Both equity and credit markets have enjoyed solid performance over the past few months as the global recovery continues and GDP growth is modest but sustainable, investment management firm Pimco noted in its mid-year asset allocation outlook.
Earnings for the first quarter of the year exceeded expectation and look to be on track for a strong second quarter as well, oil prices have remained relatively stable, and markets have been benign in their responses to major political events, the company said.
Despite this, Pimco said investors should take on a “defensive stance” and thoroughly consider the potential downside risks their portfolios face.
“However good the backdrop, one cannot help but notice that all these positive developments are widely discussed and well-known by most investors, and therefore already reflected in asset prices,” the company explained.
“As usual, markets will want more good news to fuel the rally, and this is where the problem lies – there aren’t any obvious catalysts on the near-term horizon to surprise markets in a good way.”
Pimco said its base case was that many of the known risks will “remain at bay”, but added that there were now too many risks on the horizon for them to be ignored.
Examples of these risks given by the company were “disappointing” inflation figures globally, the current US administration’s lack of progress in enacting tax reform, several central banks’ untested balance sheet reductions, and regulatory reforms in China.
“Balancing the risks against the backdrop of buoyant markets, it is a good time to pause and scan the horizon for new directions the markets may take,” Pimco said.
“The lack of near-term positive catalysts combined with the current valuations does not offer sufficient margin of safety to support a risk-on posture.”