Emerging markets, meanwhile, will likely continue to drive global growth in the coming years, as Mike Gomez has described. This means that EM countries present attractive investment opportunities amid rising credit ratings, appreciating currencies, and considerable foreign reserves.
Focus on Central Banks
Since the last Cyclical Forum, the Federal Reserve continued on a particularly aggressive rate-cutting path. Like all central banks, the Fed tries to avoid appearing to be influenced by financial markets. But as Paul McCulley and Ramin Toloui point out, the Fed is finding that financial markets are a key input to policy decisions, since they can influence the ”neutral” rate that guides Fed policy.
The Bank of England, meanwhile, is likely to continue cutting rates, Bradshaw says, given the severe tightening of lending conditions there. But a key debate for Cyclical Forum participants will be whether the European Central Bank (ECB), which has not cut rates yet, will proactively start cutting rates this year. Inflation in the eurozone has been elevated, but as Matthieu Louanges points out, headline inflation is at the same level it was when the ECB embarked on its last cutting cycle in May 2001.
In Japan, meanwhile, the prospect for slower growth has stopped the Bank of Japan’s efforts to raise interest rates, and it will likely stay on hold over the cyclical horizon. Still, with the Japanese yield curve particularly steep, Forum participants are likely to address investment opportunities in Japan’s markets.
Investment Implications
The Forum will also involve talk about where PIMCO professionals see compelling value in financial markets over the next six to 12 months. The broad repricing of risk in many of the world’s markets has raised opportunities where a lack of liquidity, distressed selling, or a glut of supply is causing investments to be attractively priced relative to risk. Mark Kiesel has noted that PIMCO, with its close eye on fundamentals, technicals, and valuations, continues to find selective opportunities, particularly in financial sector debt. Cyrille Conseil and Axel Potthof have also pointed out opportunities in the global bank loan market.
Subprime mortgages may have been the central factor in the start of the credit crunch, but nearly all mortgages have been affected. Even high-quality Agency mortgage-backed securities (MBS) are yielding more relative to Treasuries than they have in over 20 years, Scott Simon recently pointed out. While this may be due to bad news from Fannie Mae and Freddie Mac on credit losses and capital positions, PIMCO has not been concerned with their ability to guarantee MBS. This has presented a historic opportunity to invest in Agency MBS, Simon asserts, because of their attractive returns relative to Treasuries and their continuing low-risk stature.
Even in areas historically seen as low-risk, selectivity has become key. “Before the summer of 2007, most cash investors felt little need to ask questions about the specific holdings within their money market and cash investments,” said Paul Reisz recently. But in recent months, some enhanced cash strategies experienced significant volatility, and even declines in value, due to imprudent risk taking. PIMCO’s process, meanwhile, emphasises risk management and has avoided many of the securities that have hurt other enhanced cash managers.
For Cyclical Forum recaps and discussions, please check back on www.pimco.com in March and April.