Economic and Market Commentary

Three Ways to Help Hedge Inflation Risk

There are many ways to help make portfolios more resilient to inflation: We highlight three attractively priced inflation hedges now: EM currencies, green energy and real estate.

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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: Jason Odom, Product Strategist, Asset Allocation

Odom: Well, it’s been a challenging environment for stocks and bonds of late. Commodities and other real assets have rallied sharply over the past 12 months as inflation has increased

So Emmanuel, can you tell us, what are the most attractively priced inflation hedges that you see today?

Text on screen: Emmanuel S. Sharef, Portfolio Manager, Asset Allocation

Sharef: Right. There are many ways to make portfolios more resilient to inflation.

Text on screen: TITLE – Currencies of commodity-exporting countries offer an attractively priced inflation hedge; SUBTITLE – Commodities’ Net Contribution to Terms of Trade (%)

 Image on screen: A bar chart shows the percent net contribution of commodities to terms of trade for 30 different currencies. The Y-axis shows the net contribution, which is positive for commodity exporters, shown on the left of the graph, and negative for importers, shown on the right. Countries are arranged left to right in order of highest net contribution to lowest. For the exporters, bars rise up from zero, represented by a horizontal line in the middle of the vertical axis. Importers drop below that line. (A dashed vertical line in the middle separates the exporters from the importers). Among the 13 commodity exporters, “CLP,” representing the Chilean peso, has the highest net contribution to trade by commodities, at 60%. “AUD,” representing the Australian dollar, is just slightly less. “USD,” or U.S. dollar, ekes out a status as a net commodity exporter, with a contribution to trade by commodities of about 2%. For the importers, 17 countries are shown, with “JPY,” or Japan, having the lowest contribution at about negative 27%.

One of our favorite expressions right now is owning the currencies of large commodity exporters, both in developed and in emerging markets. And so that includes Australia and Canada and DM, but also for instance Chile, Peru, Columbia, and emerging markets.

And there are a few reasons we like this theme. First, these countries always have natural commodity and inflation beta. Second, we know that Russian supply has been disrupted, and so that shifts the demand for commodities to other commodity exporting countries.

And third, the credit on many of these EM currencies has really picked up, mainly because EM central banks have needed to hike so aggressively in order to control local inflation. And then finally, one more, they screen cheap in our equity valuation models.

One other expression of the theme is by directly trading commodity curves, especially the longer end of the oil futures curve. We think oil prices could remain elevated for some time because it will take time for alternative sources of supply to come online, and meanwhile, demand can stay strong because the economy continues to reopen, also strategic petroleum reserves need to be refilled, and so on.

Images on screen: Windmills, solar panels

And related to that, longer term in the energy space, this also really creates some compelling opportunities for green energy generation and green energy storage. And this was one of the themes that we discussed in our last secular outlook.

Images on screen: Residential housing

And then finally, I also want to mention real estate and REITs. These offer exposure to the shelter component of the CPI basket, which is the largest component of the CPI, and in addition to that, they pay more attractive dividends now than they used to in the past.

And again, here, we work very closely with our specialists to identify high quality companies in the REIT space in order to, again, align with our overall quality tilt that we have in the portfolio.

Odom: Erin, this is a unique environment for many investors, especially those in the developed world who have not experienced this level of inflation during their career. Do you have any other advice for navigating this unique period?

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

Browne: Yeah, well, 2022 has been a challenging environment for investors thus far across the board, and we’ve had negative returns for pretty much every single asset class outside of the commodity complex this year.

But these periods of volatility really oftentimes create compelling investment opportunities, and we’re starting to see some of that. As active investors, we’re actually really excited right now. In terms of advice, it’s important to remain focused on the long term, to stay diversified, and to retain sufficient dry powder to take advantage of market dislocations and opportunities.

Images on screen: PIMCO trade floor

And this is really what we’re trying to do right now in our portfolio.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

Disclosure


IMPORTANT NOTICE

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

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

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. 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.

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.

Beta is a measure of price sensitivity to market movements. Market beta is 1.

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. 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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. 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CMR2022-0516-2204901

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