Economic and Market Commentary

Asset Allocation Outlook for 2022

Learn how PIMCO is positioning portfolios across asset classes – including Equities, Rates, Credit, Real Assets, and Currency Markets.

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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: Jason Odom, Product Strategist, Asset Allocation

Jason Odom: Hi. I'm Jason Odom, and I'm joined today by portfolio managers Erin Browne, Geraldine Sundstrom, and Emmanuel Sharef to talk about PIMCO's latest asset allocation views. Thank you for joining us today. Geraldine, starting with you, how is PIMCO thinking about overall risk in portfolios today?

Text on screen: Geraldine Sundstrom, Portfolio Manager, Asset Allocation

Geraldine Sundstrom: We see the global economy at the mid-cycle point. And while the easy return of the reopening boom in 2021 are likely behind us, we still think this is an environment where we want to be

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 slightly overweight. Then from left to right the dials are as follows: Column 1: Equities are slightly overweight broadly; US equities are neutral to slightly overweight; Europe equities are neutral to slightly underweight; and Japan and emerging market equities are neutral. Column 2: Rates are moderately underweight broadly; US rates are neutral to slightly underweight; Europe rates are neutral to slightly overweight, and Japan and emerging markets rates are neutral; Column 3: Credit is very slightly overweight broadly; securitized credit is slightly overweight; Investment grade credit is neutral to slightly underweight; high yield is slightly overweight and emerging markets credit is neutral. Column 4: Real assets is very slightly overweight broadly; inflation linked bonds is neutral to slightly overweight; Commodities and REITs are slightly overweight; gold is neutral. Column 5: Currencies very slightly underweight broadly; USD, euro and yen are neutral to slightly underweight while EM is slightly overweight.

Text on screen: Overall Risk Positioning: Overweight

overweight risk, albeit selectively. 2022 is a year where our base case is for above-trend growth, and inflation that eventually moderates, and where most of the bottleneck will ease significantly. This results in an operating environment that is likely to be easier for most companies. Of course, there are some significant tail risks that are associated with this base case scenario, and therefore, portfolio will have to be managed with a great deal of flexibility and caution, as well as a big emphasis on security selection.

Jason Odom: Thanks, Geraldine. Looking more closely at each asset class, Erin, can you please walk us through PIMCO's views on equities and rates?

Erin Browne: We are constructive on equities,

Text on screen: Equities Positioning: Overweight

Full page graphic: Equities are slightly overweight broadly; US equities are neutral to slightly overweight; Europe equities are neutral to slightly underweight; and Japan and emerging market equities are neutral

and believe that equities provide the best opportunity for dispersion and alpha generation next year.

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

While we're cognizant of the risks of the gradual removal of accommodative central bank and fiscal policy support next year, we believe that still-above-trend global growth, strong corporate discipline, and sustained profitability next year will drive solid risk-adjusted returns.

Text on screen: TITLE – Barbell approach to sector views:, BULLETS – Long cyclical sectors: Industrials, machinery and mining, Long secular growers: Technology

On a sector basis, we're taking a barbell approach to portfolio construction. On the one hand, we're longer cyclical sectors, such as industrials, machinery, and mining that are expected to benefit from the US infrastructure deal and the buildout of a greener future. On the other hand, we're long secular growers in the tech space that we think are going to be able to take advantage of a greener, brighter future ahead.

Text on screen: Rates Positioning: Underweight

Full page graphic: Rates are moderately underweight broadly; US rates are neutral to slightly underweight; Europe rates are neutral to slightly overweight, and Japan and emerging markets rates are neutral

For rates, we expect that government bond yields will trend higher over the cycle as central banks raise rates, and are therefore underweight rates across our positions.

Although inflation breakevens have moved significantly higher, in our view they still do not fully price in the appropriate inflation risk premium,

Images on screen: PIMCO trade floor

given the potential for a left-tail outcome over the months to come. And in this period of transition, we think that active management of fixed income portfolios is going to be key to harvesting alpha and generating outperformance.

Jason Odom: Emmanuel, can you elaborate on where we are seeing potential opportunity within the credit and currency markets?

Text on screen: Emmanuel S. Sharef, Portfolio Manager, Asset Allocation and Residential Real Estate

Emmanuel Sharef: Certainly. Given that we're in an economic expansion, corporate earnings and therefore corporate credit markets should generally remain quite healthy for the time being.

Text on screen: Credit Positioning: Overweight

Full page graphic: Credit is very slightly overweight broadly; securitized credit is slightly overweight; Investment grade credit is neutral to slightly underweight; high yield is slightly overweight and emerging markets credit is neutral

However, at these very tight starting levels of spread, there just isn't that much upside for spread compression in corporate credit compared to equities. But there are still some opportunities to participate from time to time tactically when spreads widen, and there are also good opportunities in select single names, mostly in COVID affected names, both in IG and high-yield, where we rely on our credit analysis for assistance with selection.

And one area where we still see really good opportunities is in structured credit, especially non-agency mortgage backed securities,

Images on screen: Housing and residential real estate

which are really well-supported by rising house prices and very healthy consumer balance sheets.

Text on screen: Currencies Positioning: Underweight

Full page graphic: Currencies very slightly underweight broadly; USD, euro and yen are neutral to slightly underweight while EM is slightly overweight

Now, with respect to FX, the dollar and DMFX in general, is mostly trade with monetary policy expectations, so we only take tactical exposures there from time to time.

And with regard to EM and EMFX, this is an area that hasn't recovered quite as quickly. It still screens cheap in many of our models, and there are opportunities to earn carry there. However, EM also faces very significant structural headwinds, so we want to be very careful about how we size our position and remain quite controlled there.

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

Text on screen: PIMCO 50 1971-2021

Recorded 6 December 2021

Emerging Markets (EM); Foreign Exchange (FX); Developed Markets (DM)

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IMPORTANT NOTICE

Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

A word about risk: 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. 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. 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. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not.

Alpha is a measure of performance on a risk-adjusted basis calculated by comparing the volatility (price risk) of a portfolio vs. its risk-adjusted performance to a benchmark index; the excess return relative to the benchmark is alpha.

Breakeven inflation rate (or expectation) is a market-based measure of expected inflation or the difference between the yield of a nominal and an inflation-linked bond of the same maturity.

Carry is the rate of interest earned by holding the respective securities

The terms “cheap” and “rich” as used herein generally refer to a security or asset class that is deemed to be substantially under- or overpriced compared to both its historical average as well as to the investment manager’s future expectations. There is no guarantee of future results or that a security’s valuation will ensure a profit or protect against a loss.

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.

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) is authorised and regulated by the Financial Conduct Authority (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), PIMCO Europe GmbH Irish Branch  (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. 2604517) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) 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 and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) 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. 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). 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 and The Investment Trusts Association, Japan. 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 managed and operated independently. The reference number of business license of the company approved by the competent authority is (110) Jin Guan Tou Gu Xin Zi No. 020. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.). Tel: +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. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2021, PIMCO.

CMR2021-1210-1954475

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