Executive Summary

  • Our baseline economic forecast calls for a gradual but uneven healing of global activity. But we also see substantial risks, and we believe building resilient portfolios is key.
  • The pace of the recovery will affect various regions, industries, and individual companies differently, and we believe active management remains critical to add value through sector selection and tactical asset allocation.
  • Our analysis suggests that valuations of risk assets (equity and credit) are approximately fair, and we believe investors should maintain a moderate risk-on stance while balancing caution with conviction.
  • We favor companies that are positioned to deliver robust earnings despite a tepid macroeconomic environment. This approach emphasizes quality and growth in equity portfolios and “bend but not break” investments in credit markets.

Asset Allocation Outlook

After a decade of steady growth and rising asset prices, economies and financial markets were rocked by the COVID-19 pandemic. The global health crisis forced most governments to lock down their communities, halting economic activity almost overnight and causing financial markets to reprice lower at an unprecedented speed. Policymakers responded with extraordinary monetary and fiscal support measures, leading to an equally dramatic upside move in risk assets.

The challenge facing investors today is how to construct portfolios in an environment where asset prices appear disconnected from the real economy and the resolution of the health crisis is murky. Our analysis suggests that valuations of risk assets (equity and credit) are approximately fair, after adjusting for easy financial conditions and assuming a gradual economic recovery. Nonetheless, the distribution of potential economic scenarios over the next 12 months is unusually wide. Will there be a V-shaped recovery as businesses reopen? Or will the emergence of a second wave of the virus further stall economic activity? These questions cannot be answered with certainty. Therefore, investors should consider building portfolios that can weather a range of future paths.

PIMCO currently favors a modest risk-on posture within multi-asset portfolios, emphasizing resiliency in equity and credit exposures. As always, robust portfolio diversification is critical, but achieving this requires a multi-faceted approach. Duration, real assets, and currencies all can play an important role. One silver lining is that volatility and uncertainty often lead to great investment opportunities. We believe portfolios that are thoughtfully constructed, well-diversified, and sufficiently nimble should be in the best position to navigate the months ahead.