View from the Investment Committee

Reason for Optimism

Even though markets remain fragile, Group CIO Dan Ivascyn explains why PIMCO has become more optimistic on the base case view for recovery and risk assets – and why we think private credit is a powerful opportunity.

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Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: David Fisher, Head of Traditional Product Strategies

David Fisher: Hi, I'm David Fisher and I'm here once again with PIMCO Group CIO Dan Ivascyn to talk about some of the recent conversations taking place in PIMCO's investment committee or IC, and in particularly, how the IC is thinking about managing portfolios in this volatile economic environment. Thanks for joining us, Dan.

Dan Ivascyn: Thanks, David.

David Fisher: So starting with the U. S. political situation, we've seen a lot of volatility in the lead up to the election. More recently, markets have been upbeat about the possibility of a Biden presidency combined with a more divided Congress. The idea, I think, being that even if fiscal expansion may be a little bit more limited, there still should be some fiscal support as well as ongoing monetary support and perhaps less likelihood of significant reregulation or significantly higher taxes.

So how is the IC thinking about the path for both interest rates and credit spreads, given this political backdrop?

Text on screen: Daniel J Ivascyn, Group Chief Investment Officer

Dan Ivascyn: If in fact, the Republicans maintain a control of the Senate that will be a fairly moderate outcome close to the status quo. And markets typically like that. When we look at scenarios over the next several years, particularly for inflation and by extension interest rates, we do think that some of the tail type scenarios that would have caused us more concern if you had full Democratic control of Congress and the presidency are likely materially lower probability events now. Put another way, we think that inflation is going to remain relatively well contained, likely over the next few years.

Text on screen: Interest rates should remain range bound amid less aggressive fiscal policy.
Image of US Capitol building

Therefore, interest rates will be able to be more range bound, at least from a longer term perspective. And when you think about policy more broadly, in the absence of very, very aggressive fiscal stimulus, central banks are likely going to have to at least attempt to do more over this full cycle than they would have done otherwise.

We think that that bodes reasonably well for credit spreads as well, at least in the base case. I think the one negative aspect of this political set up, again if it ultimately comes to fruition, is the fact that there may be times when economies and markets face an unanticipated negative shock where it's going to be harder to get fiscal policy online.

Images of U.S. Federal Building, central banks

We saw with the COVID situation back in March a very, very powerful and coordinated response between central banks and fiscal agents. In a world with more extreme political gridlock, even outright dysfunction, is at least the risk that with central banks being less effective than they've been in the past, that markets may need fiscal and it may be more difficult for it to arrive this time versus what we saw during the March period. We've talked a lot about this.

Text on screen: Cautiously optimistic towards risk assets in a fragile market climate.

Image of trade floor.

So even though our base case views are cautiously optimistic towards other performance of risk assets, this political set up likely leads to even greater fragility, particularly fragility that could be exposed during unanticipated negative market shocks.

David Fisher: Great, and you mentioned COVID the pandemic which is, of course, the other big risk issue out there. We've seen a rise in cases in many parts of the world recently, however, even more recently, we've seen positive news on the vaccine front. So how does this inform IC discussions, particularly as it relates to risk assets, credit spreads?

Dan Ivascyn: This COVID situation is likely going to be particularly challenging for markets. You have a situation where cases are rising quite rapidly. Even over the course of the last few weeks here across this country across, parts of Europe, and we think that's going to lead to a pretty significant short term stress, even potentially coinciding with significant lockdowns of key elements of the economy again. But we are at PIMCO constructive on the vaccines coming online and being more effective than the market currently anticipates.

We actually think the distribution of those vaccines can be more efficient, quicker than the market currently anticipates. We also think they're going to be additional therapeutics that come online, significantly reducing the impact to those that contract the virus. And there very well may be meaningful reduction in the virus’ impact on economies as soon as late this year, early next year. And that could set us up for a pretty significant recovery into next year.

Text on screen: Traction against virus could lead to a significant recovery, including hard-hit sectors.

Images of commercial real estate, leisure and retail.

Any type of meaningful traction regarding the virus could lead to a pretty significant support for equity markets. The credit markets again, particularly the areas of the credit markets most negatively impacted by the virus thus far, areas of the commercial real estate space, the hospitality sector, leisure sectors, retail sectors. So this type of recovery could also coincide with a pretty significant rotation across sectors in both the fixed income and the equity markets as well. Then, I think it's important also to make a comment on interest rates.

I started by saying that we expect rates to be relatively range bound over the intermediate to longer term. Any type of accelerated recovery associated with better outcomes for COVID will likely create some upside pressure for yields.

But we just don't see yields rising much more than a quarter of a percentage point or so, using the 10 year as an example, maybe a bit higher than that. I think it's just important to note that although you may have a short term period of weakness, we don't expect the type of multi-year weakness in interest rates that at least a few market participants are suggesting.

David Fisher: Great. So we've had a lot of client questions about specific sectors of the markets. So I thought we could do a little bit of a lightning round to talk about views on some of these sectors. So starting a little bit more broadly, high yield. What are your thoughts?

Text on screen: Title: Sector views; bullet: cautious on high yield

Dan Ivascyn: Cautious. High yield beta has performed very, very well since the March period. Certainly we could see some further spread tightening. But even in a V shape type recovery for the economy, there is still going to be significant pain and when companies do get into trouble into distress, investors have to be cautious about much lower recoveries than we've seen in the past. So, that's an area where we are much more selective, much more cautious than we were a few months ago.

David Fisher: Great, how about Asia Fixed income?

Dan Ivascyn: Asia fixed income’s a critically important area for us strategically. Again, Asia fixed income will be much more closely tied to China. China's economic growth, China policy.

Text on screen: Title: Sector views; bullet: cautious on high yield, selectively constructive on Asia fixed income

I think it's going to be an important area for investors to think about return in a world where return expectations have to come down quite a bit, so at least over the intermediate to longer term, quite constructive on that area. But again, you want to be careful and selective given the short term economic uncertainty that we face.

David Fisher: How about European assets, particularly in light of Brexit?

Dan Ivascyn: We expect there's going to be continued volatility associated with Brexit, there’s going to be continued volatility associated with regulation and other economic uncertainty across Europe.

Text on screen: Title: Sector views; bullet: cautious on high yield, selectively constructive on Asia fixed income, continue to favor European banks

So you want to be careful there in terms of the more generic areas of the market.

We still like the banks, in the context of more traditional mandates.

With this COVID situation leading to increased debt issuance across European credits and other areas that market we do expect in the coming years another round of bank dispositions again with the goal of getting their balance sheet in order. Not all those types of investments are appropriate for traditional mutual funds, but in more alternative oriented mandates, mandates where you can afford to give up liquidity, we expect there's going to be some really attractive opportunities across Europe tied to non-performing loans, re performing loans and other related investments.

But again, you got to make sure that you have the right vehicle in order to implement those types of strategies.

David Fisher: And last one. Private credit versus public credit.

Text on screen: Title: Sector views; bullet: cautious on high yield, selective on Asia fixed income, continue to favor European banks, private credit a high conviction area

Dan Ivascyn: Private credit looks phenomenally attractive on a relative basis. This won't always be the case. But you had a situation in markets where central banks have used fairly crude tools simply because they're the only tools that they have to support the most liquid, most traditional areas of the market.

A good example is the corporate credit space where the Fed's been in buying on a targeted basis, mostly larger cap more traditional names.

A lot of that liquidity hasn't found its way into the private areas of the corporate markets, the private areas of the real estate markets. So for the time being, the valuations look incredibly attractive and in a world with very, very low prospects for yield. If you could get paid by relative illiquidity, complexity instead of simply needing to take on more raw equity or credit beta, I think that's one of the most powerful value propositions out there in the market today.

And this is true about the U. S., Europe, even Asia and again, is one of, if not the highest conviction opportunity that we see at the moment here at PIMCO.

David Fisher: Great. Well, thanks for all that, Dan. On thanks to all of you for joining us. We will see you next time.

Text on screen: For more insights and information please visit

Text on screen: PIMCO


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