The lack of attractive sovereign opportunities is throwing up great potential for investors willing to stomach risk in credit markets, according to Citywire AAA-rated Mark Kiesel.
Speaking to our sister site, Citywire Selector, Kiesel, who is CIO for global credit at the US group, revealed the three major themes which are currently sitting at the heart of his $19.3 billion Pimco GIS Global Investment Grade Credit fund.
#1 Safe as houses
While central banks are trying to shore up the foundations for developed world economies, Kiesel believes the ‘bizarre’ negative yield environment means non-sovereign investments are increasingly attractive.
On the hunt for selective value, Kiesel is eyeing housing related investments. ‘We are still very constructive on non-agency and housing, which is one of our highest conviction ideas,’ he said.
‘In the US, inventories are near 25 year lows, home ownership is also near 25 year lows and basically we have just been chronically under-building versus long-term demand. We are simply not building enough houses. It's simply supply and demand.
‘We are looking for where we can find the most supportive bottom-up, fundamental interesting opportunities and housing is at the top of our list. We are investing in home builders, home improvement companies, timber companies – so literally the whole supply chain around housing looks good.’
#2 Eyes on the EMs
With 11% of the Investment Credit fund exposed to emerging markets, Kiesel believes there is attractive longer-term potential here. This saw him move from a modest overweight in mid-2016 to a much more sizable position this year.
Focusing on idiosyncratic risk, Kiesel said he is drawn to countries with high interest rates and diversification benefits, but without the likelihood of unmanageable structural problems.
‘The one country that has come up over the last year and continues to meet that characteristic is Brazil. All of these developed markets have these central banks constantly trying to accommodate markets and get inflation rates higher.
‘Brazilian inflation has gone from 9-10% to 4-5% as they went through the worst recession they have had in 50 years. The economy has collapsed and that has allowed the central bank to lower interest rates.’
Kiesel has played this by owning local rates in Brazil, as well as the Brazilian real, and also by taking some credit risk in Brazil. ‘We have also done that through the sovereign by selling protection on the CDS and we have also done that by owning companies. We have found quite a lot of value across the Brazil complex,’ he said.
Similarly, Kiesel said Mexico has outperformed after being unfairly hampered by President Trump’s campaign rhetoric.
‘People were so worried about the wall that risk premium blew out to levels we thought weren’t warranted. We bought the other side by going long the Mexican peso.'
#3 Betting on banks
Among the more established themes in the fund, subordinated and higher quality bank credit have been a part of Kiesel's portfolio for a number of years. Bank debt as a whole accounts for 19.6% of exposure.
However, over the past year, Kiesel and his team have rotated away from its strong US emphasis to capture opportunities in Europe and the UK.
‘There were two catalysts for this. One was Brexit, where the UK banks' spreads really got crushed. Pimco took the other side of that because we did a lot of fundamental work because we thought it was an elevated risk premia.
‘A lot of people were so worried about Brexit that they sold first and asked questions later and that created a lot of value. We did some reverse inquiries with some banks in Europe and we tried to capture this risk premium.
‘We started in the US with large overweights, then last year we added Europe and the UK and, while we are still overweight, two years ago 80% of the entire position would be in the US. It has been a huge team effort and a lot of looking out one, two, three years and seeing where the situation will change.’
The Pimco GIS Global Investment Grade Credit fund returned 12.3% in US dollar terms over the three years to the end of July 2017. This compares to an 11.8% rise by its Citywire-assigned benchmark, the Bloomberg Barclays Global Aggregate Credit TR USDH, over the same period.