Text on screen: PIMCO
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Text on screen: Jason Odom, Product Strategist, Asset Allocation
Odom: Well, it’s been a challenging environment for stocks and bonds of late. Commodities and other real assets have rallied sharply over the past 12 months as inflation has increased
So Emmanuel, can you tell us, what are the most attractively priced inflation hedges that you see today?
Text on screen: Emmanuel S. Sharef, Portfolio Manager, Asset Allocation
Sharef: Right. There are many ways to make portfolios more resilient to inflation.
Text on screen: TITLE – Currencies of commodity-exporting countries offer an attractively priced inflation hedge; SUBTITLE – Commodities’ Net Contribution to Terms of Trade (%)
Image on screen: A bar chart shows the percent net contribution of commodities to terms of trade for 30 different currencies. The Y-axis shows the net contribution, which is positive for commodity exporters, shown on the left of the graph, and negative for importers, shown on the right. Countries are arranged left to right in order of highest net contribution to lowest. For the exporters, bars rise up from zero, represented by a horizontal line in the middle of the vertical axis. Importers drop below that line. (A dashed vertical line in the middle separates the exporters from the importers). Among the 13 commodity exporters, “CLP,” representing the Chilean peso, has the highest net contribution to trade by commodities, at 60%. “AUD,” representing the Australian dollar, is just slightly less. “USD,” or U.S. dollar, ekes out a status as a net commodity exporter, with a contribution to trade by commodities of about 2%. For the importers, 17 countries are shown, with “JPY,” or Japan, having the lowest contribution at about negative 27%.
One of our favorite expressions right now is owning the currencies of large commodity exporters, both in developed and in emerging markets. And so that includes Australia and Canada and DM, but also for instance Chile, Peru, Columbia, and emerging markets.
And there are a few reasons we like this theme. First, these countries always have natural commodity and inflation beta. Second, we know that Russian supply has been disrupted, and so that shifts the demand for commodities to other commodity exporting countries.
And third, the credit on many of these EM currencies has really picked up, mainly because EM central banks have needed to hike so aggressively in order to control local inflation. And then finally, one more, they screen cheap in our equity valuation models.
One other expression of the theme is by directly trading commodity curves, especially the longer end of the oil futures curve. We think oil prices could remain elevated for some time because it will take time for alternative sources of supply to come online, and meanwhile, demand can stay strong because the economy continues to reopen, also strategic petroleum reserves need to be refilled, and so on.
Images on screen: Windmills, solar panels
And related to that, longer term in the energy space, this also really creates some compelling opportunities for green energy generation and green energy storage. And this was one of the themes that we discussed in our last secular outlook.
Images on screen: Residential housing
And then finally, I also want to mention real estate and REITs. These offer exposure to the shelter component of the CPI basket, which is the largest component of the CPI, and in addition to that, they pay more attractive dividends now than they used to in the past.
And again, here, we work very closely with our specialists to identify high quality companies in the REIT space in order to, again, align with our overall quality tilt that we have in the portfolio.
Odom: Erin, this is a unique environment for many investors, especially those in the developed world who have not experienced this level of inflation during their career. Do you have any other advice for navigating this unique period?
Text on screen: Erin Browne, Portfolio Manager, Asset Allocation
Browne: Yeah, well, 2022 has been a challenging environment for investors thus far across the board, and we’ve had negative returns for pretty much every single asset class outside of the commodity complex this year.
But these periods of volatility really oftentimes create compelling investment opportunities, and we’re starting to see some of that. As active investors, we’re actually really excited right now. In terms of advice, it’s important to remain focused on the long term, to stay diversified, and to retain sufficient dry powder to take advantage of market dislocations and opportunities.
Images on screen: PIMCO trade floor
And this is really what we’re trying to do right now in our portfolio.
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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.
Past performance is not a guarantee or 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. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. Equities may decline in value due to both real and perceived general market, economic and industry conditions. 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. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
Beta is a measure of price sensitivity to market movements. Market beta is 1.
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