Portfolio Implications for Investing in the Recovery

Text on screen: PIMCO

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Text on screen: Andrew Balls, CIO Global Fixed Income

Andrew Balls: We think this is a very good environment for active investors. Bounded Optimism is the title of the piece, not optimism across the board. And we certainly don't want blind exposure to beta. We want to be looking to implement the best ideas in this environment.

And then moving to the specific portfolio implications,

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Image: Chart showing five different market implications with Rates highlighted. BULLET POINTS – Fairly neutral overall duration given both upside and downside risks; Expect to have curve-steepening positions.

on duration, we're broadly neutral on duration in our core portfolios. We've moved a little bit higher in the last weeks, but we see both upside and downside risk to duration, push and pull between lockdowns and vaccines you might say. Curves, in terms of curve positioning, we have a bias for curve steepening. Over the next year, over the next 18 months, we think central banks will continue to anchor the frontend of the curve, but further out the curve, you could see more pricing in of reflation at the longer end of the curve. So a curve steepening bias we think makes sense.

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Image: Chart showing five different market implications with Corporate Credit highlighted. BULLET POINTS – Cautious on generic credit beta; Private credit can offer an attractive vehicle for long-term positions.

Credit looks reasonable. We are going to find good opportunities there. But we would stress firstly the active approach, the best ideas of our credit analysts, our credit team. We don't want to expose you to just generic credit. We want to have the best ideas from our credit experts. And then private vehicles, private credit vehicles, a different approach, but the opportunity to benefit from liquidity premia, complexity in terms of some of the structures there, more appropriate to private credit vehicles.

Emerging markets look reasonable.

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Image: Chart showing five different market implications with Emerging Markets highlighted. BULLET POINTS – Overweight hard-currency denominated emerging market sovereign credit exposures; Select EM local positioning.

We should find good opportunities in EM external hard currency, but also select opportunities in terms of local exposures.

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Image: Chart showing five different market implications with Securitized highlighted. BULLET POINTS – U.S. Agency mortgage-backed securities offer attractive carry; U.S. mortgage credit and broader global asset-backed market offer seniority and favorable profiles.

In broad terms, housing market related assets look pretty attractive to us still. So US agency mortgages, non-agency mortgages in the US. In the UK, UK RMBS, some other global alternatives continue to offer we think pretty good risk/reward. Asset backed securities, seniority in the capital structure.

And then finally, in the global portfolios where I'm closely involved and more broadly with the more globally orientated portfolios,

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Image: Chart showing five different market implications with Currencies highlighted. BULLET POINT – Modern U.S. dollar underweight versus the basket of G-10 currencies and select EM FX exposures.

where FX positioning is appropriate, we've had an underweight to the US dollar. That's worked well in the past couple of months. We think there's further to go in terms of being underweight the dollar versus cyclical developed market countries. Often the commodity producing countries, select emerging market currencies as well. In the baseline of cyclical global recovery, we think there is further for the US dollar to underperform which is what we would expect in that kind of global recovery cycle.

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

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. Investments in residential/commercial mortgage loans and commercial real estate debt are subject to risks that include prepayment, delinquency, foreclosure, risks of loss, servicing risks and adverse regulatory developments, which risks may be heightened in the case of non-performing loans. Investments in Private Credit may also be subject to real estate-related risks, which include new regulatory or legislative developments, the attractiveness and location of properties, the financial condition of tenants, potential liability under environmental and other laws, as well as natural disasters and other factors beyond a manager’s control. Investing in distressed loans and bankrupt companies is speculative and the repayment of default obligations contains significant uncertainties. Diversification does not ensure against loss.

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