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Text on screen: Erin Browne, Portfolio Manager, Asset Allocation
Erin: I am here to discuss how PIMCO is positioning portfolios across global asset classes and other key takeaways from our latest asset allocation outlook.
I’d like to start by providing our overall risk posture in multi-asset portfolios today.
Full page graphic shows PIMCO’s asset allocation risk dials across asset classes. At the top of the page, the Overall Risk dial is set to underweight. Below the Overall Risk dial are five columns showing the risk dial for each asset class, from left to right, as follows: Column 1: Equities are underweight. Column 2: Rates are slightly overweight. Column 3: Credit is slightly overweight. Column 4: Real assets are neutral. Column 5: Currencies are slightly overweight.
We are overall underweight risk given our expectation that growth will slow in the coming quarters as the lagged effects of tighter financial conditions lead to a recession in the US by year end.
That said, the volatility across markets experienced over the last year coupled with the re-pricing across asset classes has created some compelling investment opportunities, particularly in fixed income markets.
Looking more closely at each asset class, we remain cautious on equities.
Full page graphic: Equities are underweight broadly; U.S. equities are underweight; Europe equities are moderately underweight; Japan equities are underweight, and emerging market equities are slightly overweight.
Equities look expensive when considering the macro environment, and we think that earnings estimates are still too optimistic and valuation multiples are still too high. Additionally, equities have historically underperformed heading into recessions.
From a sector perspective, we favor more defensive businesses such as healthcare and consumer staples.
One bright spot is emerging markets, most notably emerging markets Asia, which we expect to benefit from the China re-opening story that we think will continue to play out through the rest of this year.
Turning to fixed income, our views on rates and high quality credit are more constructive as we note in our outlook piece Bonds are Back.
Full page graphic: The risk dial on top shows Credit is slightly overweight broadly; securitized credit is overweight; Investment grade credit is slightly overweight; high yield is slightly underweight and emerging markets credit is neutral.
The bottom risk dial shows Rates are slightly overweight broadly; U.S., European and Japan rates are neutral; and emerging markets rates are slightly overweight.
And we think that fixed income is benefiting from higher yields, decelerating inflation, and the fact that policy rates are approaching their terminal level.
In our view, high quality bonds typically perform well heading into a recession, and we believe that this will be the case this time around as well now that inflation is starting to show signs of coming down.
Our bias is to own higher quality credit given our fundamental expectation for further economic weakness, and we particularly like mortgage related credit and securitized credit.
We also see some value in maintaining high quality liquidity in our exposure in order to be able to step in opportunistically when dislocations occur.
Within real assets, we hold a fairly balanced view today.
Full page graphic: The risk dial shows Real Assets are neutral broadly; Inflation-linked bonds are slightly overweight; Commodities, REITs and gold are neutral.
Commodities while they potentially offer a good inflation hedge, they’re often times sensitive to economic growth, so we are cautious on positioning in light of that.
Where we see more value right now is in TIPS, and they potentially offer an attractive way to hedge inflation risk given that markets are right now pricing in fairly modest long-term inflation expectations.
Lastly, I wanted to touch on PIMCO’s outlook for the dollar and other currencies going forward.
Full page graphic: The risk dial shows Currencies are slightly overweight broadly; USD is underweight; Euro is neutral; Yen is slightly overweight, and EM is overweight.
We’re underweight the dollar. We believe it that looks expensive from a valuation perspective and anticipate that some of the previous tailwinds such as the stronger relative US growth as well as the yield advantage of US rates versus the rest of the world have started to fade away.
We favor select emerging market currencies, given cheap valuations, attractive carry, falling inflation and improving fundamental and technical factors.
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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. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. 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. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government.
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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