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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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. The Covid-19 Crisis is ongoing and discussed for illustrative purposes only, the referenced impact may not be reflective of the current environment.
The discussion and content provided within this webcast is intended for informational purposes and may not be appropriate for all investors. The information included herein is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as, a forecast, research, investment advice or a recommendation for any specific PIMCO or other security, strategy, product or service. Fixed income is only one possible portion of an investor’s portfolio, which can also include equities and other products. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investors should speak to their financial advisors regarding the investment mix that may be right for them based on their financial situation and investment objective.
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. 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. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. 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. 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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