Insights

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.

FOREWORD

  • Access these views via the Dynamic Multi-Asset Fund, a dynamic fund designed to deliver across market environments and help investors navigate the toughest market situations.


From the desk of Geraldine Sundstrom, Friday 15th July 2022.

It’s nominal and doesn’t speak volumes

How the economy is really doing has become increasingly hard to figure out, and we are constantly presented with opposing anecdotes of resilience versus fast-weakening consumer demand. The signals are confusing, but perhaps not as much as it might seem.

Credit card companies or banks are encouraged by seeing transaction amounts growing at double digits, but vendors see their unit sales dwindling and inventories swell. US retail sales data for June might have looked robust, but deflate them and there is not much joy to extract. Headline nominal retail sales grew 1% month on month (above expectations of 0.9%), but CPI in June was up 1.3% month-on-month – also above expectations of 1.1%. Obviously the two indices do not cover the same sample at all but the parallel is not hard to imagine. The British Retail Consortium has started to speak volumes now as they released the June data, to help decipher the nominal from the real and its conclusion was that, “sales volumes are falling to a rate not seen since the depth of the pandemic”.

So while the retail sales data emboldens some to say the consumer is resilient, the NFIB Small Business Optimism index still fell to a decade low. Moreover, the balance of businesses expecting better business versus worse in the next six months collapsed by 7pts to -61% – the worst result since the series started in 1974. So the point is to think in real not nominal terms to figure out what is actually happening. The famous 2s-10s yield curve slope, at about -20 basis points, wasn’t duped by nominal versus real and inversion is now at its most pronounced since 2000.

Commodity markets are also starting to fear tougher times ahead and cyclical commodities like copper or iron ore have swiftly fallen from their peaks. Iron ore is about half the price it was at its post-pandemic high and 36% down from the Russian invasion peak of 2022. In other words, central banks are doing their job to bring down inflation, and their credibility is rising. Once again this week, a few central banks delivered unexpected hikes: Hungary hiked 200 basis points; Canada 100 basis points; and South Korea for the first time hiked by 50 basis points. All eyes will be on the ECB next Thursday to see if it sticks to a 25 basis point increment for its first hike or decides to jump immediately to a 50 basis point increase, just as the Swiss National Bank did in June. The ultimate proof of central bank credibility came on Friday with long-term inflation expectations by the University of Michigan falling to 2.8% from 3.1% previously and will be seen as big vote of confidence by the Fed.

Next up is earnings season, which has already been opened by a number of banks. Financials broadly missed and Q2, 2022 earnings per share are typically 20-25% below last year, with provisioning going up again as we potentially head into a recession sooner or later. H2, 2022 earnings are expected to accelerate from the pace set during the first half of the year, which seems at odds with PIMCO’s macroeconomic forecasts as well as the fall in commodity prices, so it will be interesting to observe guidance by companies as the season heats up.

In the DMAF portfolio, we continued in the same pattern from the previous few weeks as core fixed income seems to be tentatively stabilising in a wide range. We still view credit as more attractive than equities and added a small amount of investment grade via indices to keep flexibility. We also rolled our put options sales on equity indices, willing to get exposure at these high levels of volatility against our shorts, as our net equity exposure remains close to zero.

Have a good summer.

Géraldine

How can DMAF benefit investors in today’s uncertain markets?

i. Provide optionality
ii. Enhance returns
iii. Control risk

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Autor

Geraldine Sundstrom

Head of Asset Allocation EMEA

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Reaching for Resilience
Langfristiger Ausblick

Resilienz stärken

Volatilität, Inflation und geopolitische Spannungen führen dazu, dass Länder und Unternehmen ihr Augenmerk auf Sicherheit und Widerstandsfähigkeit legen. In dieser fragmentierten Welt argumentieren wir für die Stärkung der Resilienz von Portfolios und erörtern Chancen und Risiken, die wir für die nächsten fünf Jahre sehen.

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Rechtliche Hinweise

Data as of 15th July 2022 unless otherwise stated. 

Past performance is not a guarantee or reliable indicator of future results and no guarantee is being made that similar returns will be achieved in the future.

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