Transcript
Justin Blesy, Product Strategist, Asset Allocation: Hi, I’m Justin Blesy, asset allocation strategist, and I’m joined by portfolio manager Erin Browne. Erin, thank you for joining us today.
How do PIMCO’s asset allocation views influence our positioning in multi-asset portfolios?
Erin Browne, Portfolio Manager, Asset Allocation: We expect continued volatility in financial markets for the foreseeable future.
We are cautious on overall risk positioning because of the environment where the economy is likely to slow over the course of the next 12 months.
The most notable expression of this right now in our portfolios is through equities. Historically, equities have weakened heading into a recession, and we think right now that the risk/reward is really skewed to the downside given where valuations are today.
Our estimates suggest a much stronger decline in earnings than the market is currently anticipating, and therefore, we see further downside risk within equity markets.
On the other hand, we do see attractive opportunities in right now fixed income markets. Yields have reset higher over the last year, and as inflation begins to moderate, we think that fixed incomes are poised really well to outperform.
With higher yields, policy rates are approaching terminal levels, and inflation is showing signs of decelerating, the backdrop for owning fixed income has dramatically improved.
Moreover, we believe that high-quality fixed income will resume its role as a diversifier versus growth risk particularly as we enter a weaker environment, assuming that inflation remains contained.
With respect to duration positioning, we spent most of 2022 underweight, but we’ve shifted now to a more neutral position within our portfolios.
Within credit, we’re really emphasizing higher-quality issues as well as sectors that can withstand a weaker economic environment.
We expect that further dislocations, such as the one that we most recently experienced in the bank capital market, will continue. And these events can really present compelling opportunities for active investors like PIMCO.
We talked earlier about how excited we are about the opportunity in fixed income markets, but we’re also starting to see really attractive investments in real assets and currency markets as well.
And one high-conviction theme that we have right now in our portfolio is emerging market currencies, such as Thai baht, Brazilian real, and Mexican peso, which benefit from cheap valuation, high carry, and improving fundamentals.
We also think that there are interesting ways to hedge against an inflation surprise, particularly through owning inflation-linked bonds, which are pricing in a much faster normalization than we expect with respect to inflation.
Overall, we are finding interesting relative value opportunities across asset classes, as well as within asset classes. For instance, we think that high-quality credit offers an attractive alternative to equities in the current environment, and that EM assets – both rates and equities – also are appealing to their developed markets counterparts. So, while we are cautious overall on risk, we think there are a lot of reasons for us to be really excited about the opportunities in front of us.
Disclosure
Past performance is not a guarantee or a reliable indicator of future results.
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 low interest rate environments increase this risk. 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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Equities may decline in value due to both real and perceived general market, economic and industry conditions. 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. Diversification does not ensure against loss.
Asset allocation is the process of distributing investments among various classes of investments (e.g., stocks and bonds). It does not guarantee future results, ensure a profit or protect against loss.
The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.
The terms “cheap” and “rich” as used herein generally refer to a security or asset class that is deemed to be substantially under- or overpriced compared to both its historical average as well as to the investment manager’s future expectations. There is no guarantee of future results or that a security’s valuation will ensure a profit or protect against a loss.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.
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 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.
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