Navigating the Growth Rebound

Text on screen: PIMCO

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Text on screen: Jason Odom, Senior Vice President, Product Strategist

Odom: My name is Jason Odom, and I'm joined today by my colleagues Erin Browne and Geraldine Sundstrom to discuss PIMCO's asset allocation outlook.

Erin, starting with you, the global economy has moved from a late-cycle to an early-cycle environment in less than a year. How are you positioning portfolios today?

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

Browne: Looking out over the next year we expect that corporate profit growth will accelerate and risk asset valuations will remain well-supported, given the collapse that we've seen in real rates over the past year.

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 moderately overweight broadly; US equities are slightly overweight; Europe equities are neutral; and Japan and emerging market equities are slightly overweight. Column 2: Rates are slightly overweight broadly; US rates are slightly overweight; Europe rates are slightly underweight; and Japan is neutral and emerging market equities are slightly overweight. Column 3: Credit is very slightly overweight broadly; securitized credit is slightly overweight; Investment grade credit is slightly overweight; high yield is neutral and emerging market equities are slightly overweight. Column 4: real assets is very slightly overweight broadly; inflation linked bonds is slightly overweight; Commodities and REITs are neutral; gold is slightly overweight. Column 5: currencies very slightly overweight broadly; USD is mildly underweight while the euro, yen and EM are slightly underweight.

As a result, as we enter 2021 we're overweight risk assets and we're now looking to take more cyclical risk in our portfolio. To take advantage of the accelerating global growth that we expect this year

Odom: Geraldine, turning to you. Are there any other structural shifts that have occurred, and if so, what are the long-term implications for investors?

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

Sundstrom: At PIMCO we've been discussing the idea of secular disruptors for years now. The pandemic, as you said, has been an accelerator of these trends in areas like technology or geopolitical tensions between the U.S. and China.

As we look forward to the recovery phase now, climate and sustainability are at the center of many recovery policies.

Images on screen: sustainable energy, electric vehicle, automation

Importantly, many of these secular structural shifts are still in the early stage and could represent good investment opportunities, like in renewable energy, electric vehicles, or automation.

Odom: Erin, can you elaborate on some of the key equity themes being expressed in portfolios today?

Browne: Sure. The recovering activity and the ongoing improvement that we expect in corporate profits should be supportive for a rebound in cyclically exposed assets that have meaningfully lagged the market leaders, like big tech, since the market bottom in March.

Text on screen: Equity themes for 2021: BULLETED LIST – Industrial materials, Semiconductors, Consumer durables, Housing-related assets, Select emerging markets, Cyclically oriented regions

The global manufacturing recovery should benefit industries like industrial materials as well as semiconductors.

And in addition, the focused fiscal measures coupled with an improvement in the labor market, should benefit consumer durables as well as housing recovery themes.

On a regional basis we believe that select emerging markets, and cyclically oriented regions like Japan, should benefit.

Odom: Geraldine, what if the recovery hits a speed bump in 2021? How are you thinking about portfolio diversification and, protecting against that downside scenario?

Sundstrom: is indeed a time to position portfolio for a fresh, brand new economic cycle, but significant near-term risks remain. So it is important to keep good diversifiers in portfolio.

Text on screen: Portfolio diversification and potential downside protection: BULLETED LIST – Select government bonds (ex. U.S. Treasuries), High-quality emerging market bonds, Real assets, High quality currencies

First, we believe that safe government duration will remain a good diversifier for portfolio, and certainly in case of an adverse economic environment, U.S. treasury would have room to rally. However, yield levels are relatively low, and we need to broaden the scope of this duration exposure towards some higher-quality emerging market like bonds of the Chinese government or those of Peru.

We also use real assets like gold or inflation-protected treasuries, given the fact that they could not only be a hedge in case of an economic weakening, but could also act as potential hedge in case of an inflation surprise. Last, but not least, we also rely on some risk of high-quality currencies like the Japanese yen.

The bottom line of all of this is that one has to diversify their diversifiers.

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

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Disclosure

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.

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.

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. 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. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. 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. 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. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Diversification does not ensure against loss.

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 long-term, especially during periods of downturn in the market.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.

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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