We Believe

We forecast a strong global recovery in 2021 amid significant fiscal support, accommodative monetary policy, diminishing lockdowns, and accelerating vaccinations.

Despite an expected temporary bump in inflation in the coming months, we believe inflation generally will remain below central bank targets over the next one to two years. However, markets may remain focused on inflation risks in the near term, contributing to elevated volatility.

In this uncertain environment, we seek to maintain portfolio flexibility and liquidity to be able to respond to events as they unfold.

We see opportunities in COVID-recovery sectors, including housing, industrial/aerospace, and select banks and financials. We favor non-agency U.S. mortgages and select other global structured products. We favor curve-steepening positions in several developed market sovereigns, and we expect to maintain an overweight to equities in asset allocation portfolios.

Investors should be prepared for an inflation "head fake" and look to maintain portfolio flexibility and liquidity to be able to respond to events in what is likely to be a difficult and volatile investment environment.

These are two of the key takeaways from our latest Cyclical Forum and strategy meetings, in virtual format again but bringing together the whole of PIMCO's global team of investment professionals. Our economic teams laid out the baseline forecast for a strong recovery across the world and inflation that – in spite of all the reflationary talk – we think is likely to remain below central bank targets over the next one to two years, notwithstanding a temporary spike over the next several months (which could cause a "head fake" in markets). We will lay out that baseline and the risks around it below.

But, those forecasts aside, our forum discussion often returned to the potential for financial markets to maintain focus on inflation risks, at a time when central banks globally have pledged to go very slow and when fiscal policy, this year at least, should boost growth – with a very big boost indeed in the U.S.