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: Kimberley Stafford, Global Head of Product Strategy
KIM STAFFORD: Hello, I'm Kim Stafford, and I'm here again with PIMCO Group CIO, Dan Ivascyn, to give you an inside look at some of the recent discussions taking place within PIMCO's Investment Committee or IC. Dan, thank you for joining us!
DAN IVASCYN: Thanks, Kim!
KIM STAFFORD: You kicked off the year with some global travel, spending time with our investors outside of the US. In fact, you happen to be on the ground in Asia, during the recent election headlines and volatility in Japanese bonds, what stood out to you about how investors are thinking about markets? What were the range of perspectives around asset allocation and risk preferences?
DAN IVASCYN: This time of year, I do tend to hit the road and meet with clients around the globe.
Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer
And, you know, at these various events, we do surveys as well. So we actually have some hard data in addition to a lot of investor conversations.
There were a few themes this year. One general optimism towards economic growth, excitement about the riskier areas of the financial markets. A lot of excitement about global equities. A lot of excitement about the client's respective local market equities, but still not a tremendous amount of interest in global bonds or global fixed income.
So again, a risk-seeking mindset, but also a mindset where there is increasing anxiety or concern about some of the global themes or global uncertainty, policy uncertainty, geopolitics was another area of focus for investors. So I think the bottom line is that investors are still confident. They are perhaps less focused on the global opportunity set than we are at the moment. But I think that creates great opportunity.
KIM STAFFORD: You've said previously that it's always important to compare the macro outlook with what's already priced into markets. When you make that comparison, where do you see pockets of value and where do you see potential signs of complacency or risks?
DAN IVASCYN: We are confident about global growth.
Text on screen: Growth optimism is high—and already priced into credit and equities
Images on screen: Wall Street, New York Stock Exchange
We are confident about US growth particularly during the first half of this year. But when you look at risk markets, a lot of this is priced in. Maybe more optimism than is warranted, is priced in when you look at very, very tight credit spreads, particularly tight credit spreads in the riskier areas of the credit markets, then global equities are at elevated valuations.
You combine that with the optimism I talked about earlier in terms of various client surveys and discussions, would suggest that a lot of the good news is priced in. Our job as active allocators across markets is to look at what's embedded and implied in pricing.
And a great opportunity is when you see significant optimism in one market, pessimism in the other, that invites a relative value opportunity.
Over the last several weeks alone, we've had volatility in Japan, volatility in the UK associated again with politics, which then bleeds into France. You have China at a very different part of their growth cycle where they're dealing with disinflationary forces, while we have elevated inflation in Australia, across Europe, and in the United States.
Text on screen: Global divergence unlocks attractive relative value opportunities
Images on screen: Australia, European Central Bank, US Capitol building
It's a unique environment, an environment where you can do these simple relative value comparisons and it can uncover a lot of attractive opportunities.
And I think that's why we say that in high quality fixed income, your starting yield is a really, really good assumption in terms of the floor, in terms of expected return.
Text on screen: Steeper curves and volatility reward active asset allocation
Images on screen: PIMCO trade floor
But today, with steeper yield curves, more localized volatility, more policy uncertainty, you can add onto that base case yield by making thoughtful asset allocation decisions along the way, especially if you maintain portfolio liquidity, which means flexibility to react to future uncertainty.
That's very, very different than the model or the choices that investors had a decade or so ago when yields were low or negative with very little volatility, you had to lock up your money, you had to buy some of the riskier investments to generate that high yield. We're in a very different environment.
So again, we do think this is an environment where investors should acknowledge that a lot of optimism is embedded in prices.
There's reasons to be optimistic, but from an asset allocation perspective, we think you could generate similar or even higher base case yields with more resiliency, more liquidity, more future flexibility than some of the popular strategies that have done well on a historical basis but probably don't do as well going forward.
KIM STAFFORD: Investors have enjoyed a long AI led stock market boom. Lately, we've seen volatility amid AI concerns including industry disruption, capital spending growth, and borrowing needs. From your vantage point, how is AI investment changing markets and where do we see investment opportunities?
DAN IVASCYN: AI is a very important, innovative, and disruptive technology. It will, over the near term, drive growth forward.
But anytime you have a disruptive technology, there’s going to be some winners and losers, and even in a strong economy, even in an environment where, you know, overall equity prices continue to go higher they're going to be losers. So you have to be absolutely careful about this disruption. In some sense looking back at my career in the business, I remember early stages of the global financial crisis.
People knew something was going on, didn't quite know what was going on. And again, the outcome surprised many investors. Early days of COVID. And I remember an Asia trip around the same time where I returned to the States, and it felt like something major was going on. But again, it created a lot of uncertainty. I think AI's a similar type of situation for markets.
We're in the early stages, things are moving very, very quickly. And anytime you have this type of environment, you have to be prepared for the resulting disruption.
Text on screen: TITLE – PIMCO’s principles for navigating AI-driven uncertainty, BULLETS – Emphasize quality, Avoid illiquidity unless adequately compensated, Use leverage cautiously, Limit concentration risk, Focus on sectors less prone to disruption, Maintain conservative underwriting standards
Again, what that means to PIMCO is up in quality.
Be careful about locking up your money if you're not getting paid sufficiently to do so. Be careful about leverage. Be careful about concentrations, which gets back to this attractiveness of global diversification.
Focus on sectors that are less prone to disruption. More granular risk like asset back risk, hard assets back at your investments, conservatism in terms of underwriting, all these are very, very important themes on a go forward basis. And all of these themes can be exacerbated if you have some type of negative growth shocks.
I think the playbook has to be different than the playbook that investors have utilized over the last decade or so.
But I think that the good news again is where we started the conversation, is that there's this very, very attractive, high quality global opportunity set. But I do think that these asset allocation decisions will be quite consequential for absolute and relative returns going forward.
KIM STAFFORD: Great! Well thanks very much Dan, and thanks to all of you for joining us! We'll see you next time.
Text on screen: For more insights and information, visit pimco.com
Text on screen: PIMCO
Disclosures
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. 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.
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. Outlook and strategies are subject to change without notice.
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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