Mid-Cycle Investing: Growth-Oriented and Selective
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
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.
Text on screen: For more insights and information, visit pimco.com
Text on screen: PIMCO 50 1971-2021
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.
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted 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 may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets.
Socially responsible investing is qualitative and subjective by nature, and there is no guarantee that the criteria utilized, or judgment exercised, by PIMCO will reflect the beliefs or values of any one particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and PIMCO is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. Past performance is not a guarantee or reliable indicator of future results.
Beta is a measure of price sensitivity to market movements. Market beta is 1.
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.
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.
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.
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.
Select Your Location
Europe, Middle East & Africa
Location not listed? Visit our Global Site.