Voice of the Industry: PIMCO’s Asset Allocation Outlook

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Investors today are navigating a global economy at the end of the business cycle. Underlying growth looks robust but increasingly vulnerable to downside risk, prompting downgrades to many growth forecasts. Already-high inflation rose further and markets priced in rapid monetary tightening as central banks rush to control price spikes.

PIMCO’s Business Cycle Indicators – based on data covering a wide range of macroeconomic and market factors – now indicate a 98% chance that the global economy is in the second half of the economic expansion. However, although we are in a late-cycle environment, our base-case outlook does not include a global recession in 2022 (although we recognize significant downside risks to growth in several regions, including India). Europe – for more details, please read our latest cyclical outlook, “Anti-Goldilocks”). Household and business balance sheets are generally healthy, pent-up demand for services has yet to be met, and continued investment in infrastructure and energy is needed. However, the US Federal Reserve and many other central banks have made it clear that controlling inflation is now their primary task. Financial conditions are tightening accordingly, pulling markets out of the relatively easy monetary conditions to which they had grown accustomed.

In the real economy, supply shortages persist in areas ranging from labor to semiconductors. Despite hopes for continued improvement in 2022, the war in Ukraine has further upended supply chains and sent commodity prices soaring. We expect high inflation to continue to prompt central banks to raise interest rates, creating differentiation between and within asset classes.

For financial assets, late cycle behavior historically favors equities and commodities over duration and credit, but with more subdued returns and higher volatility across the board.

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