Building resiliency in portfolios is key

3 July 2020

With economic forecasts calling for a gradual healing of global activity through the second half of 2020 and into 2021 and the range of potential outcomes expected to be wide, investors should focus on building resiliency in portfolios, according to PIMCO.

The firm’s recent report found that equities and corporate credit were fairly valued when adjusting for real interest rates, economic resilience, and the level of inflation.

“As such, we favor a moderate risk-on stance in multi-asset portfolios with a focus on companies with strong secular or thematic growth drivers that are positioned to deliver robust earnings in a tepid macro environment,” the report said.

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“This approach favors quality and growth over cyclical risk in equity portfolios, and favors “bend but not break” investments in credit markets.”

As far as the overall risk was concerned, PIMCO believed that global economies would gradually recover over the next six to 12 months.

“We have a modest risk-on posture in multi-asset portfolios, but recognise the distribution of potential paths is wider than usual. We are emphasizing resiliency within procyclical exposures and seeking to access multiple sources of diversification across asset classes,” PIMCO said.

At the same time, despite the deterioration in fundamentals, equity valuations were still close to fair after adjusting for easier financial conditions. The firm said it favoured a modest overweight to equities with a focus on high quality and growth characteristics within sector and country selection. Within countries, this favored the US and Japan over Europe and emerging markets.

Credit offered heightened default risk in lower-quality segments of the corporate credit market and PIMCO said it remained overweight credit, favoring high-quality corporate issuers and mortgage-backed securities while remaining cautious on high yield corporates.

Inflation was likely to be subdued in the near term and markets had priced in low expectations. However, the significant increase in government debt could result in higher inflation over the long run.

According to the report, PIMCO had allocations to gold, real estate investment trusts (REITs), and US Treasury Inflation-Protected Securities (TIPS) as hedges against an inflation surprise, but remained cautious on commodity-related assets.

In terms of currencies, PIMCO remained neutral with respect to the US dollar (USD) given a strong rally year to date.


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