Asset Allocation Outlook for 2022
Text on screen: PIMCO
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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.
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Text on screen: PIMCO 50 1971-2021
Recorded 6 December 2021
Emerging Markets (EM); Foreign Exchange (FX); Developed Markets (DM)
Diclosure
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
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