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Pimco: Growth and Rising Stars

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Pimco sees these "rising star" companies in the US and European auto sector, the gaming, energy and chemical industries, and in sectors tied to the US housing market.

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Housing

While gaming and energy are experiencing solid secular growth, the U.S. housing market is growing because it is recovering cyclically. U.S. residential investment spending remains at relatively depressed levels (see Figure 7). While U.S. housing prices have moved up over the past 18 months, housing starts have picked up only moderately as new construction of single-family homes has been held back due to builders exercising caution, as well as land constraints in some areas of the country. Thus, U.S. housing inventories remain very low (see Figure 8) and household formation should pick up over the next several years given an improving labor market and supportive population growth. As a result, U.S. housing and residential investment spending should grow faster than the overall U.S. economy, absent a significant and unexpected rise in mortgage rates from current levels.



We believe the pace of U.S. housing price appreciation should moderate to a level of mid-single-digit gains over the next two years. While that pace will be much slower than the double-digit gains over the past 12-18 months, tight supply, continued pent-up demand, gradually improving credit availability and strong long-term fundamentals should continue to support the market.

While new construction activity is an important driver of housing, we would also highlight that new homes sales have represented less than 10% of total housing sales over the past five years, with the remainder comprising existing homes that require repair or replacement (e.g., a new roof or a new washer/dryer) or are under consideration for remodeling by the homeowner. We believe stabilizing home prices and higher U.S. home equity should encourage more remodeling activity (see Figure 9) given that consumers tend to be more willing to reinvest in their home when household equity has increased and their expectation is that housing prices will go up over time.

Our investments in the U.S. housing market have focused on non-agency mortgages, banks and homebuilders that stand to benefit over time from rising U.S. housing and land prices. In addition, we continue to find select opportunities in building materials, home improvement, lumber and appliance companies that benefit from an improved outlook for new housing construction and remodel activity.

Growth and rising stars

Pimco's longer-term approach to investing in global credit leverages our top-down and bottom-up analysis, as well as our valuation skills to identify rising stars through independent research in specific companies that have above-trend growth profiles. While the global economy's overall growth rate will likely be moderate, several industries and regions may experience healthy growth. Today, we believe credit spread tightening and rating upgrades are most likely for specific companies in these industries and areas with strong growth.

The future remains encouraging for investors who have the ability to find rising stars since these companies have strong growth profiles and, importantly, a greater ability to organically delever. Our secular and longer-term approach to investing in companies allows us to look forward and be anticipatory in our search for growth and future rising stars. In terms of specifics, we believe rising stars are likely in the U.S. and European auto sector, the gaming, energy and chemical industries and in sectors tied to the U.S. housing market.

This article originally appeared on Pimco.
No positions in stocks mentioned.
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