Economic and Market Commentary

Building Resilient Portfolios for Volatile Markets

PIMCO’s CIO of U.S. Core Strategies discusses strategies for constructing a more defensive investment portfolio in an aging economic expansion.

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Olivia Albrecht, Senior Vice President:Hi. I’m Olivia Albrecht, and I’m joined by my colleagues, Joachim Fels and Scott Mather, to discuss PIMCO’s cyclical outlook. Scott, could you help us understand what you’re thinking about, in terms of portfolio construction today?

Scott Mather, CIO U.S. Core Strategies:Certainly one theme we’ve been stressing is this defensiveness or resiliency into an environment that’s very different for financial asset prices than it was several years ago. That continues to be the case in the year ahead. In general, we’ve seen a repricing, a normalization of interest rates in the US. 

So, certainly on a fundamental basis, the US stands out as having some value and short, intermediate yields relative to the rest of the world. It’s also the case that we’ve seen a big repricing in terms of lots of spread assets.

So, we still think people should develop a portfolio that can withstand wider spreads, because we’re likely to see that in the year ahead. But at the same time, there is some value in certain sectors and certainly in shorter dated credit, especially with respect to where longer dated credit is. 

There’s also value in securitized assets – in mortgages, both the nonagency, as well as the high-quality agency mortgages, which sort of stand out in the world on a fundamental basis, in terms of being attractive. And as I mentioned before, it’s likely that inflation index bonds offer some value, because the markets appear to have priced in this drag from headline inflation persisting for a very long period of time, which it’s unlikely to.

And then lastly, it’s a sort of environment where there will be some opportunities in other spread assets. Emerging markets come to mind. Once again, the theme of defensiveness and resiliency is important because we’re likely to see pressure on emerging markets for a host of reasons as we head into 2019. But there certainly is some overshooting that’s occurred. 

So, while we don’t expect big moves in terms of the dollar, to really drive emerging market performance, there will be some local overshoots. And we’re seeing some of that now. So, for instance, in emerging market currencies; it’s one area of value.

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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 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. Diversification does not ensure against loss.

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.

References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold such securities. PIMCO products and strategies may or may not include the securities referenced and, if such securities are included, no representation is being made that such securities will continue to be included.

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.

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