Mid-Cycle Investing: Growth-Oriented and Selective

Text on screen: PIMCO

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Text on screen: Jason Odom, Product Strategist, Asset Allocation

Odom: Hi, I’m Jason Odom, an asset allocation strategist, and I’m joined today by portfolio managers Erin Browne and Geraldine Sundstrom. Thank you both for joining us today.

Erin, to get us started, can you give us a summary of the key takeaways of the asset allocation outlook?

Text on screen: Erin Browne, Portfolio Manager, Asset Allocation

Browne: Sure. Thanks, Jason. We’ve moved past the early cycle environment that really predominated risk taking in 2020, post the pandemic lows, and we’re moving really into a mid-cycle environment, which tends to be a constructive environment for risk, broadly speaking.

Text on screen: TITLE – Moving past the four peaks, BULLETS – Growth, Inflation, Policy support, Post pandemic environment

That said, we are also moving past what we define as the four peaks. That’s a peak in growth, a peak in inflation, peak in policy support, but also importantly, a peak in the post pandemic environment.

And what this ultimately means is that we think from here, we’re going to be moving into a midcycle environment that’s still going to be expansionary, albeit with slightly lower growth than we’ve seen predominate over the last year or so, but it’s still a very constructive environment for risk taking more broadly.

Odom: Thanks, Erin. Can you expand on the implications of a mid-cycle environment for different asset classes?

Browne: Mid-cycle environments tend to be quite constructive, as I noted, for risk taking and for growth oriented assets. What’s interesting, though, is that as we move into a mid-cycle environment, equities tend to be, on a risk adjusted basis, the best asset class in terms of performance.

Text on screen: Equities tend to outperform bonds and credit during a mid-cycle environment

Images on screen: PIMCO trade floor

Equities tend to outperform both bonds as well as credit.

However, there is a distinction, as we move from an early cycle environment into a mid-cycle environment. In early cycle environments, beta tends to be the predominant driver of returns, particularly for equities.

Text on screen: TITLE – Characteristics of the mid-cycle environment, BULLETS – More dispersion, SUB-BULLETS – Intra-asset class, Across asset classes, BULLETS - Security and stock selection define returns

As we move into a mid-cycle environment, we tend to see a lot more dispersion, both intra-asset class as well as across asset classes. And security selection and stock selection becomes much more important in terms of defining returns in a mid-cycle environment than what we experienced in the very beta driven early cycle environment.

And as a result of that, we think that going forward, dispersion is going to be the driver of returns and stock and security selection is going to be increasingly important.

Odom: Geraldine, moving over to you, as we move past the pandemic, PIMCO has been evaluating which changes could have a lasting impact. Can you speak about some sectors that may benefit from these more permanent changes?

Text on screen: Geraldine Sundstrom, Portfolio Manager, Asset Allocation

Sundstrom: Each economic cycle is different, and as we reach mid-cycle, as Erin said, we need to become a lot more selective in our security selection. Therefore, we need to ask ourselves, what is different this time?

Text on screen: Key ESG Considerations: Environmental

Images on screen: Windmill and Solar farms

And certainly of late, one factor has gained incredible traction, and that has to do with ESG consideration.

Indeed, when thinking about the environment, already 110 countries have pledged to a net zero CO2 future, and this means that we are likely to see in years ahead higher demand for certain goods and materials. We could also see big developments in new technology in energy production, transport, or construction.

Text on screen: Key ESG Considerations: Social

Images on screen: Corporate buildings, warehouses, G7 meeting

Now, looking at the social consideration, a number of things have been happening. We are seeing large multinational companies increasing substantially minimum wages. We are also seeing efforts from government to redistribute wealth.

The G7 has launched an initiative for a global minimum corporate tax. This could mean that with this effort and this redistribution, we could see more demand for robotics and automation, but also more consumption and potentially less saving.

Last but not least, there are governance considerations.

Text on screen: Key ESG Considerations: Governance

Images on screen: Shipping containers

We are all very well acquainted with typical corporate governance. That said, there’s also a new angle to it, which is more of a geopolitical nature.

The pandemic has put forward the issues that supply chain, long supply chain, can have, and there are now efforts from various governments around the world to secure key strategic goods like semiconductors, batteries, or medical supply.

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Please note that the following contains the opinions of the manager as of the date noted and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

The continued long term impact of COVID-19 on credit markets and global economic activity remains uncertain as events such as development of treatments, government actions, and other economic factors evolve. The views expressed are as of the date recorded, and may not reflect recent market developments.

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