Positioning Portfolios Across Global Asset Classes

Text on screen: PIMCO

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Text on screen: Erin Browne, PORTFOLIO MANAGER, ASSET ALLOCATION

Erin: Hi, I am Erin Browne, Asset Allocation portfolio manager at PIMCO. Today, I will be discussing how PIMCO is positioning portfolios across global asset classes as well as other key takeaways from our mid-year asset allocation outlook.

I’d like to begin with our overall risk stance in multi-asset portfolios.

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 slightly overweight. 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 slightly overweight. 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 see signs of a potential soft landing in the global economy, led by continued US growth, with divergent paths for other regions. We also see the risk of persistent inflation, especially in the US.

While we are expressing a preference for higher quality exposures across asset classes, we see attractive opportunities to take advantage of regional differentiation across economies as well as to broaden exposures into assets that may benefit from a rebound in economic activity.

Diving deeper into each asset class,

Full page graphic: Equities are slightly overweight broadly; U.S. equities are overweight; Europe equities are neutral; Japan equities are neutral, and emerging market equities are slightly overweight.

we are overweight equities as we believe that reaccelerating global growth should support broader earnings growth. We express a preference for up-in-quality exposures across regions and sectors - from a regional perspective, we emphasize the US over other developed markets.

On the other side, we are neutral Europe amid our expectation for weaker earnings on the back of weaker economic growth, coupled with less insulation from Chinese import competition.

Within emerging market equities, we are overweight select countries in Asia, namely South Korea and Taiwan, as we believe a recovery in semiconductor sales paired with reasonable valuations may support performance going forward.

Turning to fixed income, we see opportunities across high quality exposures in both rates and credit.

Full page graphic: The risk dial on top shows Rates are slightly overweight broadly; U.S. rates are slightly underweight, European rates are slightly overweight, Japan rates are slightly underweight; and Emerging markets rates are slightly overweight.

The bottom risk dial shows Credit is slightly overweight broadly; securitized credit is overweight; Investment grade credit is neutral; high yield is slightly underweight and emerging markets credit is neutral.

We are slightly overweight duration given elevated starting yields, which drive the potential capital appreciation.

We prefer developed markets, like Australia, Canada, and Europe, that exhibit lower inflation risks and greater downside growth risks compared to the US.

In emerging markets, we are overweight local rates in countries with high real rate exposures and have room to cut.

Within credit, we remain invested in high quality securitized credit, such as senior non-agency mortgage-backed securities, but are more cautious on corporate credit given tight spread levels today.

Full page graphic: The risk dial shows Real Assets are neutral broadly; Inflation-linked bonds, Commodities, REITs and gold are neutral.

Looking at real assets, we are broadly neutral as we await further clarity on the near-term path of inflation. While we see upside risks to US inflation, we prefer to take our exposure to inflation through equities, remaining neutral on inflation-linked bonds, gold, and other real assets at this juncture.

Lastly, I would like to provide PIMCO’s views across currencies in today’s environment.

Full page graphic: The risk dial shows Currencies are slightly overweight broadly; USD is slightly overweight; Euro is underweight; Yen is slightly overweight, and EM is slightly overweight.

Within developed markets, we are overweight the U.S. Dollar given attractive carry, less demanding valuations versus recent history, and a supportive US growth backdrop.

We are underweight the Euro amid expectations for weaker economic growth as well as the potential for greater central bank policy easing.

We are overweight the Japanese Yen as a “safe haven” alternative to the U.S. Dollar as we expect further tightening on the policy side from the Bank of Japan will improve total carry.

In emerging markets, we continue to overweight attractively-valued currencies offering  compelling yields.

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Disclosure

Past performance is not a guarantee or a reliable indicator of future results.

A “safe haven” is an investment that is perceived to be able to retain or increase in value during times of market volatility. Investors seek safe havens to limit their exposure to losses in the event of market turbulence. 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. 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. References to Agency and non-agency mortgage-backed securities refer to mortgages issued in the United States. 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. 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. Equities may decline in value due to both real and perceived general market, economic and industry conditions. The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. Diversification does not ensure against 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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