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Weekly Market Update

Geraldine Sundstrom, portfolio manager, comments on what’s moving markets and how the PIMCO GIS Dynamic Multi-Asset Fund (DMAF) is positioned.

From the desk of Geraldine Sundstrom, Friday 10th May 2019.

Without notice and pretty much out of the blue, Tariff Man struck last Sunday when the global understanding was that the US/China trade talks were progressing “nicely”.

President Trump accused the Chinese of back pedalling on some prior commitments which of course the Chinese refute. In some ways, it is totally conceivable that better growth and strong risk markets made both parties more confident and demanding. But for now US tariffs on $200bn worth of Chinese goods have risen to 25% and we are waiting for potential Chinese tit for tat retaliation as we write.

For certain, this is not a particularly confidence boosting environment at a time when the recovery was all but fragile and profits of companies could be yet again impacted. Of course we can hope that prospects for lower growth and lower stock markets could push the antagonists to eventually settle which remains PIMCO’s base case, we can hope for potentially more stimulating policies from the Chinese authorities and the Fed to absorb the shocks of a bad outcome...

But we may be in a suboptimal space for a little while and the potential damage inflicted to the global economy and corporate profits, if any, is unclear at this stage. Indeed there is still the possibility that continuing talks bring the US and China to a deal by the time any ship that left the Chinese shores arrives at a US port. However the market’s reaction to the news has been relatively contained so far and one could say that a mild period of uncertainty with an eventual trade deal in the not too distant future is priced.

The sheer binary nature of the outcome and the mild markets’ reaction made us go much more cautious and we decided to de-risk the portfolio markedly to be able to navigate the waters better and keep powder dry. While we could find interestingly priced asset pre-news in certain segments of the equity and credit markets, generic markets were close to fully priced for a recovery. So we have reduced our generic exposure given that upside vs downside looked fairly unattractive in light of the news. We reduced overall equity exposure to around 20 percent and grew safe government duration back to 3.5 years (adding in both the US and Eurozone). We have kept our tilts toward our quality baskets in the US and Japan as well as Chinese consumption which is the first beneficiary of the Chinese stimulus.

The Author

Geraldine Sundstrom

Portfolio Manager, Asset Allocation

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Data as of 10 May 2019 unless otherwise stated. 

Past performance is not a guarantee or reliable indicator of future results and no guarantee is being made that similar returns will be achieved in the future.

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