00:00Let's start off with the international business and the build out that we've seen PIMCO do there.
00:05And I am curious as to what clients outside of the U.S. are actually looking for when it comes
00:10to investment opportunities. And does that differ much from what you're seeing here in the United
00:14States? Yeah. Well, first of all, you're right. We've been building out that business and it's
00:18been quite successful. The high quality fixed income notion of PIMCO really resonates around
00:25the world as it does in the U.S. It resonates around the world. Same kind of questions. There's
00:29a demand for income. There's a demand for something that different in the portfolio as equities do so
00:34well. How do you diversify away from equity? So in some ways it's very similar. Now, also what we see
00:40is an ask for something other than just the U.S. What else is there? Global fixed income, emerging
00:48markets, also alternatives in outside of the United States jurisdictions is another area,
00:54real estate infrastructure, et cetera. So there really is this this ask of what more can we
00:59do than the U.S., especially because as U.S. equities do better and better and better,
01:03it just means that your portfolio is more and more exposed to the U.S., which last year was a
01:09bit of
01:09an issue. If you if you're not denominated in dollars, if your home currency is not dollars,
01:13it's euros, it's yen, it's something else. Yeah. And you saw the dollar depreciate as much as it was.
01:17It was a it was a rude awakening. And so now there's a lot more of an ask for how
01:22do we diversify away
01:23from the U.S. When we talk about that geographic diversification, though, is that a long term
01:28structural shift or do you think that maybe the pendulum swings back, assuming, you know,
01:33the political situation you're even. Well, I mean, we're you know, we're not calling for the end of
01:37the dollar or anything like that. No, that's it's not that. But no, there is a there is a structural.
01:41I mean, people are looking at the fracturing of geopolitics and that speaks to the need for
01:47diversification. And so, yes, this probably is a structural long term trend that we'll see.
01:52Now, that said, we see in instances like in March with the outbreak of the conflict in the Middle
01:57East, then the dollar does do well. So it isn't a one way train. But yes, we do think that
02:03over time
02:03you're going to see continued requests for diversification portfolios. I want to talk a little
02:08bit about private credit, because, I mean, you think about the conversations that are being had
02:12stateside and especially at this conference, there's a lot of concern out there. But do those
02:18same concerns exist when you take a look at Europe and just the globe in general?
02:23They do. They do. And in some ways, even more, because if you are an investor in Hong Kong and
02:29you're so far removed from what's going on in the U.S. and you start to see these headlines,
02:33you start to see underperformance, you start to see defaults, you hear about fraud, then you
02:38overreact even more than than many in the United States do. So everything that you see in the United
02:43States in terms of investor reactions is actually magnified outside of the U.S. for those investors
02:48who invested in the U.S. And then, of course, we've seen instances this year of asset-based
02:53finance opportunities in London get into trouble with fraud and real questions there. So all of
03:01these questions are very much relevant and very much alive with international investors.
03:04That's fascinating. And I do wonder, I mean, you think about, again, one of the big concerns when
03:10it comes to U.S. markets is that what we're seeing when it comes to retail investors, the big
03:14redemption requests that this past quarter has seen, that that might trickle into the institutional set
03:21as well, where demand is still strong, it looks like. I mean, does that also apply to international
03:27investors as well? Or what does the breakdown between retail and the professional set look like?
03:31It's a good one. I mean, international institutional investors are very much like U.S. ones where
03:37this is a long-term position for them and they're much more patient about what's going on in the
03:42headlines around private credit. They've underwritten for there to be a cycle over time. They know that
03:47there's going to be defaults over time. And sure enough, here's where we are. So we're seeing a lot more
03:51patience with those international investors. That said, they're looking more and more, like everyone
03:56else's. For what else can I do in private credit rather than monoline direct lending to levered
04:02companies owned by private equity sponsors? What else is out there? And so this rich vein of asset-based
04:07finance, residential mortgages, consumer loans, aviation finance, data center construction development
04:13loans, all of this is very much alive outside of the U.S. as well. And the demand for something
04:18diversifying away from sort of the core direct lending opportunity is very much alive internationally.
04:24Is most of the demand, though, pretty much in that AI tech space or is it broader than that?
04:30No, it's much broader than that. Sure. I mean, you know, we're looking at consumer loans in
04:34Singapore. We're looking at residential mortgages in Australia. We're looking at bridge lending in the
04:41U.K. We're looking, I mean, it's really spreading. What we see in the United States, what really started
04:46maybe six, seven, eight years ago in the United States of banks looking for partners, exiting some
04:51areas, looking for partners in some areas, selling loans to the PIMCOs of the world. We're seeing that
04:57really spread into Europe and into Asia now. And that's a great diversifier away from what can
05:03sometimes be somewhat crowded in the United States. Is the sort of investor class in that part of the
05:09world, though, and the difference between what you have here in the U.S., is there a higher or excuse
05:15me,
05:15is there a lower risk tolerance over there? There is a lower tolerance for defaults. So,
05:20you know, no, everybody has a low tolerance for defaults, as do we at PIMCO. But certainly,
05:27again, when you are outside and you're not, you know, you're not used to defaults, because
05:31in Europe, the default rate is extremely low on bank loans and things like that. So there is that,
05:37that, so, you know, look, but that's what PIMCO tries to do is provide this up in quality source of
05:42diversified private credit income, you know, not reaching for the yieldiest thing that might
05:48deliver the best returns if everything works out, but making sure that you've got downside protection.
05:52So there is that much more demand for what is the downside protection? Is it real? How do you know
05:58it's real? What's your track record that shows that you're actually delivering that downside
06:01protection? So, yeah, it's a great point. And it's one that we really focus on.
06:05I do want to talk a little bit about inflation, obviously a hot topic when it comes to the U
06:09.S.
06:09But, you know, a conversation we've been having today is you think about some of the energy ripple
06:14effects from what's going on in the Middle East, the U.S. relatively insulated when you think about
06:19what's going on in Europe, when you think about what's going on in Asia. How is that filtering
06:24through into your world when you think about inflation? Sure. So, I mean, we are very much
06:29focusing on the stress tests and the downside scenario where what if this continues for a lot
06:34longer than than we've expected. What if there are second order effects on to broader inflation?
06:40That's not our base case, but it certainly is possible. And if you look at the Bank of England
06:44last week, they actually ran scenario analysis a little bit like this. So you've got to focus on
06:49what is that downside scenario? And as you say, the European economy, the Asian economies are more
06:54exposed to this energy price shock than the U.S. And already the European economy was weaker and didn't
07:00have all of the capex cycle that the U.S. has. So it's less resilient to begin with. And so
07:05we're
07:05very much focused on it wouldn't take much for there to be a more serious outcome on the economy
07:11in Europe and to a lesser extent in Asia. And so then feeding those into our into our scenario
07:17analysis, not just in private credit, but across everything that we do in across fixed income in
07:22general. Absolutely. And when you think about, you know, the work that you're doing across fixed income
07:26in general, I mean, where is the haven in this moment? Because when you think about the U.S.
07:32Treasury market, especially what's going on at the long end, a lot of investors have said that's not
07:37necessarily as reliable as it has been to sort of buffer those downside shocks.
07:42Yeah, well, we still think through the cycle and through all of this, the haven is high quality fixed
07:48income. And that is in the U.S. and that's international. Now, the question is, well, what's high quality
07:53and where, you know, and how much high quality do you want? But ultimately, yes, could there be more
07:59volatility in interest rate markets? Of course, there can. But at some point, rates go high enough
08:04that it starts to really slow the economy and slow equity markets. And that sort of in a way
08:08stabilizes itself. So our view is, yes, there could be more volatility. But over time, we expect that
08:15fixed income will continue to deliver pretty interesting risk adjusted returns and as a good
08:19diversifier to equity exposures. Just real quickly, no concerns about the potential divergence in
08:24central bank rates, the idea that overseas you're potentially going to see a rise? Well, it certainly
08:30is a possibility. And, you know, the market is calling for several cuts in Europe. We think there
08:36would be probably fewer than what the market is pricing in. But there's a good chance that Europe
08:40will hike one or two times. The Bank of England, the market is pricing in two and a half hikes
08:46there.
08:46I mean, you know, the hiking cycle is going to start globally and there will be that divergence.
08:53But it's showing up in rate differentials. It's showing up in currency differentials as well.
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