Cyclical Outlook: Peak Policy, Peak Inflation, Peak Growth
TEXT ON SCREEN: PIMCO
TEXT ON SCREEN: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.
IMAGE ON SCREEN: Cyclical Forum, Tiffany speaking at the podium in the forum
TEXT ON SCREEN: Tina Adatia, Fixed Income Strategist
Tina Adatia: Tiffany, so we’ve just published our outlook for this forum, inflation inflection. Can you give us an inside look at those key takeaways?
TEXT ON SCREEN: Tiffany Wilding, North American Economist
Tiffany Wilding: Yeah sure. So, I think it can really be summarized very simply, in the sense that we’ve seen the peak pandemic.
TEXT ON SCREEN: TITLE – Economic Outlook: Peak Pandemic, Peak Policy, Peak Growth
IMAGE: Three figures are shown. In the first one, titled “Peak pandemic,” a line graph shows a rising global seven-day average of daily cases per 1 million in population, with the metric at about 50 in June 2021, up from zero in February, and having peaked at more than 100 in April. The second figure is a bar chart, titled “Peak policy support,” showing the DM Economy Fiscal Impulse from January 2002 through January 2024, with the metric forecast to drop to negative 4% by 2022, down from positive 5% two years earlier. The third figure is a line graph titled “Peak growth,” showing the PIMCO DM Real GDP Forecast, from March 2016 to March 2022, with the metric falling to about 3% in March 2020, down from 13% in March 21.
That likely happened in April, when new cases, 7-day new cases started to peak. But with that, we’ve also probably likely seen the peak in policy. So fiscal policy, that we’ve gotten during the pandemic, that is going to start to be dialed back.
And what we think that this means is that in 2021, you likely see a sort of desynchronized growth recovery between nations. But that leads off into 2022, where you get more of a synchronized growth moderation. And so what does this mean for inflation? Ultimately, inflation lags growth. So as you see growth peaking, and this policy induced demand peaking, inflation will also likely peak as well. I think that there’s more question this time around, the actual timing and the magnitude of that peak inflation as a result of some of these supply-side constraints that have come about, either within the
IMAGE ON SCREEN: Semiconductor manufacturing and shipping containers.
semiconductor industry, or around shipping and logistical bottlenecks, within the United States.
Tina Adatia: Marc, given the 3 peaks in the outlook, can you weigh in on how these to macro conclusions are being applied to portfolios today?
TEXT ON SCREEN: Marc P. Seidner, CIO Non Traditional Strategies
Marc Seidner: There are a few high conviction opportunities at this very, very moment, valuations seem generally rich to us, and our approach is one of patience, focusing on liquidity, and flexibility, and want to be positioned appropriately to capitalize on opportunity as it presents itself over our cyclical horizon.
TEXT ON SCREEN: TITLE – Portfolio implications
IMAGE: Five columns each represent an implication, shown left to right, for the following: rates, securitized, credit, emerging markets, and equities. Two or three features are listed for each implication.
With regard to specifics on investment opportunities or market risks, we expect to stay pretty close to home on overall interest rate or duration positioning.
The steepness of the yield curve and the backup in rates so far this year has created a nice carry and rolldown at intermediate points of yield curves, not just the United States but, globally, to be sure. We favor housing related assets, given the strength of housing in the United States, and quite frankly, around the world, so opportunities in nonagency mortgage backed securities continue.
Agency mortgage backed securities, which were a great opportunity for 2020, have richened to quite overvalued levels, and so we’ve reduced our exposures quite a bit, remain neutral. There’s certainly still opportunity in some of the Covid related or recovery related themes, and we’re seeing opportunity there. We do think that there are unique opportunities in emerging markets, though we’re respectful of the importance of bottom-up research and security selection, because not all countries and not all opportunities are created equal. And then, we’re generally overweight equities, and given fair and a relatively rich world, it seems okay to be still slightly overweight equities, given our macro views.
Tina Adatia: Moving on from this, Marc, can you talk about the role of fixed income at this point in the cycle?
TEXT ON SCREEN: TITLE – The role of fixed income
IMAGE: A box lists three bulleted items: yield, carry and diversification.
Marc Seidner: The role of fixed income historically is, a positive term premia, which gives you an expected higher yield or return than sitting in cash.
There is some carry, and importantly, there is the benefit of diversification, in an uncertain outlook. And while those three characteristics didn’t necessarily hold a year ago, as we think about the cyclical horizon, those three characteristics are once again in place.
Tina Adatia: Many investors are worried about rising rates. Tiffany, what is PIMCO’s view on rising rates?
TEXT ON SCREEN: TITLE – Past peak monetary policy, but central banks likely to stay the course; SUBTITLE – Past peak monetary policy, as central banks look to slow asset purchases
IMAGE: A line graph shows cumulative net purchases for seven central banks, from January 2020 through May 2021. All seven start around zero, and rise to levels between 10% and 18% over the time period. The Reserve Bank of Australia cumulative purchases are at 10% by May 2021, the lowest, and that of Reserve Bank of New Zealand is at 18% by April 2021, the highest. The Federal Reserve’s is about 13% in May 2021.
Tiffany Wilding: So, Monetary policy, that impulse, if you will, is likely peaking. But, looking a little bit further out, just because this policy impulse as we call it, has peaked, doesn’t mean that we think that central banks are actually going to be quick to start to remove policy or raise interest rates.
So, the Federal Reserve, for example, we don’t think they raise interest rates until well into 2023 and of course, other central banks could be even later than that. So the ECB, of course, could be one that’s later. So I think that’s the thing could keep in mind here, is although there is a policy peak that’s happening, we think central banks will largely kind of stay the course on interest rates.
Tina Adatia: Marc, in the case that rates do rise, which fixed income sectors can be expected to outperform?
Marc Seidner: Well, let’s start off with a couple points. One, let’s be clear, rising rates aren’t always bad. Yes, they can negatively impact near-term performance, but rising rates
IMAGE ON SCREEN: PIMCO trade floor
can lead to higher levels of longer-term performance, and longer prospective returns, particularly in the context of what Tiffany mentioned, with central banks likely anchoring short-term interest rates at extraordinarily accommodative and extraordinarily low levels, beyond our cyclical horizon.
So, rising rates aren’t necessarily bad.
TEXT ON SCREEN: Higher rates may mitigate against downside risk
IMAGE ON SCREEN: PIMCO trade floor
Higher rates, as I mentioned earlier, may potentially provide protection against downside risk in a broader asset allocation.
And as we look around the world, there are opportunities where interest rates is have already risen, and create some opportunities. So we encourage investors to think about bonds from a global context, not just one particular country or opportunity.
TEXT ON SCREEN: For more insights and information, visit pimco.com
TEXT ON SCREEN: PIMCO 50 1971-2021
European Central Bank (ECB)
Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Statements concerning 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 under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
PIMCO as a general matter 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 is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Irish Branch (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. BR022803) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser.| PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited Unit 3638-39, Phase II Shanghai IFC, 8 Century Avenue, Pilot Free Trade Zone, Shanghai, 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other) | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (109) Jin Guan Tou Gu Xin Zi No. 027. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.). Tel: +886 2 8729-5500.| PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2021, PIMCO.