Looking forward, rather than reaching for yield, we believe that investors will be reaching for resilience in their portfolio construction, looking to build more robust asset allocation in the face of a more uncertain environment for macro volatility, market volatility, and central bank support.
For our part, we will look to build resilience into the portfolios we manage on behalf of clients and seek to benefit during periods of market volatility.
Starting valuations – even following the weakness we have seen in asset markets in recent months – and our expectations for a more volatile macroeconomic and market environment call for low and realistic expectations for asset market returns over the secular horizon.
That said, the yield on core bond benchmarks has recovered from Covid-era lows, and in our baseline outlook we think that forward markets either price in or are close to pricing in what is likely to be the secular high for policy rates across different countries.
We anticipate positive returns on most bond benchmarks over the secular horizon, and fixed income investments, at higher yield levels, should play an important role in building resilience into diversified portfolios.
Private credit strategies can be an attractive complement to public credit allocations, though we are seeing excesses in some parts of these markets.
We expect to favour higher-quality corporate credit, and will seek to provide liquidity, not to demand liquidity, during periods of credit market stress.
Amid higher inflationary pressures, we see US Treasury inflation-protected securities, commodities, and select global inflation-linked investments as providing a reasonably priced hedge.
Real estate can also serve as an inflation hedge, particularly in sectors such as multi-family and self-storage, where leases are generally shorter than one year.
We believe equity markets are likely to deliver lower prospective returns than investors have experienced since the global financial crisis, reinforcing our focus on quality and the importance of careful selection.
We also expect emerging markets to offer good opportunities, while we stress the importance of active investment to sort between the likely winners and losers in a difficult investment environment.
Daniel Ivascyn is group chief investment officer; Joachim Fels, global economic adviser; and Andrew Balls, chief investment officer of global fixed income at Pimco
