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Economic and Market Commentary

Targeting Relative Value Opportunities

Learn where we’re finding interesting opportunities across and within asset classes, with Erin Browne, asset allocation portfolio manager, and Justin Blesy, asset allocation strategist.

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Text on screen: Justin Blesy, Product Strategist, Asset Allocation

Justin: Hi, I’m Justin Blesy, asset allocation strategist, and I’m joined by portfolio manager Erin Browne. Erin, thank you for joining us today.

How do PIMCO’s asset allocation views influence our positioning in multi-asset portfolios?

Erin: We expect continued volatility in financial markets for the foreseeable future.

Text on screen: Due to a slowing economy, we are cautious on overall risk in our portfolios

Images on screen: Small town Main Street

We are cautious on overall risk positioning because of the environment where the economy is likely to slow over the course of the next 12 months.

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

The most notable expression of this right now in our portfolios is through equities. Historically, equities have weakened heading into a recession and we think right now that the risk/reward is really skewed to the downside given where valuations are today.

Our estimates suggest a much stronger decline in earnings than the market is currently anticipating and therefore we see further downside risk within equity markets.

Text on screen: We see attractive opportunities in fixed income as yields have reset higher

Images on screen: Stock market ticker

On the other hand, we do see attractive opportunities in right now fixed income markets. Yields have reset higher over the last year and as inflation begins to moderate, we think that fixed incomes are poised really well to outperform.

With higher yields, policy rates are approaching terminal levels, and inflation is showing signs of decelerating, the backdrop for owning fixed income has dramatically improved.

Text on screen: We believe high-quality fixed income will resume its role as a diversifier

Images on screen: PIMCO trade floor

Moreover, we believe that high quality fixed income will resume its role as a diversifier versus growth risk particularly as we enter a weaker environment, assuming that inflation remains contained.

With respect to duration positioning, we spent most of 2022 underweight, but we’ve shifted now to a more neutral position within our portfolios.

Text on screen: In credit, we are emphasizing high-quality issuers

Images on screen: Residential neighborhood

Within credit, we’re really emphasizing higher quality issues as well as sectors that can withstand a weaker economic environment.

We expect that further dislocations, such as the one that we most recently experienced in the bank capital market will continue. And these events can really present compelling opportunities for active investors like PIMCO.

Text on screen: TITLE – Notable themes in portfolios today: BULLETS – Fixed income, Real assets, Currencies, SUB-BULLETS: Select emerging market currencies, BULLETS - Inflation-linked bonds, High-quality credit, Emerging market rates and equities

We talked earlier about how excited we are about the opportunity in fixed income markets, but we’re also starting to see really attractive investments in real assets and currency markets as well.

And one high conviction theme that we have right now in our portfolio is emerging market currencies, such as Thai Baht, Brazilian Real, and Mexican Peso which benefit from cheap valuation, high carry, and improving fundamentals.

We also think that there are interesting ways to hedge against an inflation surprise, particularly through owning inflation linked bonds which are pricing in a much faster normalization than we expect with respect to inflation.

Overall, we are finding interesting relative value opportunities across asset classes, as well as within asset classes. For instance, we think that high quality credit offers an attractive alternative to equities in the current environment, and that EM assets -- both rates and equities -- also are appealing to their developed markets counterparts. So while we are cautious overall on risk, we think there are a lot of reasons for us to be really excited about the opportunities in front of us.

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Past performance is not a guarantee or a reliable indicator of future results.

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. Diversification does not ensure against loss.

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The terms “cheap” and “rich” as used herein generally refer to a security or asset class that is deemed to be substantially under- or overpriced compared to both its historical average as well as to the investment manager’s future expectations. There is no guarantee of future results or that a security’s valuation will ensure a profit or protect against a loss.

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Learn where we’re finding interesting opportunities across and within asset classes, with Erin Browne, asset allocation portfolio manager, and Justin Blesy, asset allocation strategist.

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