A key architect of the compulsory retirement savings system lauds its many achievements, stretching from the national economy to the individual. Where it’s double faulting is in serving members – and it needs to be addressed promptly.
With performance and diversification driving demand, these funds are expected to experience four-fold global growth over the next decade to nearly $AU65 trillion.
… as PIMCO re-assesses macro trends for credit markets
PIMCO, the big US-based global bond manager, is de-risking its credit portfolios following a re-assessment of potential macro-economic trends ahead of the inauguration of Donald Trump as president later this month.
In a research note written by Mark Kiesel, PIMCO’s CIO for global credit, the manager says that the potential for both left tail (higher risk) and right tail (opportunity) outcomes has increased given developments including the Trump election but also the growing realisation that monetary policy is not working to stimulate developed markets.
Kiesel says the main left-tail scenario involves the risks of trade restrictions and protectionism, anti-immigration policies, dollar strength and an escalation of geopolitical conflicts. The right-tail scenario centres on upside potential from faster global growth driven by higher government spending, lower taxes and deregulation.
He says: “With equity and credit markets pricing in mostly right-tail outcomes, we have been de-risking portfolios broadly across the credit markets. Given the degree of uncertainty, active investors should be in an excellent position to capitalize on market dislocations in 2017.”
PIMCO recommends investors increase their cash exposures and go up in quality in their credit portfolios.
Kiesel says “Left-tail risks are increasing and there is growing risk that the US economy could overheat under Trump’s policies, leading to more aggressive interest rate increases by the Federal Reserve over the next year. Simply put, the probability of US recession over our cyclical horizon has moderately increased while valuations in many areas of the credit market have become less attractive…
“Compared with about a year ago, when PIMCO increased credit risk, we are taking less overall credit and ‘spread risk’ and have been shifting our portfolios into areas of the credit market where we see the most favorable risk/reward. This shift, while subtle, underscores our views on credit sectors positioned to withstand the potential changes and uncertainties in the market outlook.”
The four main areas the manager sees opportunities are in
- higher quality corporate bonds
- bank capital/specialty finance
- non-agency mortgages, and
- agency mortgages.
