The opportunities appear unusually attractive and diverse, with active country and stock selection playing a key role. A reconsideration of the traditional 60% equities/40% bonds allocation is necessary.
The global economy continues to recover from the fallout of the pandemic, including trade dislocations, excessive monetary and fiscal interventions, persistently high inflation, and bouts of high volatility in financial markets. At the 2024 Pimco Secular Forum, we explored the consequences of these disruptions, which are driving unexpected positive developments, while also creating longer-term risks.
On the positive side, disinflation has materialized more quickly than expected in most developed economies. Furthermore, macroeconomic and inflationary risks seem more balanced than during our last Secular Forum a year ago. Central banks are also expected to change course and cut rates, but probably on different timetables.
However, we see three main areas where investors have benefited but may be overlooking risks over our five-year secular horizon:
- Large-scale fiscal stimulus has fueled the recent exceptional growth in the US economy, but it comes at a cost: the US debt trajectory is unsustainable and the government will sooner or later have to address this problem. . In the meantime, financial markets will increasingly have to do without government support.
- If artificial intelligence (AI) is expected to realign labor markets and boost productivity, it will undoubtedly take several years before we see a significant economic impact. The massive investments that have accompanied the rapid rise in stock prices are reminiscent of previous technology booms.
- Asset valuations appear to offer little protection in some markets. These include equities, whose valuations appear stretched, and lower-rated direct corporate lending markets, which are less liquid and more exposed to variable rates.
For investors, the inflationary shock and sharp increases in key rates in the early 2020s led to a rise in bond yields, which now include significant protection against inflation. Starting yields show a strong correlation with five-year yields. This backdrop provides attractive long-term prospects for bond yields as inflation ebbs, particularly on a risk-adjusted basis relative to other assets. Opportunities in global bond markets also appear unusually attractive and diverse, with active country and security selection playing a key role.
In our opinion, this secular environment deserves to reconsider, or even reverse, the traditional 60% equity/40% bond allocation.
As banks withdraw from certain markets, we also see attractive opportunities in asset-backed lending, particularly in consumer-related sectors given the strength of US consumption. Bank disintermediation and capital requirements will create opportunities in commercial real estate lending.
Discussions at the Secular Forum addressed the role of the United States and China in the transition to a multipolar world that could change market and political dynamics. The peace dividends that countries have enjoyed in recent decades are turning into the costs of conflict that could well constitute a disruptive force.
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