How Can Transformation Lead to Opportunity in 2022?
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Text on screen: Jason Odom, Product Strategist, Asset Allocation
Jason Odom: Hi. I'm Jason Odom, and I'm joined today by portfolio managers Erin Browne, Geraldine Sundstrom, and Emmanuel Sharef. Thank you for joining us today. PIMCO recently published our asset allocation views for 2022, titled, “Opportunity Amid Transformation.” Erin, would you walk us through some of the key takeaways?”
Text on screen: Erin Browne, Portfolio Manager, Asset Allocation
Erin Browne: As we emerge from the pandemic, we think that the next decade will be fundamentally different from the one that we've experienced over the prior decade. PIMCO is referring to this period as the age of transformation. The key question for us as investors is to assess what changes are temporary, and what changes are going to be more permanent in nature. Two areas that we're watching more closely are labor markets and global supply chains. With respect to labor markets,
Text on screen: Labor markets: We expect temporary effects of pandemic will fade throughout 2022
Images on screen: Labor and manufacturing companies
we expect that the temporary effects of the pandemic will fade as we navigate through 2022, such as government assistance and childcare constraints. However, some of the structural shifts, like a shift to working from home, shift to earlier retirement, as well as increased labor bargaining power, will likely remain more permanent in nature.
Similarly, the disruptions that we've are experienced in the post- pandemic
Text on screen: Labor markets: Supply chains: We expect bottlenecks to ease in 2022
Images on screen: Cargo ships and busy ports
period in supply chains will also ebb as we move through 2022. That said, as we exit this pandemic period, the future is going to require a much more physical buildout of infrastructure investment,
Images on screen: Electric car, solar panels and windmills
which will keep demand for technology and green infrastructure imports much higher than what we've experienced in the past. The magnitude and the permanence of these changes in the labor market and global supply chains will have important implications for inflation over the next 12 months, and this is going to be a key swing factor for markets, in our view.
Jason Odom: Thanks, Erin. You bring up an interesting point about inflation being a key swing factor. Emmanuel, what is PIMCO's base case expectation for inflation, and how does that impact positioning in our multi-asset portfolios?
Text on screen: Emmanuel S. Sharef, Portfolio Manager, Asset Allocation and Residential Real Estate
Emmanuel Sharef: Our base case is that inflation should peak in the first quarter of 2022, and then gradually decelerate throughout the year, ending the year around 2 percent for core PCE. But even in that benign scenario, it means we still have several months of relatively high and uncomfortable inflation prints ahead of us, and those prints will remain high while these logistical bottlenecks and wage pressures that we're currently facing gradually ease. In the meantime,
Images on screen: The Federal Reserve
the biggest risk in our view is a policy mistake, if central bankers feel that they need to early and aggressively hike rates into an environment where the economy's already naturally slowing, that could significantly handcuff growth. So therefore inflation and its components are something that we're watching and tracking very closely, given the linkage to interest rates, to growth expectations, and then ultimately also to asset prices and portfolio correlations.
Jason Odom: Geraldine, turning to you, in an environment where valuations are full, and higher inflation remains a threat, where are the pockets of opportunity for investors to preserve and grow their capital?
Text on screen: Geraldine Sundstrom, Portfolio Manager, Asset Allocation
Geraldine Sundstrom: Clearly, there are some risks on the horizon, but with the amount of changes that are occurring currently in the global economy in this age of transformation, there are some compelling investment opportunities for active investors.
Text on screen: TITLE – Potential opportunities for active investors:, BULLETS – Semiconductors, Renewable energy, Automation space, Infrastructure
For instance, the green and digital transformation is leading to an explosion in demand for semiconductor, a trend that we expect to continue for years to come. Other things would be application, like renewable energy or the automation space, which are sectors that are likely to see strong tailwinds in the years to come. Last but not least, this transformation will require important infrastructure spending, and a lot of goods are going to need to be carried around to do those investments. As such, we have seen recently a large spike in maritime transport and shipping costs. However, we think that, for the next couple of years, it is likely that shipping will remain supported.
The bottom line is that at PIMCO, we have spent a long time to identify those new secular trends and try to position our portfolio to come up with new ideas that will generate those differentiated returns
Jason Odom: Thanks, Geraldine. Erin, in our mid-year update, you described the economy as being mid-cycle. Is that still the view? And if so, has anything notable changed?
Erin Browne: Our economic models continue to suggest that the economy is mid-cycle, whereby growth will remain positive, but moderate from the levels that we've seen over the last year. The main difference from earlier in the year is that inflation has proven to be
Images on screen: PIMCO trade floor
much more stubborn than previously expected. Overall, we anticipate a bumpier road ahead, characterized by higher market volatility, greater dispersion in performance across both risk asset classes, sectors, as well as regions.
However, as active investors, these tend to be periods of opportunity for our portfolios, ripe for alpha generation for those that can be patient and identify new themes as they emerge.
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Recorded 6 December 2021
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