Text on screen: PIMCO

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Text on screen: Tina Adatia, Fixed Income Strategist

Tina Adatia: PIMCO has just published its 2022 outlook titled Investing in a Fast Moving Cycle. Tiffany, there you talk about how there'll be more volatility and uncertainty in the economic outlook ahead. So to start off, Tiffany, can you give us an overview of what's changed and what we can expect in 2022?

Text on screen: Tiffany Wilding, Economist

Tiffany Wilding: I think the key points to underscore from the cyclical outlook are really that the developed market economies, including the United States,

FULL SCREEN GRAPHIC: Title – Cyclical Outlook: Investing in a fast moving cycle; A bar graph shows the phases of the business cycle in the shape of a wave, starting at the bottom with trough, and charting a multi-colored line up to early, mid, late, peak, and then recession. 

have very quickly transitioned from an early cycle recovery to what we think we're currently in, which is a mid-cycle expansion. But I think more importantly, it looks like we're also rapidly progressing towards later cycle dynamics. Further complicating issues is that the fast pace of this recovery just coupled with a very

Images on screen: COVID-related images, Closed businesses,

volatile and uncertain nature of this virus has contributed to product and labor market frictions, which has elevated inflation. And of course the timing with which those issues will moderate is highly uncertain. That's created the potential for an unwanted jump and inflation expectations. So I think all of these factors necessitate a faster shift in policy from central banks away from the extraordinarily easy conditions that prevailed in 2020 and 2021.

Tina Adatia: Okay. So Marc, turning to you. What does that actually mean for markets and what are some of the key economic indicators that you are watching for that could signal a turn in that cycle?

Text on screen: Marc P. Seidner, CIO Non-traditional Strategies

Marc Seidner: Typically as we evolve from early stage to mid cycle and to late stage of an economic cycle, that does portend a heightened degree of macroeconomic and fundamental volatility. And in those environments, that naturally translates to a higher degree of financial market volatility. So with regard to investment implications of our cyclical outlook, the highest level should be that investors should expect increasing uncertainty and increasing volatility in financial markets,

Images on screen: NYSE, Global central banks, Global financial markets

You combine that in an environment where because of low interest rates, the need for yield, the search for income and central bank asset purchase programs. We find ourselves an environment of rather unattractive valuations across most of the assets that we look at.

So increasing volatility, increasing uncertainty, rich valuations to us is an environment that warrants particular caution on behalf of investors. It's certainly the approach that we're taking as we manage PIMCO portfolios on behalf of our clients.

FULL PAGE BULLETED LIST: TITLE – PIMCO’s portfolio construction approach: LIST – Reducing overall risk, Being global, Remaining flexible, Nimble portfolio construction, Maintaining liquidity

And increasing caution to us means reducing overall risk in portfolios, being global in our nature, being very flexible, very nimble in our portfolio construction, and very, very importantly, maintaining adequate and ample liquidity to capitalize on opportunity. 2022 could be a year of increasing opportunity for investors and we want to make sure, and we would suggest to our clients that they maintain ample liquidity to capitalize on that opportunity.

Tina Adatia: So, what are those key things to watch over the next year?

Tiffany Wilding: I would really boil it down to three areas.

FULL SCREEN GRAPHIC: Title – Three important developments impacting the outlook for 2022; Three line graphs follow: the first, titled New Virus Variants, shows the global seven day average of daily case per 1 million; the second chart, titled inflation broader, more persistent, shows core CPI process in developing markets vs. pre-pandemic trends; and the third chart, titled more hawkish central banks, shows the fed funds rate (realized and futures).  

The first is just the virus itself and I think that this latest wave of new cases associated with the Omicron variant is really a good reminder of just how volatile and how uncertain the path of this virus is. And although we do see that some of the economic effects of new waves of new cases are diminishing. Again, it just creates a lot of uncertainty on the path of economic activity. The second risk that we would just highlight is that just inflation remains persistently elevated and we've seen inflation broaden out over the last six months or so relative to what we were expecting. It's certainly always possible that that remains elevated for various reasons.

And then the third risk that I would just highlight is just that financial conditions remain extraordinarily easy as a result of the both fiscal and monetary policies that we've seen to date. And it's possible as we go through this transition and withdrawal policy that you could just see a more abrupt adjustment in financial conditions, of course, higher market volatility, as we've already alluded to, and that can ultimately slow down the recovery by more than expected.

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Disclosures

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.

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.

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 long-term, especially during periods of downturn in the market.

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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