Text on screen: PIMCO
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Text on screen: Geraldine Sundstrom, Portfolio Manager, Asset Allocation
Sundstrom: Hi, I'm Geraldine Sundstrom, asset allocation portfolio manager. And I'm here today to go over PIMCO's portfolio positioning across asset class, in light of our recently published asset allocation outlook, risk-off, yield-on.
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. Then from left to right the dials are as follows: Column 1: Equities are underweight. Column 2: Rates are slightly overweight. Column 3: Credit is slightly overweight. Column 4: Real assets is slightly overweight. Column 5: Currencies very slightly underweight.
First, our overall risk posture remains cautious, as we're facing a complex backdrop of ongoing policy tightening, elevated recession risk, as well as likely sticky inflation on the way forward. Looking more closely at each asset class,
Full page graphic: Equities are underweight broadly; US equities are underweight; Europe equities are moderately underweight; Japan equities are underweight and emerging market equities are slightly underweight
we remain underweight equities. Despite a steep correction so far this year, we believe that now equities are indeed reflecting the higher level of yield. However, forward earning consensus are still too elevated for a recessionary environment. As such, we favor defensive sectors, like healthcare and pharmaceutical, and we think that the European region is probably the most at-risk.
Full page graphic: Credit is very overweight broadly; securitized credit is moderately overweight; Investment grade credit is neutral; high yield is slightly underweight and emerging markets credit is neutral.
Rates are overweight broadly; US rates are slightly overweight; Europe rates are neutral; Japan rates are slightly underweight; and emerging markets rates are slightly overweight.
Moving on to fixed income, while the starting points are much more attractive of yield now, and we believe that an allocation to fixed income will diversify and balance risky portfolio again. Within fixed income, we favor government-quality papers from those economies and countries which are most sensitive to the level of interest rates, but also like high quality securitized bonds in AAA tranches, as well as agency mortgages and select investment-grade corporate credit.
Full page graphic: Real Assets is slightly overweight broadly; Inflation-linked bonds and commodities are slightly overweight; REITs and gold are neutral.
In terms of real assets, we do maintain an exposure to inflation-protected bonds, with our view that inflation will be sticky on the way down, but also has significant upside risk. Turning to commodities, we believe that oil and grains not only have low inventory, but will continue to suffer from supply constraint, and therefore keep an allocation there.
Full page graphic: Currencies is slightly underweight broadly; USD is neutral; Euro is underweight; Yen is neutral, and EM is slightly overweight.
Finally, turning to foreign exchange, we believe that the US dollar is indeed expensive. However, we also reckon that it could remain so for a while longer, at least until we have witnessed and identified the peak of interest rates. We are cautious on the Euro.
We believe that this is a currency that will continue to face structural challenges ahead. However, we're willing to dip a toe in those high-carry select emerging market currencies.
Text on screen: For more insights and information, visit pimco.com
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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. 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. 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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations. References to Agency and non-agency mortgage-backed securities refer to mortgages issued in the United States. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Diversification does not ensure against 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.
The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.
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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