Finding refuge in negative-yielding bonds or gold is not the “optimal way” for investment in the current “stable but not secure” environment, according to Pimco.
As the year progresses, markets are displaying “a strange dichotomy”, the asset manager said in its latest asset allocation outlook.
Thirty percent of sovereign debt globally now offers negative yields, suggesting investors are increasingly focused on certainty and capital preservation even as several major central banks seek to stimulate growth and risk-taking. Yet, on the other hand, measures of implied volatility in both stock and bond markets globally are close to all-time lows.
Investors’ search for security amid an eerie calm in markets is likely a symptom of a long-term economic outlook that might not be secure, but it is likely to remain stable over the cyclical horizon.
“We believe that finding refuge in negative-yielding bonds or gold is not the optimal way to navigate the current environment as our base case remains that a global recession is not imminent. A modest risk-on bias is still warranted, in our view,” Mihir P. Worah, CIO of Asset Allocation and Real Return, and Geraldine Sundstrom, portfolio manager of Asset Allocation commented on Pimco’s report.
“However, in light of stretched valuations and complacency across many assets, we are maintaining ample dry powder and remain focused on portfolio liquidity, and we anticipate low market returns will be the norm for the foreseeable future,” Worah and Sundstrom wrote.
Thus, Pimco’s positioning is still “risk-on” but taking lower than normal risk as markets appear too complacent.
The asset manager is taking equity-like risk higher in the capital structure through non-traditional credit and prefers US bank equities as it considers them “cheap relative to the S&P 500”.
“In particular, non-agency mortgage-backed securities can provide an attractive, high quality source of income,” Pimco said.
The asset manager is more bullish on emerging markets (EM) as headwinds against EM investments are fading and it said REITs (real estate investment trusts) appear attractive in a world of persistently low long-term interest rates.