We now live in the era of uncertainty. The market is very volatile, where it can have wild swings that might scare even the most seasoned of professionals. This is where fixed income comes into the picture to help smoothen things up and make investing less of a wild rollercoaster ride.
Smart Investor spoke to Dan Ivascyn, Managing Director and Group CIO of PIMCO to find out more about the global fixed income outlook for 2023. Ivascyn is leading the company’s fixed income strategies and PIMCO is an American investment management firm focusing on active fixed income management worldwide. PIMCO manages investments in many asset classes such as fixed income, equities, commodities, asset allocation, ETFs, hedge funds, and private equity.
Global Fixed Income Outlook For 2023
Smart Investor: 2022 has been a torrid year for markets on the back of higher interest rates and persistent inflation. What’s your broad outlook for markets in 2023 and are we tipping towards a recession?
Dan Ivascyn: Over the next six to twelve months, we expect to see shallow recessions and rising unemployment across many large developed markets. Central banks are determined to bring down inflation, which means tighter financial conditions and slower growth that is unlikely to
bounce back quickly.
We believe the return potential in the bond markets is now compelling, given how much yields have risen year-to-date. We do see downside risks for global equity markets, however, given starting valuations and earnings expectations that may not account for ongoing central bank tightening measures and increased recession risk.
SI: Fixed income has also not been spared from the volatility as bond yields rise with the Fed staying on its hawkish path. Is the bond route over or
should investors stay buckled up? What’s your take on the global fixed income outlook for 2023?
DI: The global fixed income outlook for 2023 is looking quite attractive whether it is from an absolute perspective, versus cash for those that may have been on the sidelines looking to avoid the volatility, or versus equities where we see more downside risk. Given the dramatic rise in rates so far this year, we are finally at a point where we do see considerable opportunities for the patient investor, particularly in the higher quality space that should be more resilient in a recession.
The bottom line is that valuations have changed a lot very quickly and careful investors can now go on the offense in select parts of the fixed income market.
SI: Against a backdrop of slowing growth and risks of corporate defaults, how will the team be approaching its credit selection and investment process? Which sectors are you finding attractive?
DI: In credit markets, we seek to balance near-term caution given the uncertainty and recession risks with a long-term focus on high quality, resilient assets that may see some near-term weakening, but that we believe are highly unlikely to default. This includes a range of high quality
structured credit assets, high quality investment grade corporate debt, particularly financials, and even some high yield credits that we believe have sufficient balance sheet resiliency over a range of adverse economic outcomes.
We’re more cautious on areas of the credit markets that are very sensitive to the economic cycle. This includes weaker emerging market corporate exposures, lower-rated bank loans, and segments of the private credit market where weaker-quality borrowers will likely face the direct impact of higher central bank policy rates via higher debt service costs, which will likely be accompanied by deteriorating earnings power.
SI: Why should investors consider fixed income as an asset class in their portfolios?
DI: There are several reasons bonds make sense in a diversified portfolio. Firstly, the increase in yields globally means there is a much higher income potential in bonds than there has been in a long time. High single digit yields in high-quality bonds provide a powerful source of returns and stability, particularly compared to equities which may see more weakness in a recession.
Secondly, current valuations mean there is the potential for capital gains as the trade-off between growth and inflation becomes more evident, potentially resulting in a Fed pivot.
Finally, while stocks and bonds have tended to move in the same direction this year, we expect to see a return to negative correlations, meaning fixed income generally should rise in value when equities fall.
Well there you have it, the global fixed income outlook for 2023 by an expert.
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