Positioning Portfolios for 2024

Text on screen: PIMCO

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

Geraldine: Hi everyone, I am Geraldine Sundstrom, portfolio manager and head of asset allocation. I am here with you today to discuss how PIMCO is positioning portfolios across global asset classes as well as other key takeaways from our year-end asset allocation outlook, Prime Time for Bonds.

I’d like to start by providing our overall risk posture in multi-asset portfolios today.

Given our outlook for slower growth, inflation, and the potential for a mild recession, we are emphasizing diversification and caution in our portfolios and prioritizing quality.

This outlook along with market valuations and asset class fundamentals also leads us to strongly favor fixed income in our 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 neutral. Column 2: Rates are overweight. Column 3: Credit is slightly overweight. Column 4: Real assets are neutral. Column 5: Currencies are slightly overweight.

Looking more closely at each asset class,

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

we are neutral on equities as we believe earnings expectations and elevated valuations will return to more reasonable levels over time.

Thematically, we favor high quality U.S. companies versus European equities. We are also underweight emerging market equities given concerns about Chinese growth outlook.

From a sector perspective, we prefer those that may benefit from secular growth and fiscal measures while we’re negative on rate-sensitive industries, such as homebuilders or consumer durables like automakers.

Full page graphic: The risk dial on top 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.

The bottom risk dial shows Rates are overweight broadly; U.S. and European are overweight, Japan rates is underweight; and emerging markets rates are overweight.

Turning to fixed income, we see very attractive opportunities within the asset class. We are overweight high quality fixed income given high yields, a decelerating inflation, and our view that policy rates are approaching their terminal level.

For bonds in general, the starting yield is a strong predictor of the potential returns and therefore at current levels, high quality fixed income offers potentially higher returns than equities.

We are overweight the United States, European duration as well as those countries that have structurally a more floating rate mortgage market, like Australia, because their economies are more sensitive to higher interest rates.

Within credit, we prefer high quality securitized credit, like agency mortgages, and are underweight the higher risk corporate sectors, especially in high yield.

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

Within real assets, we do prefer Inflation-Linked bonds given attractive real yields.

We see the most value in the American TIPS, which offer an attractive way to hedge inflation given markets are pricing in a fairly modest long-term inflation expectation, and therefore, they are very valuable in terms of portfolio construction.

Lastly, I wanted to touch upon PIMCO’s outlook for foreign exchange going forward.

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

We are neutral the U.S. Dollar, we’re balancing more attractive interest rates properties with overvaluation concerns.

We are underweight the Euro given expectations for divergent monetary policy paths as well as a contracting economic activity.

We are overweight the Japanese Yen as a useful diversifier in portfolios and an alternative to the U.S. Dollar given the cheaper relative valuation.

And finally, we are overweight select emerging market currencies that offer attractive valuation profiles as well as high real carry.

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Disclosure

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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