Preparing Portfolios for Multi-Asset Opportunities Ahead of 2025

Text on screen: PIMCO

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

Erin: Hi, I am Erin Browne, managing director and Asset Allocation portfolio manager at PIMCO. Today, I will walk through how PIMCO is positioning portfolios across asset classes and key takeaways from our year-end asset allocation outlook.

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 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 overweight. Column 2: Rates are overweight. Column 3: Credit is slightly overweight. Column 4: Real assets are overweight. Column 5: Currencies are slightly overweight.

To begin, we are overweight risk in our multi-asset portfolios

While we expect US growth outperformance to fade as the US moderates towards the rest of the developed world, a soft landing appears to be the highest probability outcome.

However, we view inflation as the biggest risk to our soft landing base case, making hedges to upside inflation especially important for the year ahead

Fixed income has recently resumed its traditional inverse relationship with equities, providing valuable diversification benefits and potential tailwinds for multi-asset strategies.

Focusing in on equities, economic growth has been the primary driver of equity returns during rate cutting cycles.

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

We have a regional preference for the U.S., as historically, U.S. equities have a consistent record of delivering positive returns during soft landings.

We also expect the U.S. equity market to continue to broaden out beyond the Magnificent 7 over the cyclical horizon.

We are underweight European equities as we expect muted corporate earnings, largely resulting from lower relative economic growth and spillover effects from China.

Within emerging markets, we are broadly neutral, though we look for select tactical opportunities.

Shifting to fixed income, we are constructive on high quality exposures across rates and credit markets

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

The Credit 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 overweight duration, given attractive starting yields. We expect yield curves to steepen as global central banks continue to normalize policy, creating a supportive backdrop for capital appreciation potential as well.

We favor developed ex-U.S. exposures, such as U.K. and Australian rates, and are neutral U.S. nominal rates, though we continue to express a steepening bias in the U.S. amid rising fiscal deficits.

We are underweight Japanese duration amid expectations for the BOJ to gradually raise rates despite recent market volatility.

Within global credit markets, we prefer high quality securitized credit, like senior non-agency mortgage-backed securities, but are more cautious on corporate credit given historically rich spreads.

Turning to real assets, we see opportunities to hedge upside inflation risks

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

We are overweight inflation-linked bonds, specifically U.S. TIPS, as we believe pricing is attractive for inflation protection, particularly in the 5-year portion of the TIPS curve.

We are also overweight REITs as Fed rate cuts should lower interest costs, providing a boost to earnings in 2025 and offering upside potential.

Clickable overlay on screen: “Read the full outlook”

Finally, we are actively positioning across currencies in the current environment

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

Within developed markets, we are slightly overweight the U.S. Dollar given upside risks from potential fiscal policy outcomes stemming from the U.S. election result.

We are neutral on the Euro as we seek to balance potential negative impacts from trade policies and our expectation for growth recovering to a more normal pace amid falling rates.

We are overweight the Japanese Yen as we believe the BOJ will hike rates over the cyclical horizon, and in emerging markets, we are overweight select currencies that provide attractive carry and compelling valuations.

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Disclosure

U.S. equities returns during soft landings is represented by MSCI USA Index.

Magnificent 7 consists of Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta, and Tesla.

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

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. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations. References to Agency and non-agency mortgage-backed securities refer to mortgages issued in the United States. Equities may decline in value due to both real and perceived general market, economic and industry conditions. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. 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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. 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.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. There is no guarantee that results will be achieved.

Bank of Japan (BOJ); Mortgage-backed securities (MBS); Real Estate Investment Trust (REIT).

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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