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A Balancing Act

Recession risk has diminished but both cyclical and secular risks remain. So, in 2020 investors will have to strike the right chord between traditional safe-havens and risky assets to find a rewarding balance. But how?

PIMCO’s latest Cyclical Forum outlined seven macro themes for this year, starting with a slight improvement in economic data, which we believe pushes back the risk of recession. Further monetary and fiscal support, a relatively contained U.S. dollar and an easing of the global trade tensions also support our belief that global growth will be higher in 2020 than in 2019.

Yet, it would be unwise to expect 2019-like returns again this year; risks, both cyclical and secular, remain and current valuations across nearly all asset classes are at higher levels. The recent Iran and coronavirus crises are stark reminders of risks, while the challenges and volatility usually associated with a U.S. election year lie ahead. And given the almost record-low level of interest rates in major economies, potential financial market losses in the event of recession could be more significant than in past ‘garden-variety’ recessions as central banks have less room to cut and support growth. Finally, other disruptive forces, including technology, populism and aging populations, continue to challenge businesses and societies alike.

Balancing Act

 

Given these current conditions, how can investors strike a fine balance to either generate returns without undue risk or protect their capital in case of an economic or financial market downturn?

Aided by PIMCO’s traditional prudent approach, focus on capital protection, and liquidity management, we believe investors can meet their objectives using the following four strategies, some of which can be delivered with an eye towards sustainability and ESG considerations:

1. Diversification

Over time, financial assets don’t move in lockstep with one another; in other words, the lack of perfect correlation means that diversification pays off for investors (see box). In this sense, our Diversified Income Fund is designed to deliver the higher returns associated with corporate and Emerging Market (EM) credit, combined with the lower risk profile of diversified fixed income relative to equities or more narrowly-defined credit strategies. To achieve this, the fund uses its flexibility to nimbly increase or decrease allocations to investment grade, high yield and emerging market debt, while also tactically capturing opportunities outside of these sectors such as in AAA-rated mortgage backed securities when they offer attractive value.

Diversification

Investors willing to further diversify their sources of return and benefit from the traditionally higher yields of EM, may find our Emerging Markets Opportunities Fund appealing. The solution aims to provide investors with diversified exposure across the full suite of emerging market debt, ranging from U.S. dollar-denominated (“external”) bonds to local currency-denominated debt. When managing the portfolio, PIMCO strives to provide investors with participation in the upside of returns, while remaining mindful of the sharper drawdowns that can periodically occur in emerging markets. This solution has been appealing to investors who wanted exposure to EM debt, but were reluctant to take on the full volatility of the asset class. We also believe that our EM franchise offers the best of both investment worlds: we have the focus and ethos of a boutique, with the scale, expertise and resources of a major platform.

2. Core strategies

For investors who are more focused on protecting their capital or need a place to invest proceeds from equity de-risking, our Global Bond Fund gives access to a rich opportunity set, including high-quality government and corporate debt. The fund blends PIMCO’s distinct top-down approach with the independent views of our 65+ credit research team, to deliver a well-diversified and resilient strategy.

For those who prefer a more regionally-focused approach but still want a high quality portfolio, our UK Income Bond and Euro Bond funds may be attractive solutions.

3. Income

Investors have turned to bonds in search of income for centuries, and PIMCO has spent almost five decades delivering it. If you are tired of protracted low bond yields, but don’t want to compromise on quality or diversification to find income, our suite of income-producing funds, including the Diversified Income Fund, Euro Income Fund and UK Corporate Bond Fund, are designed with these needs in mind. For investors who have a slightly more bullish view of financial markets and want some equity upside participation through dividend-paying stocks, our Strategic Income Fund may be a suitable solution.

4. ESG

Underpinning our belief that professional and efficient capital allocation helps us deliver the solutions our clients need, we believe that for us to continue doing so, global economic growth has to be sustainable. This is why we are engaging with the companies we invest in to help them drive change towards more sustainable practices. Whilst our Environmental, Social and Governance (ESG) filter runs through our well-established investment process, we have also developed a suite of ESG-specific funds for those investors more keen to be ESG-active through their bond allocation. These strategies include our Global Bond ESG Fund, Emerging Markets Bond ESG Fund and Global Investment Grade Credit ESG Fund.

We will continue to update you with our views and initiatives. Until then, you can see more detail about our Solutions in “Growth Expectations Are Low, Uncertainty Is High. Based On Your Needs, How Can We Help You?” And please reach out to our team for further assistance. We are here to help.

The Author

Ryan P. Blute

Head of Global Wealth Management, Europe

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London
PIMCO Europe Ltd
11 Baker Street
London W1U 3AH, England
+44 (0) 20 3640 1000

Milan
PIMCO Europe Ltd - Italy
Corso Matteotti 8
20121 Milan, Italy
+39 02 9475 5400

Munich
PIMCO Deutschland GmbH
Seidlstraße 24-24a
80335 Munich, Germany
+49 (0) 89 26209 6000

Zurich
PIMCO (Schweiz) GmbH
Brandschenkestrasse 41
8002 Zurich, Switzerland
Tel: + 41 44 512 49 10


PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (25 The North Colonnade, Canary Wharf, London E14 5HS) in the UK. The Italy branch is additionally regulated by the CONSOB in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services and products are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany) and PIMCO Deutschland GmbH Swedish Branch (SCRO Reg. No. 516410-9190) are  authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Swedish Branch is additionally supervised by the Swedish Financial Supervisory Authority (Finansinspektionen) in accordance with Chapter 25 Sections 12-14 of the Swedish Securities Markets Act. he services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 31a para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services and products provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser.

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