Weekly Market and Portfolio Update

Geraldine Sundstrom, portfolio manager, comments on what’s moving markets and how the PIMCO GIS Dynamic Multi-Asset Fund (DMAF) is positioned.

From the desk of Geraldine Sundstrom, Friday 2nd August 2019.

We certainly had an eventful couple of weeks with lots of new events but in truth the same theme has been in play since the Fed pivot earlier this year. Only with a twist.

The global economy has been slowing under the weight of trade uncertainties which got compounded yet further by another new wave of tariffs on Chinese goods this week. Global earnings growth is already in a recession and global manufacturing has been contracting for months.... But poor growth and stubbornly low inflation encourage Central Bankers around the world to ease monetary policy and lower yields have continued to inflate asset prices and stretch valuations. As recession probabilities grow again around the world, risky assets continue to rise in price as savers and investors flee negative interest rates. Central Bankers have been turning everything and anything into gold regardless of the risks.

It is true that monetary stimulus might soothe the pain of a hot trade war but it is not the prospects of an economic rebound or earnings inflection point that pushes up asset prices anymore (as it was the case earlier in the year) - it is the alchemy of zero interest rates.

Globally around $14 trillion of debt is yielding below 0%. In the eurozone, over 60% of sovereign debt is in the sub-zero club as well as $1.4 trillion of corporate debt. The demand for assets is insatiable as the savings get bigger: according to the Institute of International Finance (IIF) in Q1-2019 only (Q2 data not yet available) global debt increased by a whopping $3 trillion to a total of $246 trillion compared to a $3.3 trillion increase for the entire year 2018. Certainly the sub-zero club is likely to continue growing as the ECB and the Fed are expected to cut rates again in 2019 joined by many other Central Banks around the world.

In DMAF portfolios, we are sticking with our theme that aligns well with fundamentals and the PIMCO secular theme of disruptions and remain skeptical of the alchemy. The US remains our preferred region for fixed income and equities, but we also view China as a real contender and wish to maintain exposure to the consumer there, especially as they are receiving the bulk of the government’s stimulus. We continue to remain cautious on Europe which lacks the necessary ammunition and technology to fight in a disrupted world. Finally to produce carry we have increasingly used foreign exchange (FX) rather than rely overly on fixed income given negative rates. As such equity exposure is in the mid teens with longs in US Tech, Pharma and Healthcare as well as Chinese modern consumption vs. a short in Europe. Government duration is just below 3.5 years and in FX we have longs in USD and EM high yielders.


Geraldine Sundstrom

Head of Asset Allocation EMEA

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Data as of 2 August unless otherwise stated.

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