A prudent investment strategy is to maintain flexibility and liquidity, according to Pimco, in its March 2022 cyclical outlook, Anti-Goldilocks.
“Amid this difficult and uncertain environment, a key plank of our investment strategy will be to emphasise portfolio flexibility and portfolio liquidity to respond to events and potentially take advantage of opportunities,” said Joachim Fels, the firm’s global economic advisor, and Andrew Balls, global fixed income chief investment officer.
More specifically, the fund house expects to target modest duration underweights given the current levels, the upside inflation risks and the prospect for more central bank tightening.
This will involve de-emphasising curve positions, with the broad global tightening cycle now underway. Pimco also see US treasury inflation-protected securities (Tips) as a reasonably priced way to mitigate upside inflation risks.
Adapting allocations to a new reality
In credit, Pimco suggests that positioning in portfolios should focus on resiliency, liquidity and principal preservation for a wide array of scenarios.
“We will look to be underweight generic corporate credit, as we believe several areas of securitised products markets offer higher credit quality or more default-remote alternatives to corporate credit,” explained Balls. “Within corporate credit, we expect to continue to favor senior financials.”
Geographically in credit markets, the firm will likely maintain a bias for the US over Europe and emerging markets.
In the equities space, meanwhile, Pimco will likely be broadly neutral on overall equity beta risk in its asset allocation portfolios.
According to the firm, the current environment favours high quality and less cyclical companies, given the late stage of the cycle, with underlying growth momentum still strong but increasingly vulnerable to downside risk.
Further, for commodities, based on the importance of energy to the production costs of other commodities, the impact on broad inflation due to the events in Ukraine has the potential to lead to meaningfully higher prices as commodity buyers broadly look to reduce dependency on Russian exports.
With commodity indices exhibiting positive carry at levels rarely seen, Pimco believes commodities can also play a role in mitigating upside inflation risks.
“Our asset allocation portfolios – and our fixed income portfolios – will tend to emphasise keeping powder dry in an effort to take advantage of dislocations in equity markets as they arise,” added Balls.