Quick Takes: Navigate Inflation Concerns with a Multi-Asset Approach
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: PIMCO Quick Takes: Navigate Inflation Concerns with a Multi-Asset Approach
Text on screen: Greg E. Sharenow, Portfolio Manager, Commodities and Real Assets
Sharenow: As we can all attest to, inflation has hit our pocketbooks, it's hit the markets, it has become a central part of the political dialogue. In 2022,
FULL PAGE GRAPHIC: TITLE – Persistent and broadening inflation led to a rapid re-pricing of Fed hikes. A line chart is shown; the subtitle for the chart reads: Higher than expected. It shows three lines. The blue line represents Core Goods. The green line represents Core Services. The black line represents the Core Consumer Price Index (CPI). All three lines showed significant increases. The biggest increases were in Core Services and Core CPI, which rose from approximately 2% in January 2019, to above 4% in mid- to late 2021, and to above 6% as of October 31, 2022.
as you can see core inflation, both goods and services, have been on the rise and have hit over 6%.
As we look to 2023 we still expect inflation to be high, although begin to moderate some.
FULL PAGE GRAPHIC: TITLE – Persistent and broadening inflation led to a rapid re-pricing of Fed hikes. A line chart is shown; the subtitle for the chart is Overshooting? It shows four lines plotted against the federal funds rate (%) on the left axis. The dark blue line represents the median federal funds rate expectations from the Federal Open Market Committee (FOMC) during its December 2021 meeting. The green line shows the FOMC’s median fed funds rate expectations during its March 2022 meeting. The red line shows the FOMC’s median fed funds rate expectations at its June 2022 meeting. The light blue line shows the FOMC’s median fed funds rate expectations at its September 2022 meeting. The chart shows the median expectations moving significantly higher, from below 1% at the FOMC’s Dec. 2021 meeting, to below 2% at its March 2022 meeting, to near 3.5% at its June 2022 meeting, to below 4.5% at its September 2022 meeting. The median expectation for the fed funds rate shows an increase to above 4.5% in 2023, trending down toward 2.5% after 2024 and beyond, based on median expectations during the September 2022 FOMC meeting.
The rise of inflation has led to significant changes in expectations for the fed in terms of the amount of hikes and to the level for which they are going to hike over the course of 2022 and 2023.
This has had a negative impact on asset pricings broadly, as we've seen with the selloff in equity markets and the retracement in fixed income markets.
The inflation backdrop has meaningful implications for investors.
FULL PAGE GRAPHIC: TITLE – Asset class sensitivities to growth and inflation surprises. The chart shows four shaded sections measured by inflation, which measures asset price movements in response to an increase or decrease in inflation, and Growth (bottom scale). The upper left corner in light blue, High inflation, Low growth, shows assets Gold and Treasury Inflation Protected Securities (TIPS). The upper right corner in green, High inflation, High growth, shows Commodities, REITs and Emerging Markets Currencies. The lower left corner in dark blue, Low inflation, Low growth, shows Core Fixed Income and Treasuries and U.S. Core Bonds. The lower right corner in red, Low inflation, High growth shows Non-Inflationary Growth, Low inflation, High growth, with Equities and High Yield.
We would expect equities to perform well in a high-growth and stable- and low-inflation environment, while fixed income the opposite in low growth. As a result, a traditional 60/40 portfolio would benefit from the diversification of owning both fixed income and equity.
The problem becomes when inflation rises and becomes less stable. In this environment, we have seen that the correlations between fixed income and equity reverse and become positive.
What asset classes could investors look to in this environment to help insulate the portfolio?
In an environment where you have high growth and high inflation, one of the best inflation-fighting assets tends to be commodities.
Now in a low-growth, high-inflation environment we would expect TIPS and gold to be an asset class that performs quite well.
Text on screen – Key Take-aways: Real assets can provide diversification across economic environments, Different types of real assets can react differently to changes in economic growth, Given macro uncertainty, investors may want to consider a multi-real asset approach
The key takeaway for investors are as follows: given the highly uncertain macro backdrop, thinking beyond a 60/40 portfolio, including real assets, can provide broader diversification across economic environments. TIPS and commodities share a linkage with inflation but can react differently to surprises in GDP and the resulting risk-on or risk-off market environment.
Investors may want to consider a multi-real asset approach that can provide broader diversification to traditional equity and bond portfolios.
Text on screen: For more insights and information, visit pimco.com
Text on screen: PIMCO
Past performance is not a guarantee or a reliable indicator of future results.
A word about risk: 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. 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. 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. 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. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. 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. Diversification does not ensure against loss.
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.
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.
It is not possible to invest directly in an unmanaged index.
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.