Olivia Albrecht, Senior Vice President:Hi. I’m Olivia Albrecht, and I’m joined by my colleagues, Joachim Fels and Scott Mather, to discuss PIMCO’s cyclical outlook. Scott, could you help us understand what you’re thinking about, in terms of portfolio construction today?
Scott Mather, CIO U.S. Core Strategies:Certainly one theme we’ve been stressing is this defensiveness or resiliency into an environment that’s very different for financial asset prices than it was several years ago. That continues to be the case in the year ahead. In general, we’ve seen a repricing, a normalization of interest rates in the US.
So, certainly on a fundamental basis, the US stands out as having some value and short, intermediate yields relative to the rest of the world. It’s also the case that we’ve seen a big repricing in terms of lots of spread assets.
So, we still think people should develop a portfolio that can withstand wider spreads, because we’re likely to see that in the year ahead. But at the same time, there is some value in certain sectors and certainly in shorter dated credit, especially with respect to where longer dated credit is.
There’s also value in securitized assets – in mortgages, both the nonagency, as well as the high-quality agency mortgages, which sort of stand out in the world on a fundamental basis, in terms of being attractive. And as I mentioned before, it’s likely that inflation index bonds offer some value, because the markets appear to have priced in this drag from headline inflation persisting for a very long period of time, which it’s unlikely to.
And then lastly, it’s a sort of environment where there will be some opportunities in other spread assets. Emerging markets come to mind. Once again, the theme of defensiveness and resiliency is important because we’re likely to see pressure on emerging markets for a host of reasons as we head into 2019. But there certainly is some overshooting that’s occurred.
So, while we don’t expect big moves in terms of the dollar, to really drive emerging market performance, there will be some local overshoots. And we’re seeing some of that now. So, for instance, in emerging market currencies; it’s one area of value.
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