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Text on screen: Tina Adatia, Fixed Income Strategist
Tina Adatia: Moving a little bit beyond rates and thinking about given this uncertainty risk across different asset classes, where do you see the most opportunity for the year ahead?
Text on screen: Marc Seidner, CIO Non-Traditional Strategies
Marc Seidner: I suppose diversification remains key, as I've said a couple of times, and we'd always drive that point home. Flexible strategies can also take advantage of a more uncertain yield and spread environment, we would drive that point home.
Text on screen: TITLE – Portfolio implications – Credit: LIST – Emphasis on active name selection; COVID-recovery sectors, housing, industrial/aerospace and select banks and financials all attractive; Private credit strategies offer attractive liquidity premiums.
We continue to find reasonable opportunity in both public and private credit markets here. I would emphasize, as I mentioned, the generic credit spreads don't look all that attractive, but certainly there are opportunities in public markets through sort of the COVID recovery theme that can be embedded in industries, airlines, lodging, retail, other real estate related sectors that should benefit quite strongly from the reopening of the economy and have lagged the recovery.
Text on screen: TITLE – Portfolio implications – Securitized: LIST – U.S. non-agency mortgage-backed securities still attractive; Global securitized including UK residential MBS offer good valuations vs. generic corporate credit.
And in terms of financial markets, speaking of real estate more broadly, and perhaps more specifically we find great value in non-agency mortgages today. We had found great value in the agency mortgage backed securities market, which offered very compelling valuation this time last year, less so today. And so we look more to add value through the non-agency mortgage sector than the agency mortgage sector.
Text on screen: TITLE – Portfolio implications – Emerging Markets: LIST – High quality EM FX (appropriately scaled) may offer value against USD; Select EM local positioning.
High quality emerging markets, if we do enter a period of strong global recovery with ample central bank liquidity, and perhaps kinder, gentler geopolitical environment, that should be an environment where emerging markets should be able to find their footing.
More broadly, as we think about asset allocation, we think that the convexity of equities look quite good in terms of a strong recovery, in terms of the early nature of a cyclical recovery. Similar with the COVID recovery theme in corporate credit, both public and private.
Text on screen: TITLE – Portfolio implications – Equities: LIST – Overweight to equities with prefense for cyclical over defensive stocks; favor equity markets in U.S. and Asia.
When we look at the equity markets, we would favor cyclicals over defensive, and that's been a theme that's worked and it should continue to work.
And then lastly, we've talked about fiscal policy and
Images on screen denote infrastructure: bridge, rail, highways
infrastructure and another fiscal package that will likely create a longer term spending profile, which we'll probably pay for, which means taxes are going up. And therefore, at least in the United States, municipal bonds look quite good to us. So there are sort of some specific ideas, Tina, in terms of where we're seeing value over the next 12 months.
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Full page graphic: PIMCO 50, 1971 to 2021
Please note that the following contains the opinions of the manager as of the date noted and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
The continued long term impact of COVID-19 on credit markets and global economic activity remains uncertain as events such as development of treatments, government actions, and other economic factors evolve. The views expressed are as of the date recorded, and may not reflect recent market developments.
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. 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 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. 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. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Diversification does not ensure against loss.
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