Economic and Market Commentary

Comparing Risk Assets in Mid-Cycle Markets

Growth-oriented asset classes are likely to shine, but not equally. Geraldine Sundstrom and Erin Browne discuss our views across asset classes, including equities, credits, currencies and rates, and how we’re positioning for a mid-cycle environment.

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Text on screen: PIMCO

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Text on screen: Jason Odom, Product Strategist, Asset Allocation

Odom: Erin, starting with you, can you talk about our overall risk profile in multi-asset portfolios, given where we’re at in the cycle?

Text on screen: Erin Browne, Portfolio Manager, Asset Allocation

Browne: We’re overweight risk in our portfolios on the back of the view that we’re in a mid-cycle environment, and we generally prefer equities over other risk oriented asset classes in mid-cycle environments.

Text on screen: Emphasizing tactical flexibility and sector/security selection in portfolios

Images on screen: PIMCO trade floor

After the strong rally that we saw over the past year, we’re really emphasizing tactical flexibility along with sector and security selection in portfolios.

Odom: Thanks, Erin. Drilling into individual asset classes, Geraldine, can you talk about PIMCO’s views on equities and credit?        

Text on screen: Geraldine Sundstrom, Portfolio Manager, Asset Allocation

Sundstrom: Above trend growth is a supportive environment of risky assets like equities or credit where we have an overweight stance. That said, on valuation grounds, equities are looking a little cheaper and our overweight is bigger.

FULL PAGE GRAPHIC -- presents PIMCO’s views across asset classes in five columns. Top of page shows Overall Risk with dial at overweight. Then from left to right -- Column 1: Equities, overweight; US, overweight; Europe, overweight; Japan, overweight; Emerging markets, neutral. Column 2: Rates, US, underweight; Europe, underweight; Japan, underweight; Emerging markets, overweight. Column 3: Credit, overweight; Securitized, overweight; Investment Grade, overweight; High yield, overweight; Emerging markets, overweight. Column 4: Real Assets, overweight; Inflation-linked bonds, neutral; commodities, overweight; REITS, overweight; Gold, neutral. Column 4: Currencies, underweight; USD, underweight; Euro, neutral; Yen, neutral; Emerging markets, overweight.

FULL PAGE GRAPHIC: Equities, overweight; US, overweight; Europe, overweight; Japan, overweight; Emerging markets, neutral.

Looking more precisely into equities, we are long those sectors and companies that are going to enable this green and digital recovery, paying particular attention to those ESG factors. In terms of region, this tilts us towards the United States, Japan, and emerging market Asia.

And when looking at sectors, we could mention in particular semiconductors and green technologies.

FULL PAGE GRAPHIC: Credit, overweight; Securitized, overweight; Investment Grade, overweight; High yield, overweight; Emerging markets, overweight.

When it comes to credit, we are cautious on generic corporate credit. That said, we do find certain numbers of opportunities in housing related credit, in particular non-agency mortgages and U.K. RMBS.

We also like other securitized credit like AAA CLOs in Europe. Last but not least, there are also some reopening sensitive corporate credit where we do also have exposure as well as select external debt from emerging markets.

Odom: And staying with you, Geraldine, how about our view on rates?

Sundstrom: We are slightly cautious when it comes to duration,

Images on screen: European Central banks

since we think central banks are going to very slowly remove accommodation, and we’ve reached that peak.

FULL PAGE GRAPHIC: Rates, US, underweight; Europe, underweight; Japan, underweight; Emerging markets, overweight.

That said, we don't think that rates are going to sell off dramatically, and we see them evolving inside a range.

Currently, interest rates are the bottom part of this range, and therefore, this warrants a tactical underweight stance. That said, we will be ready to dial up and down our exposure depending where we find ourselves, since fixed income is potentially the great diversifier in an asset allocation portfolio. In terms of region, we favor the dollar block as well as specific emerging market local rates.

Odom: Thanks, Geraldine. Erin, back to you. Can you talk about our active currency views?

Browne: Midcycle environments tend to be periods of dollar weakness, and in fact, when you look at the dollar relative to either developed market currencies or emerging market currencies right now, the U.S. dollar screens pretty rich on a relative valuation basis.

FULL PAGE GRAPHIC: Currencies, underweight; USD, underweight; Euro, neutral; Yen, neutral; Emerging markets, overweight.

As a result, we’re moderately underweight the U.S. dollar, particularly against other developed markets.

However, we do think that you need to be gradual in your approach in terms of scaling into emerging market currencies, particularly since the overhang of the COVID pandemic still continues to disrupt many emerging market currencies.

So we’re really looking to be selective in starting out with being long emerging market currencies in SEMEA and Eastern Europe, and we’ll look to gradually increase that position as we navigate through the back half of 2021 as well as into 2022.

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DISCLOSURES


IMPORTANT NOTICE

Please note that the following contains the opinions of the manager as of the date noted and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

The continued long term impact of COVID-19 on credit markets and global economic activity remains uncertain as events such as development of treatments, government actions, and other economic factors evolve. The views expressed are as of the date recorded, and may not reflect recent market developments.

All investments contain risk and may lose value. 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. 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. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. U.S. agency mortgage-backed securities issued by Ginnie Mae (GNMA) are backed by the full faith and credit of the United States government. Securities issued by Freddie Mac (FHLMC) and Fannie Mae (FNMA) provide an agency guarantee of timely repayment of principal and interest but are not backed by the full faith and credit of the U.S. government. Structured products such as Collateralized Debt Obligations (CDOs), Constant Proportion Portfolio Insurance (CPPI), and Constant Proportion Debt Obligations (CPDOs) are complex instruments, typically involving a high degree of risk and intended for qualified investors only. Use of these instruments may involve derivative instruments that could lose more than the principal amount invested. The market value may also be affected by changes in economic, financial, and political environment (including, but not limited to spot and forward interest and exchange rates), maturity, market, and the credit quality of any issuer. Collateralized Loan Obligations (CLOs) may involve a high degree of risk and are intended for sale to qualified investors only. Investors may lose some or all of the investment and there may be periods where no cash flow distributions are received. CLOs are exposed to risks such as credit, default, liquidity, management, volatility, interest rate and credit risk. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Diversification does not ensure against loss.

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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.

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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CMR2021-0713-1716285

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