With the global economy in a mid-cycle expansion, the environment appears ripe for growth-oriented assets such as equities and credit.
However, believes Pimco, given the significant differentiation in returns, sector and security selection remain crucial.
“In equities, we focus on companies positioned to benefit from secular disruptions in technology, geopolitics and sustainability,” said Geraldine Sundstrom, portfolio manager, asset allocation at Pimco. “In credit, we focus on housing-related sectors.”
More specifically, within multi-asset portfolios, the fund house generally prefers equities over other risk assets based on relative valuations, added Erin Browne, portfolio manager, multi-asset strategies.
Looking beyond the business cycle, the potential impact of longer-term disruptions leads Pimco to forecast that trends fuelling sustainability and evolutions in technology present investment opportunities as well as risks.
Preparing post-peak portfolios
For the time being, in Pimco’s view a peak in growth is imminent, as it is in inflation and policy support. In line with this, its overall assessment that the economy is mid-cycle is reflected in equity valuations.
Historically, these periods have seen strong but differentiated returns in equity markets, explained Sundstrom.
And while credit tends to have positive returns in this environment, it often underperforms equities on a risk-adjusted basis, she added.
“Return dispersion across assets is typical during mid-cycle environments, and every cycle is different. Uncertainty surrounding the uneven recovery from a pandemic-driven recession calls for flexibility and a careful eye toward sector and security selection,” said Sundstrom.
For Browne, meanwhile, the emphasis in multi-asset portfolios is on the bottom-up opportunities within asset classes that can outperform as beneficiaries of the ongoing recovery, as well as longer-term disruptions.
New influences to watch
A trend that might have an impact in the current mid-cycle recovery that has not been present previously is ESG investing.
“Corporate earnings calls, for example, have seen a dramatic increase in mentions of ESG since the onset of the pandemic. Mapping these ESG influences helps inform asset allocation strategy,” said Sundstrom.
With more than 110 countries – representing over 70% of global GDP – so far pledging to a net zero carbon future, investment and consumption patterns are changing. This should create strong demand for certain goods and materials, such as renewable energy, semiconductors, and forestry and pulp products. Simultaneously, adds Pimco, certain businesses face risky transitions or long downturns.
“The move toward a greener future necessitates adoption of new technologies and new energy sources, as well as updated regulations and policies,” explained Browne.
Another potentially important dynamic for portfolios to consider is the more serious dialogue than ever before among OECD nations to develop a global minimum corporate tax rate; the G7 has proposed at least 15%.
“The impacts could be broad and certain companies could see their taxes go up,” said Sundstrom.
Demand for automation and advanced technology such as artificial intelligence could be one response, which is a likely long-term positive for industry leaders in these sectors, she added. However, broader redistribution of income could also mean more economy-wide consumption and less propensity to save.
