FURTHER INSIGHTS
What are your views on interest rates and inflation in the UK? What about in the US?
Inflation has remained sticky in the UK and the US, and we believe that we won’t get to central bank targets this year. With elevated inflation and underlying growth momentum looking resilient, we believe that the Bank of England is likely to hike rates further and keep its options open by highlighting data dependency and signalling that more hikes may be required if inflation remains high. In the U.S., we believe that recent banking turmoil has increased the likelihood that the Fed is already finished hiking. The Fed we believe will now look to pause and any rate cuts will likely require inflation to decline further, so investors should not expect a quick pivot.
You can watch the interview here or read PIMCO's views below.
It’s been another year of black swan events and violent market moves with inflation and interest rates affecting market conditions in the UK and US. With fears of a recession on the horizon many investors are wondering how to adapt their portfolios and diversify their returns.
Terry Oh, Head of Global Wealth Management, UK & MEA asks Anna Dragesic, Head of Global Credit Product Strategies at PIMCO to explain why bonds are back and the opportunities for investors in going global in credit markets.
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Credit and Default Risk
A decline in the financial health of an issuer of a fixed income security can lead to an inability or unwillingness to repay a loan or meet a contractual obligation. This could cause the value of its bonds to fall or become worthless. Funds with high exposures to non-investment grade securities have a higher exposure to this risk.
Currency Risk
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Derivatives and Counterparty Risk
The use of certain derivatives could result in the fund having a greater or more volatile exposure to the underlying assets and an increased exposure to counterparty risk. This may expose the fund to larger gains or losses associated with market movements or in relation to a trade counterparty being unable to meet its obligations.
Emerging Markets Risk
Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk. Investments in these markets may expose the fund to larger gains or losses.
Liquidity Risk
Difficult market conditions could result in certain securities becoming hard to sell at a desired time and price.
Interest Rate Risk
Changes in interest rates will usually result in the values of bond and other debt instruments moving in the opposite direction (e.g. a rise in interest rates likely leads to fall in bond prices).
Mortgage Related and Other Asset Backed Securities Risks
Mortgage or asset backed securities are subject to similar risks as other fixed income securities, and may also be subject to prepayment risk and higher levels of credit and liquidity risk.
The global advantage: investing in credit opportunities
Anna Dragesic and Terry Oh discuss how investors should adapt their portfolios amid a looming recession
How attractive are corporate bonds vs. equities today?
Bonds are back and look much more attractive compared to equities. At current yield levels, bonds can provide an attractive balance between income generation and cushion against downside economic risks. Uncertain environments tend to be good for bonds, and we believe bonds are poised to exhibit more of their traditional qualities of diversification and capital preservation, with the potential for upside price performance in the event of further economic deterioration. Our outlook calls for staying up in quality, such as investing in investment grade credit. The yield for investment grade credit is now near the highest level since the global financial crisis.
Why should investors go global for credit?
Learn more about PIMCO
Will there be a recession? Does that matter for investors?
We do see a recession as likely. The significant tightening of credit conditions from bank failures increases the risk of a sooner and deeper recession. Historically, recession and unemployment increases have tended to begin around 2 to 2.5 years after the start of a hiking cycle. The current cycle appears to be evolving broadly in line with this historical timeline. As a result, in this current environment, investors should be careful in overall risk taking; prioritising liquidity, staying up in quality and preserving some dry powder.
How does PIMCO’s GIS Global Investment Grade Credit Fund harness global opportunities today, especially given dislocated markets?
PIMCO’s Global Investment Grade Credit Fund invests across the global credit market benefitting from over 80 credit analysts located across the globe who meet with management teams and conduct independent analysis to come up with proprietary credit ratings and determine relative value views. Currently we are taking advantage of the bottom-up ideas to emphasise ‘bend-but-don’t-break’ positions such as secured debt of US airlines, senior bonds from European and UK banks, UK supermarket bonds backed by real estate assets and also Asian gaming bonds which are benefiting from China re-opening. As you can see we are really targeting to uncover value all over the globe.
What is PIMCO’s philosophy in credit investing?
PIMCO’s credit philosophy is based on three principles: be active, take a longer-term view and be diversified. Overall, our edge is our large size as it gives us unparalleled macroeconomic resources to deliver differentiated views versus bottom-up only managers. We also have a large credit team to provide global coverage and independent credit ratings amidst a growing universe of companies have the ability to do reverse inquiries. Ultimately, we believe our large scale and consequently greater access to issuers is fundamental to our ability to aim to generate consistent long term outperformance.
Investors should go global to benefit from the larger opportunity set. The global credit market is around GBP 12 trillion compared to only GBP 550 bn for the sterling credit market and with more choices active managers like PIMCO can find more high conviction ideas. Also, there are certain sectors that are less prevalent if you are just focus on sterling credit markets and so you miss out on investing in pipelines or technology. Sterling credit portfolios are also less liquid, translating into higher transaction costs.
“Investors should go global to benefit from the larger opportunity set”
Anna Dragesic, Head of Global Credit Product Strategies, PIMCO
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Anna Dragesic, Head of Global Credit Product Strategies, PIMCO
“Investors should be careful in overall risk taking; prioritising liquidity, staying up in quality and preserving some dry powder”
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