Economic and Market Commentary

Capitalizing on Diverging Global Economies

Learn how we are navigating differences in monetary policies and economic outlooks in order to optimize portfolio performance.

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Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institution and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: Shelby Pope, ASSET ALLOCATION STRATEGIST

Shelby: Erin, can you begin by sharing PIMCO’s economic outlook and its implications for positioning in our multi-asset portfolios? 

Text on screen: Erin Browne, PORTFOLIO MANAGER, ASSET ALLOCATION

Erin: Over the next six to twelve months, we anticipate diverging paths among regions and sectors. US growth remains robust, but many other economies appear to be weakening, though we are starting to see some early signs of a pick-up in economic activity elsewhere. Persistently sticky inflation, especially in the US, remains an important risk.

Text on screen: Our multi-asset portfolios are emphasizing quality and diversification.

Images on screen: European Central Bank, Bank of England

While we favor higher quality positioning across asset classes, we see opportunities in a broader range of sectors, including more cyclically-oriented areas, which we believe will be supported by recovering economic activity.

We are slightly overweight equities amid the outlook for economic divergence and our expectation for broadening and rebounding earnings growth.

And we’re also marginally overweight high quality fixed income, especially in more interest-rate sensitive economies outside the US.

Shelby: Thank you Erin. Emmanuel can you provide more detail on our view to be overweight both equities and duration?

Text on screen: Emmanuel S. Sharef, PORTFOLIO MANAGER, ASSET ALLOCATION

Emmanuel: Absolutely. We see diversification benefits in owning equities and bonds in today’s environment, especially as we expect a return to a more traditional negative correlation between the asset classes. Exposure to equity risk today offers upside potential if the economy continues to rebound, while fixed income positioning should perform well if recession risk becomes a primary concern again, and as central banks begin cutting rates.

Text on screen: TITLE - Diverging regional outlooks support a diversified bond allocation: BULLETS - Developed market countries ex. U.S., Floating rate mortgage markets, Greater downside growth risks, High-quality emerging markets

Diving deeper into our stance on duration, we prefer developed market countries outside the US, like Australia and Canada, with floating rate mortgage markets because they really feel the effects of any changes in monetary policy right away. We are also overweight exposures to countries with greater downside growth risks, such as the UK.

And lastly we are finding some really attractive opportunities for high quality duration exposure in select emerging markets.

Shelby: Great. And Erin, within equities, do you see attractive opportunities from a sector or regional perspective today?

Erin: Absolutely, while macroeconomic indicators are suggesting a potential soft landing, we also see bottom-up signs of a growth rebound from the equity markets. More companies are highlighting improvements in inventory and many companies and sectors appear set to emerge from earnings “recessions”.

Text on screen: In 2024, we expect to see broader participation in the earnings recovery.

Images on screen: PIMCO trade floor

As we navigate through 2024, we expect to see broader participation in the earnings recovery beyond just the mega-cap technology which may propel equity markets higher from here.

Text on screen: TITLE - Maintain a preference for up-in-quality exposures: BULLETS - High free cash flow, Strong margins, Low Leverage

Against this backdrop, we still maintain a preference for up-in-quality exposures with high free cash flow, strong margins, and low leverage, but we are also starting to expand our positioning to include more economically-sensitive sectors like industrial cyclicals.

From a regional lens, we prefer US equity exposures given more buoyant economic growth and higher earnings expectations. We are neutral Europe amid greater downside risks to growth and our expectations for weakening earnings.

Text on screen: Opportunities in select emerging markets.

Images on screen: South Korea city street and skyline

Additionally, we see opportunities in select emerging markets, for example Korea, which appears to have upside potential driven by reasonable valuations and a recovery in semiconductor sales.

Shelby: And Emmanuel, looking beyond equities and duration, are there other asset classes that present opportunities today?

Emmanuel: So one of our highest conviction views today is

Text on screen: TITLE - High conviction fixed income opportunities: BULLETS - U.S. agency mortgage-backed securities, Securitized credit, Non-agency mortgage-backed securities, Asset-back securities

US agency mortgage-backed securities. Valuations there remain compelling – we see a considerable spread pick-up versus treasuries. And with a government guarantee, they offer a high quality, liquid expression of duration to hedge potential downside growth surprises.

Looking more broadly at fixed income, we also see some opportunities within global credit markets with today’s elevated yield levels, especially in securitized credit.

We like senior positions in non-agency mortgage backed securities and select asset-backed securities, which we believe are supported by resilient fundamentals, attractive valuation profiles, and robust household balance sheets.

Turning to corporate credit, spread levels appear tight for both investment grade and high yield, so we don’t think corporate bonds provide enough compensation for the risk in the current environment.

Text on screen: Text on screen: High carry and continued U.S. resilience make the U.S. dollar attractive.

Images on screen: United States Mint

And finally, within developed market currencies, the U.S. Dollar stands out to us as an attractive option. Its valuations are less demanding than they have been recently and it should be supported by relatively high carry and continued US resilience. In emerging markets, we are constructive on select high-yielding currencies that have attractive relative valuations and elevated total carry.

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

Text on screen: PIMCO

Disclosure


Past performance is not a guarantee or a 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. 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. U.S. agency mortgage-backed securities issued by Ginnie Mae (GNMA) are backed by the full faith and credit of the United States government. References to Agency and non-agency mortgage-backed securities refer to mortgages issued in the United States. Securities issued by Freddie Mac (FHLMC) and Fannie Mae (FNMA) provide an agency guarantee of timely repayment of principal and interest but are not backed by the full faith and credit of the U.S. government. 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. Equities may decline in value due to both real and perceived general market, economic and industry conditions. The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. Diversification does not ensure against loss.

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. 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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.

CMR2024-0502-3549278

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