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16-M013 Asset Allocation Altitude Adjustment_v9

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[PIMCO] [MIHIR P. WORAH, CIO Real Return and Asset Allocation] This stuff about our asset allocation investment outlook for 2016 is definitely an interesting start to the year. To begin with, let's frame the macroeconomic outlook. [We believe global growth will continue at a rate of 2.25%-2.75%] We think that global growth is going to be around 2.5%, [U.S. Growth 2% to 2.5%] and within that 2.5% you're going to see the US grow 2% to 2.5%, [Europe and Japan Growth 1%] similar to last year—Europe and Japan at around 1%. The differences will be in the emerging markets where we think [China slows down to 5.5% to 6.5%] China slows down to 5.5% to 6.5% rate. [Brazil, Russia, India and Mexico growth 1.25% to 2.25%] On the other hands, the BRIMs—Brazil, Russia, India, and Mexico— actually grow a little bit faster. [GERALDINE SUNDSTROM Portfolio Manager, Asset Allocation] At the same time, we're seeing that inflation is going to creep a little bit closer [We expect global inflation to edge higher towards 1.75% - 2.25%] to Central Bank's targets reaching close to 2% in most areas. So the world looks pretty benign, healthy. In addition, we don't see another 70% drop in oil prices from $100 to $30. [Oil prices around $50 per barrel by the end of 2016] In fact, we expect oil prices to end 2016 around $50 a barrel. So while there's a lot of uncertainty and risks around our view, all said and done we expect inflation to rise modestly in 2016 from 2015 levels. Even though the world is bright ahead of us, there are certain risks that we will need to take into consideration. We reviewed three major risks that we are taking into account [Key Considerations for Portfolio Construction #1: Correlation of bonds and equities] when we're constructing our portfolios. First of all is the correlation of bonds and equities. This relationship has been rather useful in building portfolios in the past, but we feel that this might be changing. In the outlook that we have where growth is steady but Central Bank moves are going to be based on what inflation is doing, it's likely that the correlation between stocks and bonds could break and rates could be going up at the same time as stocks are going down. So investors who build portfolios depending on the negative correlation of these stocks and bonds should be aware of these shifts. [Key Considerations for Portfolio Construction #2: Importance of currency movements] The second one is the importance of currency movements. Currency movements, or relative currency movements, weren't that important in the past. High rates of growth, high levels of inflation, low volatility masked currency moves. In fact, relative currency movements have large impacts on asset class valuations on economic growth. The fact that the dollar appreciated along with expectations of Fed hiking led to withdrawal of liquidity not just in the US but in many emerging markets as well. And this will make it much harder for companies who have overseas businesses to generate earnings. So this is something that increasingly we embed in our asset selection and security selection to see depending on their home currencies which companies are likely to benefit or lose in this foreign exchange game. [Key Considerations for Portfolio Construction #3: Lack of liquidity in the markets] And the third factor is just a lack of liquidity in the markets. [Less capable of acting as intermediaries in the market] As regulation has gone up, banks are less capable of acting as intermediaries in the market. [Banks have lower balance sheets, Higher hurdles to trading] They have lower balance sheets. They have higher hurdles to trading. [Cannot be buffer between buyers and sellers] And they're not able to provide the buffers between buyers and sellers that they were. This presents risk from time to time when you have a risk there and you want to exit your portfolio. However, this could also be an opportunity if we feel that the volatility is not warranted by fundamentals. [THREE KEY CONSIDERATIONS FOR PORTFOLIO CONSTRUCTION] These three paradigm shifts—possibly changing correlations between stocks and bonds, [Less stable stock/bond correlation, Much higher overall portfolio impact from currencies] the high importance of currencies, [Markedly different liquidity conditions] and reduced liquidity—are something investors should keep in mind as they build their portfolios for 2016. So where does this environment leave us with asset allocation? [OUR 2016 OVERALL RISK IS MODERATE] Well, first of all our overall risk level is moderate. We do not think this is a world where you want to shy away from risk— quite the opposite. At the same time, asset valuations are not cheap enough to warrant big risk taking. So we do stay moderate. When it comes to equity, [OUR 2016 VIEW ON EQUITIES] we have an underweight stance. [U.S., Europe, Japan, Emerging markets] We think that valuations are pretty mature, and in the past few years the rally has been fueled by a lot of multiple expansions rather than earnings growth. Going forward, we feel that companies will have to show genuine earnings growth for markets to continue to perform. [OUR 2016 VIEW ON REAL ASSETS] Away from that, we see opportunities in real assets and oil. We think the supply and demand balance in the oil markets [OUR 2016 POSITION ON RATES] could be turning. We're slightly defensive on interest rates balancing the recession hedging and the defensive properties of bonds with the fact that the US economy is doing well and the global economy with the help of Central Banks is likely to recover and lead interest rates slightly higher. [OUR 2016 VIEW ON CREDIT] Credits—this is finally something where we are excited when it comes to asset allocation in 2016. [Securitized, Investment grade, High yield, Emerging markets] Our portfolios are very much focused on quality income, and we feel that this is how you are likely to generate most of your return when it comes to 2016, given valuations of assets around the globe. Credit, we feel, is one of the only areas where fundamentals are disconnected from valuation. In fact, credit looks relatively cheap. [OUR 2016 VIEW ON CURRENCIES] Finally on the currency front as we build portfolios, we continue to maintain an overweight of the dollar [USD, Euro, Yen, Emerging markets] not only expecting it to rise modestly from current levels but also it does act as a defensive hedge against the sharp devaluations by China or other emerging market currencies. [Learn more about how we invest across asset classes pimco.com/assetallocationoutlook] [PIMCO] [Recorded 8 February 2016, 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. Equities may decline in value due to both real and perceived general market,] [economic and industry conditions. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be suitable for all investors.] [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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns] [of a portfolio. Investors should consult their investment professional prior to making an investment decision. 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.] [PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities] [and Exchange Commission. PIMCO Investments LLC, U.S. distributer, 1633 Broadway, New York, NY 10019 is a company of PIMCO. PIMCO Europe Ltd (Company No. 2604517), PIMCO Europe, Ltd Amsterdam Branch (Company No. 24319743), and PIMCO Europe LTD - Italy (Company No. 07533910969) are authorized] [and regulated by the Financial Conduct Authority (25 The North Colonnade, Canary Wharf, London E145HS) in the U.K. The Amsterdam and Italy branches are additionally regulated by the AFM and CONSOB in accordance with Article 27 of the Italian Consolidated Financial Act, respectively.] [PIMCO Europe Ltd services and products are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication.] [PIMCO Deutschland GmgH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich Germany) is authorized and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie-Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG).] [The services and products provided by PIMCO Deuthschland GmgH are available only to professional clients as defined in Section 31a para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. PIMCO (Schweiz) GmbH] [(registered in Switzerland, Company No. CH-020.4.028.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: +41 44 512 49 10. The services and products provided by PIMCO Switzerland GmbH are not available to individual investors, who should not rely on this communication] [but contact their financial adviser. PIMCO Asia Pte Ltd (501 Orchard Road #09-03, Wheelock Place, Singapore 238880, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services] [License and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorized. PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central,] [Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorized.] [PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia) offers products and services to both wholesale and retail clients as defined in the Corporations Act 2001 (limited to general financial product advice in the case of retail clients.)] [This communication is provided for general information only without taking into account the objectives, financial situation or needs of any particular investors.] [PIMCO Japan Ltd (Toranomon Towers Office 18F, 4-1-28, Toranomon Minato-ku, Tokyo, Japan 105-0001) Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association] [and The Investment Trusts Association Japan. Investment management products and services offered by PIMCO Japan Ltd are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorized.] [. Valuations of assets will fluctuate based upon prices of securities and values of derivative transactions in the portfolio, market conditions, interest rates and credit risk, among others. Investments in foreign currency denominated assets will be affected by foreign exchange rates.] [There is no guarantee that the principal amount of the investment will be preserved or that a certain return will be realized; the investment could suffer a loss. 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PIMCO is a trademark of Allianz Asset Management of America LP in the United States and throughout the world. © 2016, PIMCO. CMR2016-0210-164328]

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Posted by: pimco on Apr 8, 2016

16-M013 Asset Allocation Altitude Adjustment_v9

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