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View From the Investment Committee

Balancing Investment Ideas for Today Against Opportunities for Tomorrow

Group CIO Dan Ivascyn discusses where we’re seizing opportunity now and where we’re exercising patience.

Text on screen: PIMCO

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Text on screen: Kimberley Stafford, Global Head of Product Strategy

Kim: Hello, I'm Kim Stafford and I'm here again with Group CIO, Dan Ivascyn to give you an inside look at what's happening in recent discussions in PIMCO's Investment Committee or IC. Dan, thanks for joining us today.

Dan: Thanks, Kim.

Kim: One question that we've been getting from clients is whether they should stay in cash, given relatively elevated yields for short dated investments. How do you think about the balance of benefits between cash and bonds in this environment?

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

Dan: So, first of all, investors should have cash and investors should take advantage of the high yields that cash currently provides. So we think that there's a lot of opportunities for clients to target opportunities in the very front end of the yield curve to take advantage of rates that we haven't seen in many, many years.

Text on screen: Cash rates can change quickly

lmages on screen: Retail bank

The difference, though, is that cash rates change and they can change very quickly. People, in fact, in the marketplace anticipate yields on cash investments going down over time. So when you invest in cash, you're not locking in a longer term return.

But when you step back and look at the yields you can get in a two year or a five year or even a ten year type of high quality fixed income investment, they still look attractive from a historical perspective.

Text on screen: Can benefit from price appreciation with bonds

Images on screen: Exterior banks

So the advantage of going from cash into a high quality bond portfolio is you can lock in these attractive yields for multiple years and you can benefit in the form of price appreciation when yields drop. In fact, over the course of the last few months, we have seen a rally and we've seen bond prices go up.

Kim: We've spoken in the past that public markets reprice significantly in 2022, yet we hadn't yet seen this flowing through to private markets at this stage. The stock of private markets probably has more room to reprice, but the flow of new private assets looks more and more attractive. So how do you think about that dynamic today?

Dan: I think that's right. So the first point, when you look at what's being priced into public markets, whether you're looking at individual bonds or other proxies for the future direction of private prices like real estate investment trusts, business development companies and similar products, you still see a significant gap. So when thinking about putting a unit of risk to work today in the marketplace,

Images on screen: Stock market ticker

the public markets still look like they have a significant valuation advantage.

But as you just hinted at, that's beginning to change. We're seeing a significant pipeline of activity on the private side at much more realistic prices. And we think an ongoing theme over the course of the next several quarters will be this gradual adjustment or convergence between the pricing of private assets and public assets. This cycle is likely to be accelerated at this point in time, given the challenges we're seeing with the regional banks.

Bottom line, you know, good value today in the public space. We're setting ourselves up for attractive opportunities within the

Images on screen: Exterior office buildings

private opportunity set. That includes both corporate credit risk as well as opportunities within the commercial real estate space.      

Kim: Great. We've also been getting questions about PIMCO's views about the investment opportunities both in the U.S. and abroad. So can you share your global views on developed and emerging markets?

Dan: We have a slight preference at the moment for developed market risk, given what we talked about earlier, that there's been so much repricing in the higher quality, more certain end of the fixed income or overall investment opportunity set.

Images on screen: China, India, Brazil

But emerging markets also have a lot of attractive attributes as well. A lot of emerging market nations this cycle have gotten well ahead of inflation relative to developed markets central banks. Within the higher quality areas of the emerging markets where you have had

Images on screen: Emerging market Central Banks

active central bank policy to combat inflation and we’re you have more resiliency in terms of higher rated overall fundamentals, that area of the opportunity set will be more volatile, will be a bit more economically sensitive. So we would express some caution as to what you target.

But in the investment grade rated segments, particularly countries that have gotten ahead of the inflationary situation,

Images on screen: Brazil

Brazil comes to mind. Even in Mexico. We do think that there's pretty good value both in local rate markets, currency markets and even on the external credit side.

Over a multi-year period, we do think we perhaps are at a turning point where non-U.S. investments begin to outperform their U.S. dollar alternatives.

Kim: We've discussed in the past our cautious stance on corporate credit, particularly the lower rated areas of the market. What is our current view on corporate credit markets today?

Dan: A couple of things. One, the recent volatility in spreads has allowed for us to be tactical in some of the higher quality areas of the market. So we've been much more active in the investment grade space. Even the higher quality ends of the high yield opportunity set over the last several weeks, just being more tactical, responding to what's been a pretty volatile market.

We remain, though, much more cautious on the areas of the credit opportunity set that are most exposed to the

Images on screen: The Federal Reserve building

central bank tightening that we've seen thus far. One obvious area that jumps out to us is the floating rate segments of the corporate credit universe. That's primarily the senior secured bank loan space.

All of this tightening that's occurred thus far is going to continue to have an impact over the coming quarters for these types of companies.

And that's going to lead to some downgrade pressure or outright pressure to restructure debt as the cycle progresses. Similar mindset towards private corporate credit, which we know is much more sticky in terms of how it's marked in the current environment.

This is a process that will move quite slowly but are going to present attractive opportunities for new capital. And we think investors should be cautious on allocating risk or holding that risk in more traditional mandates, because we do think there's significant downgrade pressure to come.

Kim: In our cyclical outlook. We talked about how it's likely going to be easier for the Fed to reduce inflation from 8% to 4%, but likely harder to get it from 4% to 2%. So as we think about the Fed's fight against inflation, what are the investment implications that you're considering and what assets should investors consider to safeguard them against inflation remaining more sticky?

Dan: The bottom line is inflation is going to continue to be a source of longer term uncertainty. Inflation or sustained inflation can have a significant negative impact on financial assets if it lingers too long.

So we do think in the context of an overall diversified portfolio, it makes sense to go out and source inflation protection either in the fixed income markets and various government inflation protected bond markets, or if you have an expanded mandate, a lot of

Images on screen: Oil rig, corn harvesting, mining machinery

interesting things to do within the commodity space as well.

This very well may be an attractive entry point in some of those segments of the opportunity set as well.

Kim: The market has been focused on the recent volatility that we've seen. But what are the broader macro takeaways?

Dan: Well, that's right. It's been all about the banks, European banks, U.S. regional banks, and in some sense they've really stolen the headlines. While, in fact, we have a highly differentiated global growth environment, highly differentiated global financial market environment.

Images on screen: China

For example, China is at a very different stage of their cycle. They're not facing an inflation problem like much of the rest of the world. In fact, they're seeing a pretty significant post-COVID growth acceleration while other policymakers around the globe are trying to slow their economies down.

Text on screen: TITLE – Key takeaways: BULLETS – More macroeconomic uncertainty, Less synchronized growth and financial cycles, Less correlated global markets 

More macro uncertainty, less synchronized growth cycles, less synchronized financial cycles, less correlated global markets. And this can create tremendous opportunity for investors.

It's an environment that favors global opportunity sets, very flexible mandates because there's going to be a lot of volatility, therefore a lot of opportunity for active management.

Kim: Great. Well, thank you very much, Dan, and thank you to all of you for joining us. We'll see you next time.

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