Credit may not be hitting the heights of earlier in the year but investors cannot afford to overlook it amid low-yielding government bonds.
That is according to Pimco’s Mark Kiesel, who Citywire AA-rated and global chief investment officer for credit at the US investment house.
In a recent market outlook, Kiesel said, despite spreads on US corporate bonds being lower than earlier in the year, yields and potential returns are making the sector an attractive way for many investors to seek yield and income.
‘After this year’s rally, credit remains one of the more appealing sources of income in financial markets,' he said.
‘We believe investors can still seek potential returns of 3-6% in the credit markets by investing in investment grade and high yield corporate bonds, bank loans, emerging markets and non-agency mortgages.’
Kiesel, who runs several funds at Pimco including the PIMCO Investment Grade Corporate Bond and PIMCO Credit Absolute Return funds, said the levels credit is at is especially attractive as an alternative to high concentrations in government bonds.
‘The technical demand for higher quality credit may increase given the decline in government bond yields this year, while fundamentals and valuations also remain supportive, especially for US focused companies with growth potential and the ability to raise prices.’
Pricing power is key
Kiesel said finding attractive companies able to raise prices on goods and services is key to delivering a more positive growth trend.
‘Finding trends in the industries where prices are rising can provide meaningful insight, pricing power is key to a company’s financial flexibility, which is a relevant consideration when investing across capital structure.’
‘The dispersion in pricing-power trends creates opportunities for active management - essentially choosing companies in sectors that are growing, raising prices and acting in bondholders’ interest, and actively avoiding other sectors.’
Kiesel said one way of identifying and confirming pricing power is to observe recent trends in the US consumer price index (CPI), excluding food and energy.
‘Based on CPI pricing-power trends we see today, we are favoring healthcare, building materials and companies that are benefiting from strong demand tied to US housing activity.’
‘In healthcare, we are seeing investment opportunity in hospitals, select pharmaceutical companies and medical device makers.’
These companies can be shielded a bit from competition due to patents and operating licenses, and maintain market share in an industry that’s benefiting from demographic demand trends, Kiesel added.
EM on the radar
Kiesel said, despite the pressure on global banks this year, US, UK and European bank bonds are looking attractive and emerging markets are delivering more opportunities.
‘Countries like Brazil, Mexico and Russia look attractive at current valuations as commodity prices have stabilized and the outlook for China is one of muddle-through rather than a hard landing.’
‘In the commodity sector, pipelines are attractive at current valuations, but we remain cautious on many industrial metal companies.’
Emerging markets have rallied this year, and the asset class can be susceptible to bouts of global risk aversion as well as idiosyncratic developments, added Kiesel.