With volatility increasing in late cycle, we are likely to see more and more of these idiosyncratic opportunities arise from time to time.
Here we would like to highlight three because they unduly suffered during the latest episode of volatility.
The first one is MLPs, midstream energy sector in the U.S. - think storage and pipelines. The U.S. is playing an increasingly important role in addressing energy needs globally via the oil sector, natural gas, and liquefied gas, and the midstream sector is likely to see good growth and is a cornerstone to this development.
Further, it is a sector that has deleveraged in the last few years, and yet still trade at a deep discount to its historical valuation. Therefore, with a dividend yield approaching eight percent, we're seeing it's an attractive asset to add to a multi-asset portfolio.
The second one are UK banks. UK bank spreads have widened significantly due to fears of a no-deal Brexit; however, PIMCO assigns a relatively low probability to such an outcome, and we also notice that the capital situation of most UK bank has improved significantly in the last few years.
Last but not least, we also know thanks to the stress test of the Bank of England that the resiliency of this bank to an economic downturn is good.
Lastly, we would like to highlight dollar denominated bonds of large Chinese property developer. These are bonds whose spreads has widened between 250 to 300 basis point last year due to fears of a deep economic slowdown in China.
Since then the Chinese government has come with a number of policies of cutting interest rates, giving access to mortgages, and also onshore financing to those bank, as well as a fiscal stimulus. Therefore we feel that those bonds in the low double B's and high single B with a yield of seven to nine percent in U.S. dollars offers relatively attractive returns.
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Investing in MLPs involves risks that differ from equities, including limited control and limited rights to vote on matters affecting the partnership. MLPs are a partnership organised in the US and are subject to certain tax risks. Conflicts of interest may arise amongst common unit holders, subordinated unit holders and the general partner or managing member. MLPs may be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer’s financial condition, or unfavorable or unanticipated poor performance of a particular issuer. MLP cash distributions are not guaranteed and depend on each partnership’s ability to generate adequate cash flow. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively. Diversification does not ensure against loss.
There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.