Investors would be making a mistake if they map the ongoing commodity weakness into a general global slowdown which would impact the US as well, said Scott Mather, CIO at PIMCO.
Investors should not forget the reduction in commodity prices is a good thing for US growth and most developed world consumer of commodities. So if anything, it’s a boost in growth. The drop in interest rates partially offsets some of the strengthening in the dollar.
So, people shouldn’t become too gloomy about global growth at this point as much of the downturn is a thing of the past, and it won’t be a surprise to see the impact six months hence as easy monetary policy is really beginning to lift growth globally. Investors should be careful in misinterpreting the drop in commodity prices as it has a lot to do with a supply glut rather than a fall-off in demand, he noted.
Asked if he’s more optimistic about global growth compared to others, Scott answered in the affirmative. Investors are likely to witness the biggest spike in energy demand this year compared to the last five years. Markets are witnessing a temporary phenomenon of supply overwhelming demand. But, within a couple of quarters, that’s likely to reverse. The energy supply glut is really putting pressure on other commodities, but it’s not really telling much about the global growth picture, he argued.
Asked to comment on the present elevated market volatility, Scott said going forward the market is likely to witness many episodes during the first or second tightening where the VIX (volatility index) is above 20. Investors should ensure they are not fully extended out in the risk spectrum in whatever they are doing, whether they are in equity markets or credit markets. There’s going to be many more opportunities to add risk at favorable prices in the quarters ahead.
The other thing investors should do is to look for the defensive aspects of their portfolio; if they are bond investors, it means they need to ensure they are invested in high quality securities to a significant extent.
It can be reasonably inferred that the markets are nowhere near the end of the turmoil that’s going to impact the high-yield market and the energy-sector in particular. Investors need to watch carefully what they hold and make sure they buy the highest-quality at this point in time, he observed.
Asked if the 10-year US Treasuries are likely to appreciate higher from here, Scott answered in negative. The 10-year in the longer end of the yield curve is probably most impacted by this near term fear of deflation, which PIMCO thinks is a little bit myopic. As it becomes clear the US economy is not going to materially slow from these global developments, PIMCO believes the 10-year yield begins to go back to the mid 2 percent as a normal range amid the developments underway, he concluded.
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