PIMCO’s Asset Allocation Views: Favor Moderate Risk Positioning

PIMCO’s Asset Allocation Views: Favor Moderate Risk Positioning

PIMCO’s Asset Allocation Views: Favor Moderate Risk Positioning

In our Asset Allocation Outlook,Beyond Beta,” published in January, we suggested that investors will be well-served by an emphasis on robust portfolio construction through targeted diversification and a focus on exploiting relative value opportunities, declaring that the days of bold beta bets are over. This post offers a brief update to these views.

Overall Risk Position
Since January, U.S. data have been mixed but generally moved closer to meeting the Fed’s conditions to begin hiking rates. Over the next six months, we believe markets will grow more volatile as investors seek to anticipate the Fed’s timing.

We remain overweight on risk assets, but we have somewhat pared down our overall risk posture: We want to mute the potential impact of a brief drawdown due to the uncertainties in Greece, and to prepare the portfolio to step back into our higher-conviction risk positions at more attractive levels over the next few months. Meanwhile, we continue to peer across markets to pinpoint the formation of upside catalysts and begin to express those views across our portfolio.

Equities: We remain constructive, but valuations have become more mature; country and region selection remain critical. Within developed markets we are underweight U.S. equities, benchmark-weight in Europe and overweight Japan (both currency-hedged). In emerging markets, we find Asia most attractive and focus exposure in China and Korea, which are supported by reforms and monetary stimulus.

Rates: We are underweight U.S. duration as markets appear to have fully priced in our New Neutral expectations. Nevertheless, our underweight is sized keeping in mind that bonds will continue to offer diversification versus stocks in a multi-asset portfolio. Given ultra-low interest rates, we are also underweight duration in core Europe. In contrast, we recently added to local Mexican bonds given attractive real yields.

Credit: Within credit, we mostly favor capital securities issued by European banks as they continue to delever and housing-related asset-backed securities in the U.S. We also recently added to select property credits in China, which we believe may benefit from policy easing underway there.

Real Assets: We like exposure to inflation breakevens in the U.S. We are maintaining a net neutral position in commodities, emphasizing relative value opportunities across energy, metals and agriculture sectors instead.

Currencies: Divergence in global growth and policy should continue to fuel the relative strength of the U.S. dollar versus global currencies, particularly the euro. Within EM currencies, the Indian rupee stands out given attractive local rates, a strong central bank and falling inflation.

Please stay tuned for our secular Asset Allocation views coming in June.


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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 the current low interest rate environment increases this risk. Current 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. 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. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations. 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. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be suitable for all investors. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Diversification does not ensure against loss. The strategy overview is intended to illustrate major themes for the identified period. No representation is being made that any particular account, product or strategy will engage in all or any of the above themes. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.