Positioning Portfolios in a Fast Moving Cycle
Text on screen: PIMCO
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Text on screen: Tina Adatia, Fixed Income Strategist
Tina Adatia: Marc, before we dive into specific asset classes, could you give us a bit of a big picture view on how PIMCO is thinking about portfolio positioning, given this uncertainty?
Text on screen: Marc P. Seidner, CIO Non-traditional Strategies
Marc Seidner: We are trying to take a long-term approach and look for a potential short term over or under reactions to the ever changing cycle.
FULL SCREEN GRAPHIC: Title – Portfolio Implications: Take long-term approach while watching for potential short-term overreactions;Chart shows spread valuations relative to past 20 years for TIPS, Agency MBS, U.S. Investment Grade, U.S. High Yield, EM External, S&P 500 P/E Ratio: The valuations for all of the these securities are currently in the expensive range with the exception of EM External And Agency MBS.
If you see in the graphic of a picture often tells a thousand words and this happens to be an environment where we have shifted quite rapidly from very attractive valuation on most assets that we look at in the post pandemic environment, again, thinking back to the first half of 2020 and the opportunities that presented themselves at that moment, many assets looked quite cheap both on a fundamental and a valuation basis.
Obviously the environment is very different and valuation has shifted. Most assets that we look at look quite rich, quite expensive on an historic basis. And that's an environment, again, as we've said, of increasing fundamental uncertainty increasing market uncertainty potential rises in volatility.
And here valuations seemed quite unattractive to us across most of the assets we looked at. There are certain pockets of opportunity, but generally valuation seems quite unattractive to us.
Tina Adatia: Thanks, Marc. So you did mention looking at each risk factor. So maybe starting with interest rates, what's our view on duration and yield curve?
Marc Seidner: Yeah, we've been quite unimpressed with the overall level of bond yields globally, and so we've been quite cautious in terms of duration positioning. That said,
FULL PAGE BULLETED LIST: TITLE – PIMCO’s views on duration and yield curve:, LIST – Increase duration as yields rise, Positioned for a steeper yield curve
As yields rise given that we are in the late stages of the cycle, we are going to be quite interested in adding duration to portfolios. Again, bonds should and likely will continue to have the diversification benefit that is so necessary in the late stage of an economic cycle and while yields right at this moment don't look all that attractive to us, there's not enough of a risk premia built into the level of interest rates globally.
With regard to the yield curve, that may be one of the more interesting opportunities that's presenting itself. Again the yield curve has flattened quite a bit in recent months. And to us, that means that positioning for a somewhat steeper yield curve may be warranted at this point.
Tina Adatia: Thanks, Marc. Now, moving on to spread assets, maybe just a brief comment on corporate credit. What are we thinking there and also emerging markets?
Marc Seidner: Yeah. Quickly on corporate credit, and we've said this many times over the course of the last few months, we're rather unimpressed with the generic level of corporate spreads.
FULL PAGE BULLETED LIST: TITLE – PIMCO’s views on spread assets:, BULLETS– Cautious on corporate credit, SUB-BULLETS - We like COVID-recovery sectors, BULLETS – Opportunities in non-corporate credit, SUB-BULLETS – Securitized, mortgage-related, and consumer-related assets, BULLETS – Select emerging market opportunities
The fundamental environment for many companies is still quite positive, and so we're not looking for dramatically wider spreads, but valuations seems quite unattractive to us, and we'd be quite cautious on generic corporate credit. There are opportunities we still like the COVID recovery theme, the pandemic is still a risk factor, but as the pandemic plays itself out, and we learn more about the Omicron variant, it's quite possible that we may be closer to the end than the beginning of the pandemic. And that should be a tailwind for the COVID recovery theme and COVID recovery sectors in the market.
With regard to non-corporate credit, the consumer balance sheet still looks incredibly robust here in the United States, but also globally. And that to us continues to create opportunity and attractiveness in securitized assets, mortgage related assets, consumer related assets. And then lastly, Tina you asked emerging markets, emerging markets had quite a rough ride in 2021 that may present opportunity in 2022 that's one area where the valuation on specific countries and opportunities looks quite attractive to us.
This is an environment of differentiation in terms of economic fundamentals. It's certainly an environment of differentiation within industries and within individual companies. And again, it's an environment that I think should reinforce the benefits of active management and really robust research processes and security selection.
Just a note touching back on the inflation outlook, again, stress testing for a variety of inflation environments on companies’ income statements and balance sheets, which hasn't really been necessary for much of the last couple decades will be increasingly important to understand how margins get affected in a more uncertain economic and fundamental environment.
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