Shots of cities and people walking on streets.
Mihir P. Worah, CIO Asset Allocation and Real Return: We’ve seen soft economic data globally for most of 2019. What’s happening now is that the US is catching down to the rest of the world, and we’re starting to see the US slow down as well. Whether it’s a natural evolution of the business cycle, or whether it’s uncertainty around trade and what our trade policy’s likely to be, we’re seeing profits slow down and we’re seeing economic activities slow down.
Shots of PIMCO employees working.
Erin Browne, Portfolio Manager, Multi-Asset Strategies: So our macro risk indicator, as informed by our tactical asset allocation model, recently turned negative as we moved into the third quarter of this year.
Chart: An allocation dial shows overall risk weighting leaning slightly more toward under than over.
As a result of that, that does make us more defensively positioned across our risk asset portfolios.
Geraldine Sundstrom, Portfolio Manager, Asset Allocation: As a result, we have an underweight when it comes to the equity asset class,
Chart: An allocation dial shows overall equity weighting leaning more toward under than over. The U.S. is slightly over, Europe is highly under, Japan and Emerging Markets are on par on the bar slide.
and within equities we favor highly defensive, high quality sectors. In terms of region, this leaves us with an overweight in the US, and underweight in Europe, while we keep a neutral stance in Japan and emerging markets which are supported by cheaper valuations.
Erin: We do have an overweight to US duration,
Chart: An allocation dial shows overall rates weighting leaning more toward over than under. The U.S. is over, Europe and Japan are under, and Emerging Markets are over.
but we think given valuations right now the US really is the best place to be positioned across fixed income portfolios. And we do have a slight underweight to European duration as well as to Japanese duration.
Geraldine: We think that credit is likely to underperform in the late cycle,
Chart: An allocation dials shows credit weighting leaning more toward under than over. Securitized is highly over, investment grade is under, high yield is highly under and emerging markets are over.
and we are underweight corporate credit, and favor, on the other hand, securitized high quality credit like non-agency mortgages. In terms of maturity, we will also favor short-term maturity bonds, especially in high-yield, where our credit analysts have better visibility on cash flow.
Mihir: Global central banks are easing financial conditions, in the face of this, inflation expectations are still fairly low worldwide. This makes real assets quite attractive,
Chart: An allocation dials shows real assets weighting leaning more toward over than under. Inflation-linked bonds are over, commodities are neutral, MLPs are slightly over and gold is on par on the bar slide.
so generally our multi-asset portfolios are overweight real assets. We could be overweight inflation-linked bonds or gold, depending on our models, we fluctuate between one or the other, but we always overweight either inflation-linked bonds or gold. We also like REITs and MLPs, and like I said, the general environment, when the global central banks are easing financial conditions, trying to get inflation up, you want to be overweight real assets, and that’s how we’re positioning our portfolios.
Geraldine: The dovish pivot by developed markets central banks should be supportive of high yielding, relatively attractive valued emerging market FX,
Chart: An allocation dials shows overall currencies weighting being on par. The U.S. dollar, euro and yen are on par, emerging markets are slightly positive on the bar slide.
whether for long, a basket of high-yielding emerging market currencies funded by a short in US dollar in Europe. We also recommend a mild overweight position in the Japanese Yen, which is a good diversifier of risk because of its risk-off properties.
Chart: An allocation dials shows munis weighting leaning more toward over than under. Investment grade and high yield are over; general obligation is under; and revenue bonds are over on the bar slide.
Erin: In this macro environment we do like municipal bonds particularly for US oriented investors. And the rationale for it is, as we move later cycle, we do think that duration will remain well-bid. And municipal bonds offers a good relative value opportunity for US retail oriented investors.
Within municipal bonds, particularly we like revenue bonds which are backed by revenue streams, as opposed to general obligation bonds which we think are more risky particularly as we move later cycle and as we potentially could see default probabilities picking up.
Shots of PIMCO employees working.
Erin: Our main conclusion right now is that as we continue through this late stage of the economic cycle, you really want to move up in quality and stay defensive within your portfolio positioning.
Screenshot of PIMCO article, “Easing into Slowing growth”
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Recorded 4 September 2019
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