Play Equities as Long as Fed ‘Drip’ Allows: Kashkari
As earnings season kicks off, Neel Kashkari, head of global equities at bond giant Pimco, is making the case for why corporate profits are going to prove “very strong.”
In short, it’s because corporate borrowing rates are low across the globe, and Kashkari uses the U.S. as a prime example.
"We think the Fed is going to keep the cost of capital low for corporations. And, I think if you look at Washington, the momentum, if anything, is to keep corporate taxes low," he said.
He doesn’t see this changing any time soon. Pimco’s Thursday equity report forecast that the Federal Reservewill continue its policy of monetary easing (keeping borrowing rates low) through the end of 2014.
“It could be even longer,” said Kashkari.
Interestingly, the basis for this forecast has more to do with how markets react to the Fed, than it does with the U.S. economy.
“Every time the Fed tries to back away from its massive easing policy, they take the risk markets react,” he said.
Kashkari uses an addiction analogy to illustrate his case: “It’s like a morphine drip; it makes the patient feel better, but it doesn’t cure underlying disease. The moment you try to take the morphine away, the patient wakes up in a lot of pain.”
This phenomenom, he says, is global, as central banks battle their own domestic debt woes — take Europe and the European Central Bank , for example. “The easy money is tool of choice for central banks around the world,” said Kashkari.
In this low-interest-rate world, corporate profits can stay strong, he said, and, naturally, Pimco is getting in on the action.
“We see many risks in Europe; from Greece, Portugal, and now Italy and Spain,” Kashkari said. “But we are finding names we like.”
Kashkari named Ensco as a top pick. “It’s one of the largest offshore drillers in world, trading at about 10 times our estimate of earnings. And it’s an example of a European company not directly at risk from European fragmentation, or Greek default.”
In the U.S., Kashkari likes Viewpoint Financial, a small Texas bank. “It’s tied to the strengthening Texas economy, and it’s trading at about 1.25 times tanglible book, when most of its peers are trading 1.7 times.”
Trading at a lower “tangible book” — a measure of what shareholders receive in the case of bankruptcy — is, in this case, another way of saying the company is less expensive that its competitors.
In both examples, Kashkari analyzes companies in the context of the ecomomic environment in which they operate. Said he: “We're finding names in equities globally.”
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Neel Kashkari does not personally own shares in Ensco or Viewpoint Financial. Pimco owns shares of both companies in its “Equity Mutual Funds.”
Follow Jennifer Leigh Parker on Twitter @jparker741 .