Insights

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.

FOREWORD

  • Access these views via the Dynamic Multi-Asset Fund, a dynamic fund designed to deliver across market environments and help investors navigate the toughest market situations.


From the desk of Geraldine Sundstrom, Friday 24th June 2022.

Canaries Galore

The canaries are succumbing one after another and markets have taken notice of the growing wave of evidence that the global economy is slowing, potentially quite fast. This was most visible in fixed income markets, where rates have (at least temporarily) eased off, and expectations of central bank rate hikes have been lowered. Nevertheless most central bankers, notably Jerome Powell during his bi-annual testimony, continue with the same hiking rhetoric, in a determined, unconditional mood without showing any signs of relaxing. Only Australian and UK central banks have offered more explicit reality checks to markets’ expectations of the future path of policy rates.

A number of relevant news items trickled in during the week. First, South Korean export data (the most timely leading indicator with a long track record) for the first 20 days of June fell sharply by 10% month on month – the steepest decline since April 2020 – and the fall was broad across sectors. We also had a large number of companies from various sectors warning about May and June demand: with one stating demand is “significantly down”; another expecting a “sharp downturn in the second half”; another noting the need to offer incentives and price reductions, with some industrials idling production lines; and finally one noting the growing competition as supply chains get restored. This could, of course, be the result of a switch of demand from goods to services but we also have services companies starting to note a fading consumer. Overall, all these anecdotes were confirmed by Flash PMI prints for the month of June.

The Eurozone composite Flash PMI for June came at 51.9 (well below expectations of 54.0 and the prior month at 54.8) and Services surprised the most to the downside, shrinking to 52.8 in June from 56.1 the previous month. On closer inspection, new orders and future output showed unhealthy falls, while supplier delivery time and prices were comfortably past their worst. The U.S. also produced disappointing numbers, with the composite index coming in at 51.2 in June versus expectations at 53 and May at 53.6 – again both manufacturing and services showed weakness. Probably more telling was the comments from the PMI chief economist noting that the deterioration in forward-looking indicators sets the scene for an economic contraction in the third quarter. He also went as far as saying: that “price pressures have peaked”; spoke about a “solid fall in new orders”; noted that many services firms are now seeing households “increasingly struggle”; and finally said that companies are reassessing their staffing needs going forward. It made for a bleak read, without doubt. There were other indicators beyond PMIs, like the IFO, consumer confidence in Germany and Italy, the Commodity Research Board Raw Industrial Material index dropping below its 200-day moving average for the first time in two years, and Maritime freight rates continuing to move lower when it should be the peak season.

Lower interest rates certainly gave a boost to markets, given the soothing impact on risk assets valuations. But this is only one dimension: equities will also be affected by earnings growth ahead, and the potential for credit defaults in any economic downturn. Currently, the consensus forecast for the S&P500 remains at around 9% EPS growth in 2022, with the Eurostoxx600 at 15% (which could be materially off if a downturn were to occur), while 2023 numbers remain elevated too. As such, markets are likely to wonder what they are truly wishing for – lower rates or lower growth – and volatility should linger for a while.

In the DMAF portfolio, we are sticking to our cautious stance. We decreased equities by a small amount, as we did FX (which we see as commodity related), as this could be hurt in a recession scenario.

Géraldine

How can DMAF benefit investors in today’s uncertain markets?

i. Provide optionality
ii. Enhance returns
iii. Control risk

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The Author

Geraldine Sundstrom

Portfolio Manager, Asset Allocation, EMEA

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Disclosures

Data as of 24th June 2022 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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