As we look to 2022, our base case is of positive global growth and high inflation in the near term. Although we expect inflation to moderate over the course of the year, there are upside risks to our forecasts.
We believe that growth assets, such as equities and credit, will tend to generate positive returns over the next year. However, we expect greater performance dispersion across sectors and regions, a common feature of mid-cycle periods.
Indeed, in our Asset allocation outlook, “Opportunity Amid Transformation”, we discuss the fundamental shifts taking place at the “base level” of the economy which we believe will have implications for growth and inflation, but will also create distinct investment opportunities in a number of sectors and regions.
Specifically, we discuss disruptive and potentially transformative trends in labour, technology, transportation and energy.
With fuller valuations, risky assets are more vulnerable to exogenous shocks and policy errors. In our view, the risk of a policy error has increased as monetary and fiscal stimulus wanes and authorities attempt to engineer a transfer of growth to the private sector. This creates the potential for “thicker tails” (more divergent positive and negative results) that underscore the importance of selection – within and between asset classes.
The outlook for equities
Overall, we remain positive on equity market risk. We foresee substantial differentiation between regions and sectors, which justifies a more selective and dynamic approach.
Within developed markets, we remain overweight US equities and have positioned our overweight in cyclical growth sectors. We also have exposure to Japanese equities, which tend to have a valuation cushion as well as a beta to cyclical growth.
We view European equities as more challenging due to a combination of unfavorable sector composition, energy price headwinds and growing unease around the COVID-19 outlook.
In emerging markets, we remain positive on certain exposures in Asia. At the same time, we are closely monitoring regulatory developments in China and the evolution of geopolitical tensions in the region. We remain overweight in Emerging Asia, focusing on hardware technologies and equipment that will be critical to regional and global growth.
From a sector perspective, we maintain a preference for secular growth trends such as digitalization and sustainability. In particular, we believe semiconductor manufacturers, industrial automation equipment suppliers, and green energy and mobility providers should all benefit.
We supplement this with exposures likely to benefit from a more inflationary environment; these are companies that we believe have high barriers to entry and strong pricing power that can potentially benefit from inflation through price increases, such as global shipping companies.
Rates, credit and currencies
We expect government bond yields to trend higher over the cycle as central banks raise rates, but in a multi-asset portfolio environment, we believe duration can play a diversifying role.
Therefore, we continue to maintain some duration exposure. We are maintaining a slight overweight in US TIPS (Treasury Inflation-Protected Securities) in multi-asset portfolios. Although inflation breakevens have increased significantly, we believe they still do not fully capture an appropriate inflation risk premium.
We see that corporate credit seems fully valued. As such, we see little opportunity for spread compression outside of one-time opportunities identified by our credit analysts.
Securitized credit, on the other hand, still offers attractive value in our view, particularly for non-agency U.S. mortgages, where a strong consumer balance sheet and housing market underpin improving credit quality at spreads that we consider cheap compared to corporate bonds.
Finally, in the forex market, the US dollar is still rich in our valuation models, especially against emerging market (EM) currencies, but we shouldn’t assume that the dollar is destined to weaken in a environment where emerging market economies and central bankers continue to face challenges .
Past performance is not a guarantee or reliable indicator of future results.
All investments contain risks and may lose value. Invest in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation and liquidity risks. The value of most bonds and bond strategies is affected by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity can contribute to reduced market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Inflation-linked bonds (ILB) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs lose value when real interest rates rise. Treasury Inflation Protected Securities (TIPS) are U.S. government-issued ILBs. Shares may decrease in value due to real and perceived general market, economic and industry conditions. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to prepayment risk, and although usually backed by a government, government agency or private guarantor, there can be no assurance that the guarantor will perform its obligations. References to agency and non-agency mortgage-backed securities refer to mortgages issued in the United States. Invest in securities denominated and/or domiciled abroad may involve increased risk due to currency fluctuations, as well as economic and political risks, which may be increased in emerging markets. Exchange rate can fluctuate significantly over short periods of time and reduce portfolio returns.Diversification does not insure against loss.
Statements regarding financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work in all market conditions or that they will be suitable for all investors and each investor should assess their ability to invest for the long term, particularly during periods of declining market Marlet. Investors should consult their investment professional before making an investment decision. Outlook and strategies are subject to change without notice.
Forecasts, estimates and certain information contained herein is based on proprietary research and should not be construed as investment advice, an offer or solicitation, or the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations and, unlike actual performance history, do not reflect actual transactions, liquidity constraints, fees and/or other costs. Further, references to future results should not be construed as an estimate or promise of results that a portfolio of clients may achieve.
Terms “cheap” and “richas used herein generally refers to a security or asset class that is deemed to be significantly undervalued or overvalued relative to both its historical average and the investment manager’s future expectations. investments. There is no guarantee of future results or that the valuation of a security will ensure profit or protect against loss.
PIMCO in general provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This document contains the opinions of the manager and these opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. It is not possible to invest directly in an unmanaged index. The information contained herein was obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a registered trademark of Allianz Asset Management of America LP in the United States and throughout the world. ©2021, PIMCO.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.