Ivascyn (PIMCO): “The future is brighter, but tensions are not over”
Consensus is too skewed toward a soft-landing certainty not supported by data, according to the firm's group cio. Credit risk and equity overvaluation the two main dangers to monitor. High conviction on quality fixed income
by Davide Mosca
Dan Ivascyn's journey at PIMCO began more than two decades ago, and there are not many times when it has been necessary to address a degree of change in the markets such as we have seen over the past two years.
“We have new points of balance across all the fundamental economic metrics, although” the asset manager's group cio said at a dedicated European press meeting, “much is already reflected in current prices”. Prompted in choosing a recurring question that is particularly relevant at the moment, the economist had no doubts: “I wonder if the current level of debt can be sustained and for how long” specifying, however, how this is a mandatory question in any context for a fixed income manager.
The sun is shining on fixed income
“Our exposure to rates has risen sharply to above the levels of recent years, following the trend of yields that are now returning to their historical average after the shock brought about by the pandemic that had driven this figure lower than at any time in history”. The future is, therefore, bright for fixed income taking into account that the returns piled up by bond vehicles are “at levels that are making the asset class competitive even against equities”. “Even considering the persistence of inflation”, Ivascyn specifies, “real returns remain attractive”. Moving toward fixed income, moreover, means not only benefiting from carry but also positioning for an expected appreciation “that will happen quickly, albeit with timing that is not precisely predictable”.
Inflation, central banks and equities the big questions
One factor of great interest to investors, pointed out by PIMCO's group cio, is the return of the diversification potential of fixed income versus equity in the face of a slowdown in the inflationary run. How and when this will happen, however, is still up in the air. “We think the Fed has already decided on at least one more hike. Everything then depends on inflation, and if this leads to the need for further tightening there will certainly be negative effects on growth and the outlook for equities. If, on the contrary, there is a steady downward movement we may see cuts as early as during 2024”, says Ivascyn.
PIMCO's base case scenario is now one of “sticky” inflation resulting in a slightly above-average forecast positioning. “The economic slowdown is not over and the consensus is too shifted toward a soft landing certainty that we do not yet have. From an investment point of view, we have to take into account the high valuations reached by equity and the possible strains on lower credit quality segments. That is why we have a cautious approach and have lowered the overall level of risk”, the expert concludes.
Geraldine Sundstrom, portfolio manager, also spoke on the point, noting that market expectations are positioned for 12 percent earnings growth from now till the end of 2024. "At the same time, we have an expected declining level of overall economic growth. It is not impossible to have such a dichotomy, but such data signals how high the point is at which equity valuations currently stand," she concludes, specifying how right now expectations about the effects of artificial intelligence development on corporate earnings are as high as to be handled with extreme care.