Macau) and Japan (cyclical industries, exporters and financials).
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 …
Staying fit
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.
Technicals
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.
continue reading: http://www.pimco.com/EN/Insights/Pages/Fit-and-Focused.aspx?utm_source=subscription_email&utm_medium=email&utm_campaign=website_subscription_email
