PIMCO’s recent annual Investment Summit – this year hosted virtually - aimed to help investors prepare for a world of “Escalating Disruption,” the theme of our recently published secular outlook. Joining the discussions were Chief Executive Officer Emmanuel Roman, Group CIO Dan Ivascyn, Global Economic Advisor Joachim Fels, CIO Global Credit Mark Kiesel, and Managing Director and Portfolio Manager Geraldine Sundstrom, among other leading portfolio managers. Here are five key takeaways:
Following the outbreak of the COVID-19 pandemic, four macroeconomic disruptors are likely to become even more pronounced over the secular horizon:
- China’s rise: the Asian country has dealt with the pandemic more efficiently than other nations, hence its growth will be more prominent. The U.S. will continue to push back – whatever the election result.
- Populism: the pandemic has increased inequality, which could lift the risk of more extreme policy outcomes.
- Technology: the pandemic has turbocharged digitalisation. There will be winners and losers, and distinguishing between them will be an important source of alpha for investors.
- Climate change: climate-related risks have come into the spotlight this year with extreme weather events around the world. Investors will need to respond to the move from brown to green.
Over the short term, we are likely to see above-trend secular growth, as we move from a “hurting” to a “healing” phase of the cycle. The length and strength of this phase will be influenced by two swing factors: the state of the pandemic and the path of fiscal policy. Longer-term, the pandemic may weigh on growth as a result of “economic scarring,” such as skill erosion in the labour market and reduced business investment.
Generating returns in this environment may be more challenging as yields remain low, valuations appear relatively full and volatility is expected to be high. Investment success in the years ahead will likely be defined by preparing for the risks and opportunities that arise from disruption. Active management stands to play a critical role, including within multi-asset strategies that have the flexibility to invest across global markets.
A low rate environment will contribute to demand for income-generating assets, including high-quality investment grade debt in the U.S. and Europe. Overall, major credit markets have been supported by unprecedented fiscal and monetary stimulus that may lift growth, help curtail defaults, and ultimately lead to credit spread compression. Sectors where we currently see opportunities include technology, healthcare, utilities and banks.
Key opportunities exist in private credit, as companies seek access to liquidity beyond what is available in public markets to recover from the crisis. Mandates that are flexible - and able to differentiate between companies that must overcome short-term challenges and those that face enduring headwinds - should be positioned to capitalise on areas of value. PIMCO is focused on opportunities where companies are under temporary stress and in need of capital solutions; these opportunities range from commercial real estate to travel and hospitality, to technology. Patient capital should be able to generate attractive returns in this vintage.
