Capitalizing on Market Shifts in 2024
Text on screen: PIMCO
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Text on screen: Ken Chambers, Fixed Income Strategist
Ken Chambers: Dan, All the events of last year, it really led to opportunities for PIMCO to manage risk and capitalize on markets by delivering alpha for clients. How are we evaluating markets now with 2023 in the rear-view mirror as we look ahead to 2024?
Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer
Dan: Sure. Well, as you said, 2023 was quite an interesting year. You wouldn't necessarily know that if you looked at starting valuations at the beginning of the year where we ended up. But people are beginning to romance the notion of a very, very high probability of a soft landing. The data has been consistent with that view but we do think markets have likely gotten ahead of themselves a little bit. So,
FULL PAGE GRAPHIC TITLE: Navigating the Descent: Investment implications
The subtitle reads: Our process helps us evaluate a range of scenarios to plan for the road ahead. The graphic shows three sections. The first section shows economic scenarios that include soft landing, overheating, hard landing, and stagflation. The second section shows the 2024 outlook for developed markets, including: Inflation and unemployment consistent with rate cuts; Markets already pricing in a substantial cutting cycle; Soft landing possible but risks remain; and Global monetary policy divergence. The third section shows four investment implications given the various economic scenarios and developed market outlook: 1) Bonds are attractive; 2) Focus on quality; 3) Global opportunities are abundant; and 4) Preference for intermediate maturities.
given the fact that we tend to, at PIMCO, think about the probability distribution of potential outcomes, we assign a higher probability than what the market's implying. So we think it makes sense to protect against those tail scenarios.
In a world of considerable uncertainty, a war in Europe, war within the Middle East, inflation's still high and policy rates quite restrictive. Be a bit more defensive, be a bit more careful in the more economically sensitive areas of the overall opportunity set. But again, real great value in high quality sectors and segments of the market. Last year was quite volatile. And a lot of these higher quality sectors, because of that volatility, are trading to get levels that are attractive from a historical perspective.
Ken Chambers: So, let's take a few of these things in turn. The yield environment today, even after that strong rally that we saw at the end of the year, we're still relatively attractive in terms of the level of yield. Attractive, cheap. How should investors evaluate the opportunity sets, just kind of where we are today?
Dan: So today, in terms of thinking about portfolio construction, you don't have to take a tremendous amount of interest rate exposure.
FULL PAGE GRAPHIC TITLE: Investment implications: Compelling time to consider active fixed income
The graphic shows four investment implications given PIMCO’s economic and market outlook: 1) Lock in elevated yields, with preference for intermediate maturities versus cash; 2) Bonds can present opportunities across macro outcomes, as bonds are attractive relative to equities, with potential diversification benefits; 3) Focus on credit quality, with up-in-quality bias across securitized, investment grade, and high yield; and 4) Attractive market dynamics for active management, as opportunities are abundant and diverse across global markets.
But by extending out the yield curve, by moving into more traditional fixed income sectors of the market, we do see pretty attractive opportunities again, across popular passive alternatives. When you add the ability to generate some other incremental return, things look pretty attractive as well.
The other point I'll make, it's a simple point, but an important point is that fixed income's not that complicated. You have some inherent cushion of predictability from the starting yield. So not surprisingly the starting yield of a high-quality bond portfolio is a very strong predictor of what forward returns will look like. The Barclays aggregate index today is yielding about 4.5%. If you add some out of index high quality exposures to that opportunity set, you can quickly get up to a 6% or even higher type yield. Again, being fairly defensive from the standpoint of overall interest rate exposure.
That type of historical return typically bodes well versus cash. It also looks pretty darn good from a risk adjusted perspective versus equities as well.
And the last point, and probably the most important point, one of the most exciting areas I have to talk about in the markets today, is that global bond investing is back less synchronized cycles, both in standpoint of the real economy inflation cycles, central bank policy cycles, geopolitical challenges, just a lot going on in a market that, again, just a few years ago, was quite quiet with rates negative in a lot of key areas of the world in significant volatility suppression from policy makers. So optimistic on alpha generating opportunities, but still with an up in quality bias and a global lens in terms of putting together the optimal portfolio.
Ken Chambers: Yeah, a handful of things to do from an asset allocation perspective, certainly. What's your advice for investors today?
Dan Ivascyn: Yeah, I would say patience is one of them. I think it's important for investors to step back, look at valuations from a long-term historical perspective, and just how attractive the broad global opportunity set will be. But realize although volatility may be lower than what we've experienced the last couple of years. It's still going to be quite high that's very, very hard to deal with. The fast extreme rollercoaster is something that most people don't love, at least in the context of investing.
But if you have a multi-year time horizon, you're sufficiently diversified and you're not making it more difficult than it needs to be. You're looking to protect yourself and not overreach in a world of significant uncertainty, we think they're going to be attractive returns to be generated, again, over two-to-three-year horizon with a lot of zigs or zags or ups and downs along the way. And we're here trying to assist clients on that journey together.
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Please note that this video contains the opinions of the manager as of the date recorded, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
A word about risk: 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. 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. Asset allocation is the process of distributing investments among various classes of investments (e.g., stocks and bonds). It does not guarantee future results, ensure a profit or protect against loss.
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