Investing in a Fast‑Moving Cycle

We Believe

  • Peak fiscal policy support, and therefore peak real GDP growth, was likely realized in 2021, and the global economy now appears to be rapidly progressing toward late-cycle dynamics. Monetary policy in most regions has shifted course toward normalization.
  • Frictions in both goods and labor markets have spurred inflation. Our base case has global inflation peaking by the first quarter and then moderating closer to central bank targets by the end of 2022, and we are closely monitoring upside risks to that view.
  • Risk premiums and yields don’t reflect potential downside scenarios, in our view, which warrants caution and a rigorous approach to portfolio construction.
  • We generally favor a duration underweight relative to the benchmark, and look to position portfolios for a steeper yield curve. Given the likelihood for higher volatility, we anticipate active duration management to potentially be a more significant source of alpha than in the past.
  • We seek credit exposure from diversified sources, including non-agency U.S. mortgages, select COVID-19 recovery themes, and single-name opportunities. We have a constructive view on global equities, but are preparing for late-cycle dynamics, with greater focus on security selection.

Economic Outlook

Uncertainty has become an ongoing theme in markets, economies, and communities everywhere, and in this environment, PIMCO investment professionals gathered – virtually, once again – for our recent Cyclical Forum. We debated key trends across global economies, policies, and investment sectors, in discussions that ultimately inform our outlook for the coming year along with high-level portfolio strategy (for more details on our forum process, please watch this behind-the-scenes video).

Economic outlook: More volatility, more uncertainty

Over the secular horizon, we expect a more uncertain and volatile macro environment with economic cycles becoming shorter in duration, larger in amplitude, and more divergent across countries (for details, see PIMCO’s Secular Outlook, “Age of Transformation”). These secular themes appear to be playing out over the cyclical horizon as well: Much of the global economy has transitioned quickly from an early cycle recovery to a mid-cycle expansion, necessitating a faster policy shift from the extraordinarily easy conditions that prevailed in 2020 and 2021, in our view.

Further complicating matters, the speed of the recovery coupled with the volatile path of the virus have also contributed to more significant frictions in both goods and labor markets that have elevated inflation. The timing and extent to which these issues resolve and inflation moderates is highly uncertain, raising the risk of an unwanted jump in longer-term inflation expectations – an outcome that we expect central banks will want to avoid or mitigate. Overall, we believe this more uncertain, more volatile macroeconomic environment is evidence that the last several decades of subpar growth and below-target inflation are firmly behind us, and what lies ahead are more volatile and uncertain paths that vary across regions and sectors.