We are in a late cycle environment in which macro conditions are increasingly signaling deterioration, and this fact alone calls for nuanced portfolio construction. However, our macroeconomic analysis suggests that the economic softening so far has been largely offset by central banks around the world pivoting to easing, which has loosened financial conditions considerably. Looking forward, it still remains unclear if the loosening of financial conditions will manage to turn the outlook around.

Here is how we are positioning multi-asset allocation portfolios in light of our outlook for the global economy and markets.

Overall Risk

PIMCO Asset Allocation Outlook Midyear Update

Given broadly slowing growth, increasing geopolitical uncertainty, and generally higher levels of volatility, we are modestly underweight risk relative to our benchmark, and are building liquidity to take advantage of tactical buying opportunities.

Equities

PIMCO Asset Allocation Outlook Midyear Update

We expect volatility and slowing profit growth to continue to restrain investor appetite for equities in 2019. Therefore, we have a modest underweight to equities with an emphasis on liquidity and high quality, defensive sectors. We favor large caps over small caps, U.S. equities over European equities, and have increased our weighting in high-dividend-yielding equities, which we believe should benefit from lower sovereign bond yields.