Bonds look attractive now and will be a bright light in 2024, according to a new outlook from portfolio managers at Pimco.
Erin Browne, Emmanuel Sharef and Geraldine Sundstrom shared their Asset Allocation Outlook with Investment news and their belief that bonds have rarely been as attractive as they seem today.
“We strongly favor fixed income in multi-asset portfolios. Given current valuations and a perspective to challenge economic growth and lower inflation, we believe that bonds have rarely appeared more compelling than stocks,” the portfolio managers declare.
Digging deeper, duration offers attractive value at current yields – particularly medium-term US – and the investment manager maintains overweight allocations to US bonds but also Canada, the UK, Australia and Europe. Mortgage-backed assets and select secured bonds are favorable in the credit space.
The outlook calls for the end of rate hikes and inflation to ease, but that does not mean that all is well with a moderate risk of recession in several developed economies.
The traditional inverse relationship between stocks and bonds will return, the portfolio managers believe, with the potential for contraction in some economies as fiscal support ends and monetary policies take effect after a typical lag.
A disappointing gain
With high valuations in the stock market, the portfolio managers believe that investors could face disappointment based on previous earnings expectations.
Given the potential for weaker than expected earnings in sluggish economies, and overvaluation, the outlook reflects a cautious neutral stance for Pimco’s equity assets, with quality and relative value opportunities in focus.
The report says equity investors appear more optimistic about the economy than corporate credit investors and expect a rebound in the S&P500 rather than a slowdown.
“We are concerned about a possible disconnect between our macro outlook and these estimates and estimates of equity earnings. It reinforces our caution about the asset class,” the portfolios warn.
Overall, despite the macro and geopolitical risks, portfolio managers see a likely return to more conventional behavior for both stocks and bonds in 2024, albeit with the potential for further disruptive influences that require portfolio flexibility.
KEY EXPORT
“Looking across asset classes, we believe bonds stand out due to their strong outlook in the underlying macro perspective as well as their resilience, diversification and especially valuation. Given the risks to an expensive equity market, the case for allocation to high-quality fixed income is compelling, “concludes the portfolio managers.
The outlook has echoes of a report released this week by CoreData revealing that more than three-quarters of US institutional investors expect higher rates to remain for at least the next 12 months, strengthening the case for fixed-income investments.