Text on screen: PIMCO
Footer Overlay: PIMCO provides services only to qualified institutions, financial intermediaries and institutional investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.
Text on screen: Ken Chambers, Fixed Income Strategist
Ken Chambers: Dan, All the events of last year, it really led to opportunities for PIMCO to manage risk and capitalize on markets by delivering alpha for clients. How are we evaluating markets now with 2023 in the rear-view mirror as we look ahead to 2024?
Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer
Dan: Sure. Well, as you said, 2023 was quite an interesting year. You wouldn't necessarily know that if you looked at starting valuations at the beginning of the year where we ended up. But people are beginning to romance the notion of a very, very high probability of a soft landing. The data has been consistent with that view but we do think markets have likely gotten ahead of themselves a little bit. So,
FULL PAGE GRAPHIC TITLE: Navigating the Descent: Investment implications
The subtitle reads: Our process helps us evaluate a range of scenarios to plan for the road ahead. The graphic shows three sections. The first section shows economic scenarios that include soft landing, overheating, hard landing, and stagflation. The second section shows the 2024 outlook for developed markets, including: Inflation and unemployment consistent with rate cuts; Markets already pricing in a substantial cutting cycle; Soft landing possible but risks remain; and Global monetary policy divergence. The third section shows four investment implications given the various economic scenarios and developed market outlook: 1) Bonds are attractive; 2) Focus on quality; 3) Global opportunities are abundant; and 4) Preference for intermediate maturities.
given the fact that we tend to, at PIMCO, think about the probability distribution of potential outcomes, we assign a higher probability than what the market's implying. So we think it makes sense to protect against those tail scenarios.
In a world of considerable uncertainty, a war in Europe, war within the Middle East, inflation's still high and policy rates quite restrictive. Be a bit more defensive, be a bit more careful in the more economically sensitive areas of the overall opportunity set. But again, real great value in high quality sectors and segments of the market. Last year was quite volatile. And a lot of these higher quality sectors, because of that volatility, are trading to get levels that are attractive from a historical perspective.
Ken Chambers: So, let's take a few of these things in turn. The yield environment today, even after that strong rally that we saw at the end of the year, we're still relatively attractive in terms of the level of yield. Attractive, cheap. How should investors evaluate the opportunity sets, just kind of where we are today?
Dan: So today, in terms of thinking about portfolio construction, you don't have to take a tremendous amount of interest rate exposure.
FULL PAGE GRAPHIC TITLE: Investment implications: Compelling time to consider active fixed income
The graphic shows four investment implications given PIMCO’s economic and market outlook: 1) Lock in elevated yields, with preference for intermediate maturities versus cash; 2) Bonds can present opportunities across macro outcomes, as bonds are attractive relative to equities, with potential diversification benefits; 3) Focus on credit quality, with up-in-quality bias across securitized, investment grade, and high yield; and 4) Attractive market dynamics for active management, as opportunities are abundant and diverse across global markets.
But by extending out the yield curve, by moving into more traditional fixed income sectors of the market, we do see pretty attractive opportunities again, across popular passive alternatives. When you add the ability to generate some other incremental return, things look pretty attractive as well.
The other point I'll make, it's a simple point, but an important point is that fixed income's not that complicated. You have some inherent cushion of predictability from the starting yield. So not surprisingly the starting yield of a high-quality bond portfolio is a very strong predictor of what forward returns will look like. The Barclays aggregate index today is yielding about 4.5%. If you add some out of index high quality exposures to that opportunity set, you can quickly get up to a 6% or even higher type yield. Again, being fairly defensive from the standpoint of overall interest rate exposure.
That type of historical return typically bodes well versus cash. It also looks pretty darn good from a risk adjusted perspective versus equities as well.
And the last point, and probably the most important point, one of the most exciting areas I have to talk about in the markets today, is that global bond investing is back less synchronized cycles, both in standpoint of the real economy inflation cycles, central bank policy cycles, geopolitical challenges, just a lot going on in a market that, again, just a few years ago, was quite quiet with rates negative in a lot of key areas of the world in significant volatility suppression from policy makers. So optimistic on alpha generating opportunities, but still with an up in quality bias and a global lens in terms of putting together the optimal portfolio.
Ken Chambers: Yeah, a handful of things to do from an asset allocation perspective, certainly. What's your advice for investors today?
Dan Ivascyn: Yeah, I would say patience is one of them. I think it's important for investors to step back, look at valuations from a long-term historical perspective, and just how attractive the broad global opportunity set will be. But realize although volatility may be lower than what we've experienced the last couple of years. It's still going to be quite high that's very, very hard to deal with. The fast extreme rollercoaster is something that most people don't love, at least in the context of investing.
But if you have a multi-year time horizon, you're sufficiently diversified and you're not making it more difficult than it needs to be. You're looking to protect yourself and not overreach in a world of significant uncertainty, we think they're going to be attractive returns to be generated, again, over two-to-three-year horizon with a lot of zigs or zags or ups and downs along the way. And we're here trying to assist clients on that journey together.
Text on screen: For more insights and information, visit pimco.com
Text on screen: PIMCO
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.
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. 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. Asset allocation is the process of distributing investments among various classes of investments (e.g., stocks and bonds). It does not guarantee future results, ensure a profit or protect 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. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.
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, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (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, via Turati nn. 25/27 (angolo via Cavalieri n. 4), 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) 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, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) 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 and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. 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, Brandschenkestrasse 41 Zurich 8002, Switzerland). 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 (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, 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 (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) 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. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, 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. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. | 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 an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 015 . The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +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. | Note to Readers in Colombia: This document is provided through the representative office of Pacific Investment Management Company LLC located at Carrera 7 No. 71-52 TB Piso 9, Bogota D.C. (Promoción y oferta de los negocios y servicios del mercado de valores por parte de Pacific Investment Management Company LLC, representada en Colombia.). Note to Readers in Brazil: PIMCO Latin America Administradora de Carteiras Ltda.Av. Brg. Faria Lima, 3477 Itaim Bibi, São Paulo - SP 04538-132 Brazil. Note to Readers in Argentina: This document may be provided through the representative office of PIMCO Global Advisors LLC AVENIDA CORRIENTES, 299, Buenos Aires, Argentina. | 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 LLC in the United States and throughout the world. ©2024, PIMCO.