Long a member of the bullish camp, PIMCO’s outlook recently shifted and they are now warning of stretched valuations and downside risks.
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As they write in Preparing for Pivot Points, "Investors have enjoyed economic stability and positive market returns for years, but stretched valuations and a changing macroeconomic backdrop suggest a change is coming."
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Anmol Sinha, a vice president and strategist at PIMCO, recently spoke with FS Insider about their new stance and how they are currently invested.
See related podcast: PIMCO Alerts Investors on Stocks, Says “Change Is Coming”
Generally growth has been fairly stable recently, Sinha said on FS Insider, but it’s been supported by monetary policy, which is beginning to reach the limit of effectiveness. That backdrop coupled with low global growth generally means there’s little room for error, he added.
“Given the low levels of growth we see globally, we have a little bit more caution in terms of what to expect for the economy going forward,” Sinha said. “If you think about where risk markets are, based on where they’ve been the last 5 years, valuations aren’t particularly attractive.”
For the last five years, central bankers have primarily been suppressors of volatility, but they’ve also been contributors to volatility more recently. This trend is likely to continue, Sinha noted.
“On some level, even if the kind of progression towards less support from central banks occurs next year or the year after, we just don’t think valuations are necessarily attractive to hold on in front of that happening,” Sinha said.
Given the potential shift in central bank support, the fragile economic backdrop, and uncertainties around the world, he thinks more caution is warranted.
“Our asset allocation models are certainly getting a little bit more defensive … not necessarily because we see imminent recession or turn in business cycles or anything like that, at least on the immediate horizon, but more so because valuations are more than priced for positive news,” he said.
PIMCO is now slightly underweight U.S. equities and closer to neutral internationally. Regarding interest rates in general, though it may be counter-intuitive, Sinha favors having some exposure to U.S. interest rates, partly because it provides some protection if there are spikes in volatility.
He believes interest rates will be range-bound in the near term, but if they do grind higher, they’re going to do so because of rising inflation expectations, and not because there’s any change to underlying growth trends.
The global economy is essentially driving without a spare tire, Sinha noted. Though growth has been positive globally, it’s been fairly low. Now, with central banks starting to run out of ammunition to deal with shocks, it leaves this low-growth environment more susceptible to shocks.
“Central banks in general are not able to step in to the same extent they were before,” he said. “That’s what makes us more cautious on the longer-term horizon.”