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Economic and Market Commentary

Capitalizing on Diverging Global Economies

Learn how we are navigating differences in monetary policies and economic outlooks in order to optimize portfolio performance.

Text on screen: PIMCO

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

Text on screen: Shelby Pope, ASSET ALLOCATION STRATEGIST

Shelby: Erin, can you begin by sharing PIMCO’s economic outlook and its implications for positioning in our multi-asset portfolios? 


Erin: Over the next six to twelve months, we anticipate diverging paths among regions and sectors. US growth remains robust, but many other economies appear to be weakening, though we are starting to see some early signs of a pick-up in economic activity elsewhere. Persistently sticky inflation, especially in the US, remains an important risk.

Text on screen: Our multi-asset portfolios are emphasizing quality and diversification.

Images on screen: European Central Bank, Bank of England

While we favor higher quality positioning across asset classes, we see opportunities in a broader range of sectors, including more cyclically-oriented areas, which we believe will be supported by recovering economic activity.

We are slightly overweight equities amid the outlook for economic divergence and our expectation for broadening and rebounding earnings growth.

And we’re also marginally overweight high quality fixed income, especially in more interest-rate sensitive economies outside the US.

Shelby: Thank you Erin. Emmanuel can you provide more detail on our view to be overweight both equities and duration?

Text on screen: Emmanuel S. Sharef, PORTFOLIO MANAGER, ASSET ALLOCATION

Emmanuel: Absolutely. We see diversification benefits in owning equities and bonds in today’s environment, especially as we expect a return to a more traditional negative correlation between the asset classes. Exposure to equity risk today offers upside potential if the economy continues to rebound, while fixed income positioning should perform well if recession risk becomes a primary concern again, and as central banks begin cutting rates.

Text on screen: TITLE - Diverging regional outlooks support a diversified bond allocation: BULLETS - Developed market countries ex. U.S., Floating rate mortgage markets, Greater downside growth risks, High-quality emerging markets

Diving deeper into our stance on duration, we prefer developed market countries outside the US, like Australia and Canada, with floating rate mortgage markets because they really feel the effects of any changes in monetary policy right away. We are also overweight exposures to countries with greater downside growth risks, such as the UK.

And lastly we are finding some really attractive opportunities for high quality duration exposure in select emerging markets.

Shelby: Great. And Erin, within equities, do you see attractive opportunities from a sector or regional perspective today?

Erin: Absolutely, while macroeconomic indicators are suggesting a potential soft landing, we also see bottom-up signs of a growth rebound from the equity markets. More companies are highlighting improvements in inventory and many companies and sectors appear set to emerge from earnings “recessions”.

Text on screen: In 2024, we expect to see broader participation in the earnings recovery.

Images on screen: PIMCO trade floor

As we navigate through 2024, we expect to see broader participation in the earnings recovery beyond just the mega-cap technology which may propel equity markets higher from here.

Text on screen: TITLE - Maintain a preference for up-in-quality exposures: BULLETS - High free cash flow, Strong margins, Low Leverage

Against this backdrop, we still maintain a preference for up-in-quality exposures with high free cash flow, strong margins, and low leverage, but we are also starting to expand our positioning to include more economically-sensitive sectors like industrial cyclicals.

From a regional lens, we prefer US equity exposures given more buoyant economic growth and higher earnings expectations. We are neutral Europe amid greater downside risks to growth and our expectations for weakening earnings.

Text on screen: Opportunities in select emerging markets.

Images on screen: South Korea city street and skyline

Additionally, we see opportunities in select emerging markets, for example Korea, which appears to have upside potential driven by reasonable valuations and a recovery in semiconductor sales.

Shelby: And Emmanuel, looking beyond equities and duration, are there other asset classes that present opportunities today?

Emmanuel: So one of our highest conviction views today is

Text on screen: TITLE - High conviction fixed income opportunities: BULLETS - U.S. agency mortgage-backed securities, Securitized credit, Non-agency mortgage-backed securities, Asset-back securities

US agency mortgage-backed securities. Valuations there remain compelling – we see a considerable spread pick-up versus treasuries. And with a government guarantee, they offer a high quality, liquid expression of duration to hedge potential downside growth surprises.

Looking more broadly at fixed income, we also see some opportunities within global credit markets with today’s elevated yield levels, especially in securitized credit.

We like senior positions in non-agency mortgage backed securities and select asset-backed securities, which we believe are supported by resilient fundamentals, attractive valuation profiles, and robust household balance sheets.

Turning to corporate credit, spread levels appear tight for both investment grade and high yield, so we don’t think corporate bonds provide enough compensation for the risk in the current environment.

Text on screen: Text on screen: High carry and continued U.S. resilience make the U.S. dollar attractive.

Images on screen: United States Mint

And finally, within developed market currencies, the U.S. Dollar stands out to us as an attractive option. Its valuations are less demanding than they have been recently and it should be supported by relatively high carry and continued US resilience. In emerging markets, we are constructive on select high-yielding currencies that have attractive relative valuations and elevated total carry.

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

All investments contain risk and may lose value. 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. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. U.S. agency mortgage-backed securities issued by Ginnie Mae (GNMA) are backed by the full faith and credit of the United States government. References to Agency and non-agency mortgage-backed securities refer to mortgages issued in the United States. Securities issued by Freddie Mac (FHLMC) and Fannie Mae (FNMA) provide an agency guarantee of timely repayment of principal and interest but are not backed by the full faith and credit of the U.S. government. 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. Equities may decline in value due to both real and perceived general market, economic and industry conditions. 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.

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