Investors today are navigating a global economy in the late stage of the business cycle. Underlying growth appears robust but increasingly vulnerable to downside risk, leading to downward revisions in many growth forecasts. Inflation, already high, has risen further, and markets have 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 macro and market factors – now point to a 98% probability 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 (though we acknowledge meaningful downside risks to growth in several regions, including Europe – for details, please read our latest Cyclical Outlook, “Anti-Goldilocks”). Household and corporate balance sheets are generally healthy, pent-up demand for services has yet to be fulfilled, and continued investment in infrastructure and energy is needed. However, the U.S. Federal Reserve and many other central banks have made it clear that taming inflation is now their primary task. Financial conditions are tightening in response, bringing markets out of the reliably easy monetary conditions to which they had become 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 surging. We expect elevated inflation will continue to prompt central banks to push interest rates higher, creating differentiation across and within asset classes.
For financial assets, late-cycle behavior historically favors equities and commodities over duration and credit, albeit with more muted returns and higher volatility across the board.
Key themes in multi-asset portfolios
Download our investor handout for details on how we are positioning portfolios across global asset classes.
In PIMCO’s multi-asset portfolios, we are following the classic late-cycle playbook. We have reduced overall beta exposure to reflect the lower returns and higher volatility that we expect in this environment. From a cross-asset perspective, we prefer equities versus duration and corporate credit, and within asset classes, we are emphasizing higher-quality exposures. Finally, we hold exposure to assets that may benefit from higher inflation and help diversify portfolios, such as commodities and select currencies.
Over the past year, many cheaper, more cyclically oriented stocks have delivered strong returns on the back of robust economic growth and risk appetite. But looking ahead, we favor less cyclical, higher-quality businesses that we believe will be more resilient to late-cycle dynamics. We look for companies with steady cash flow, profitability, and sales that can likely weather periods of economic uncertainty.