Economic and Market Commentary

Positioning Portfolios for Today's Markets

Find out how we’re positioning portfolios across global asset classes, with Erin Browne, asset allocation portfolio manager.

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Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized

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

Erin: I am here to discuss how PIMCO is positioning portfolios across global asset classes and other key takeaways from our latest asset allocation outlook.

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

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

We are overall underweight risk given our expectation that growth will slow in the coming quarters as the lagged effects of tighter financial conditions lead to a recession in the US by year end.

That said, the volatility across markets experienced over the last year coupled with the re-pricing across asset classes has created some compelling investment opportunities, particularly in fixed income markets.

Looking more closely at each asset class, we remain cautious on equities.

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

Equities look expensive when considering the macro environment, and we think that earnings estimates are still too optimistic and valuation multiples are still too high. Additionally, equities have historically underperformed heading into recessions.

From a sector perspective, we favor more defensive businesses such as healthcare and consumer staples.

One bright spot is emerging markets, most notably emerging markets Asia, which we expect to benefit from the China re-opening story that we think will continue to play out through the rest of this year.

Turning to fixed income, our views on rates and high quality credit are more constructive as we note in our outlook piece Bonds are Back.

Full page graphic: The risk dial on top shows Credit is slightly overweight broadly; securitized credit is overweight; Investment grade credit is slightly overweight; high yield is slightly underweight and emerging markets credit is neutral.

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

And we think that fixed income is benefiting from higher yields, decelerating inflation, and the fact that policy rates are approaching their terminal level.

In our view, high quality bonds typically perform well heading into a recession, and we believe that this will be the case this time around as well now that inflation is starting to show signs of coming down.

Our bias is to own higher quality credit given our fundamental expectation for further economic weakness, and we particularly like mortgage related credit and securitized credit.

We also see some value in maintaining high quality liquidity in our exposure in order to be able to step in opportunistically when dislocations occur.

Within real assets, we hold a fairly balanced view today.

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

Commodities while they potentially offer a good inflation hedge, they’re often times sensitive to economic growth, so we are cautious on positioning in light of that.

Where we see more value right now is in TIPS, and they potentially offer an attractive way to hedge inflation risk given that markets are right now pricing in fairly modest long-term inflation expectations.

Lastly, I wanted to touch on PIMCO’s outlook for the dollar and other currencies going forward.

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

We’re underweight the dollar. We believe it that looks expensive from a valuation perspective and anticipate that some of the previous tailwinds such as the stronger relative US growth as well as the yield advantage of US rates versus the rest of the world have started to fade away.

We favor select emerging market currencies, given cheap valuations, attractive carry, falling inflation and improving fundamental and technical factors.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

Disclosure


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. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Equities may decline in value due to both real and perceived general market, economic and industry conditions. 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.

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.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, Corso Vittorio Emanuele II, 37/Piano 5, 20122 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited Unit 3638-39, Phase II Shanghai IFC, 8 Century Avenue, Pilot Free Trade Zone, Shanghai, 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other) | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 012. The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. 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CMR2023-0510-2896133

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