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
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. Thank you for joining us, Dan.
Ivascyn: Thanks, Kim.
Stafford: So Dan, what does the 2022 market environment feel like so far?
Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer
Ivascyn: Very different than 2021. 2021 was relatively easy, at least in retrospect. You had tremendous
Images on screen: The Federal Reserve building
central bank accommodation, you had a period where we were seeing a bumpy COVID related recovery, and an environment where most financial assets, risk assets in particular, performed quite well.
2022, you have extreme uncertainty. You have uncertainty around the fundamental economic environment.
Images on screen: COVID-related images, The White House, US Capitol
Omicron is creating a tremendous amount of near term uncertainty.
You have uncertainty now regarding the policy response, uncertainty around inflation and the response of policymakers, and then of course what matters most to PIMCO is pricing of financial assets, how much of this uncertainty is discounted into those assets, and how do financial assets respond to changing fundamentals, uncertain fundamentals, and uncertain policy.
And that’s a great environment for an active asset manager that has sufficient flexibility to respond and react to what we think is going to be this heightened period of uncertainty in a period where markets are not that liquid, and where we’ll likely see overshooting of fundamentals.
Stafford: Inflation remains a top concern for many investors, so can you share our recent thoughts on the inflation outlook?
Ivascyn: Sure, so probably the most important thing I can say is that the inflationary environment’s going to remain quite uncertain.
Text on screen: We expect inflation risks to be higher than current forecasts in the near-term
Images on screen: PIMCO trade floor
We expect elevated inflation and the risks of inflation being even higher than what’s currently forecasted over the course of the next few months.
Stafford: And how does this manifest in portfolios as being mindful in inflation and positioning?
Ivascyn: Although we are cautiously optimistic on the inflationary trajectory, across the U.S. economy and in fact key portions of the global economy, when you look at the relatively low rate environment still, despite the backup in rates we’ve seen over the course of the last several weeks, you’re still not getting paid a lot to bet against inflation at this point.
So if you’re looking at breakeven inflation rates embedded in inflation protected securities here in the U.S. and other areas of the world, if you’re looking at just the yield curve, relatively flat, at still relatively low nominal rate levels, we still think it makes sense to be defensive.
Text on screen: TITLE – PIMCO portfolio positioning: BULLETS – Underweight duration, Defensive on interest rate risk, Constructive on emerging markets, Utilizing Treasury Inflation-Protected Securities (TIPS)
So we continue across portfolios to be underweight duration. The recent backup in rates, particularly on the front end of the curve, as we price in more central bank policy actions, are becoming more interesting from a valuation perspective.
I don’t think we’re too far away from levels where we’ll begin to reduce that duration underweight, but for the time being, we think investors should continue to be defensive regarding interest rate risk more broadly, look for areas of the world, particularly outside the U.S, certain segments of the emerging markets where central banks have already been much more active.
We also think sourcing inflation protection through TIPS markets still makes sense at current valuations as well.
Stafford: We’ve talked about our base case scenario, but what about investors who may have a different view on the path of inflation and want even more inflation protection?
Ivascyn: Inflationary risks are considerable. And the base case view could be wrong and we do think that risks are biased to higher inflation over the short to immediate term rather than lower inflation. And there’s some great opportunities to look to better insulate an overall portfolio from higher inflationary outcomes.
Text on screen: Assets with inflation-protection potential: 1. TIPS and other inflation-protected securities
Images on screen: PIMCO trade floor
Treasury inflation-protected securities, other inflation-protected securities around the globe, still offer quite reasonable valuations.
Text on screen: Assets with inflation-protection potential: 2. Commodities
Images on screen: Mining
If you look at the commodity markets, precious metals, other areas of this opportunity set, are still priced at reasonable levels from a longer term historical perspective.
Text on screen: Assets with inflation-protection potential: 3. Real estate
mages on screen: Residential real estate
Then other inflationary themes, whether it’s real estate,
Text on screen: Assets with inflation-protection potential: 4. Emerging markets
Images on screen: Emerging market countries
segments of the emerging market opportunity set, look quite attractive as well.
So even across PIMCO portfolios, despite having a constructive base case view towards inflation, we are looking to source this type of inflationary protection, including our multi-asset portfolios.
Stafford:So a lot of uncertainty about how quickly the Federal Reserve will raise interest rates, and this has created volatility early this year as investors try to assess the impact on different assets. So what are PIMCO’s views on the possible path of rates and the implications across asset classes?
Ivascyn: Even though a lot of central banks have similar base case views that inflationary pressures will begin to be reduced later this year and into 2023, they view this as a risk management exercise.
And there is a legitimate risk that policy rates need to be taken higher, and even higher than what the market’s currently anticipating.
Images on screen: PIMCO trade floor
And therefore, we think investors should be quite defensive regarding interest rate rise more broadly, but also other areas of the market that have remained elevated based on this assumption that interest rates will remain reasonably range bound.
But there’s a significant risk scenario, as you’ve mentioned, that interest rates rise materially from here. The policymakers need to do more to tighten financial conditions. That could have an impact not only on bond markets but risk assets more broadly.
So this is a time where investors need to acknowledge that there’s quite extreme uncertainty, fundamental economic uncertainty, policy uncertainty.
Text on screen: TITLE – Considerations for investors: BULLETS – Flexibility, Reducing risk across portfolios, Mitigating interest rate risk, credit risk and equity segments
We think this is the time to look to be more flexible, look for thoughtful ways to reduce risk across portfolios, and continue to be fairly defensive regarding interest rate risk more broadly, credit risk, even some more defensive strategies within the equity segment.
Stafford: So looking at bond markets in particular, what are some of the active management strategies that PIMCO’s employing to help guide portfolios through periods of rising rates?
Ivascyn: Market liquidity is not that strong at the moment. There’s a lot of volatility and ongoing anticipated volatility. So these are markets where we’re likely to see a lot of localized overshooting of fundamentals.
TITLE – Opportunities for active asset managers: BULLETS – Broad, geographic opportunity sets, Private markets, Risk assets, Liquidity
So having a broad opportunity set from a geographic perspective, being able to expand from public markets into segments of the private opportunity set, we think all makes sense.
Financial conditions remain quite supportive of risk assets still. Valuations from a historical perspective look at best fair, and in certain pockets of the market, on the expensive side.
So we think that expanding the opportunity set, being willing to give up some liquidity, all make sense at this stage of the cycle and are consistent with prudent, careful investing in a period of, again, heightened volatility and risks of overshooting fundamentals, which of course create opportunities for an active asset manager.
Stafford: And the destination of higher rates is a real positive for bonds?
Ivascyn: It is. It may not feel that way on the way up, but higher yields, perhaps steeper yield curves, at least on a forward basis, are generally good things in terms of uncovering value across markets.
But again, you don’t want to get caught wrong footed on the way up in terms of yields. And again, there’s a lot of focus in the market today about the impact of inflation on fixed income returns. I think it’s important to note that a lot of areas of the financial market opportunity set have been supported by the very low interest rate and highly liquid environment that we’ve operated in.
So interest rates being higher, inflation remaining high for a sustained period of time, will be a negative force for assets. So I think it’s time to be a bit more defensive and bet a bit more portfolio flexibility into strategies. We’ve had quite the recovery from the lows in March 2020. I think it’s time now to wait for volatility to create opportunity to go on the offense when you’re getting paid a bit more to take those risks.
Stafford: 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
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.
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. 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. 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. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses.
Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. There is no guarantee that results will be achieved.
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.
The continued long term impact of COVID-19 on credit markets and global economic activity remains uncertain as events such as development of treatments, government actions, and other economic factors evolve. The views expressed are as of the date recorded, and may not reflect recent market developments.
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, 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 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. ©2022, PIMCO.