By Davide Barbuscia
NEW YORK (Reuters) – An optimistic outlook on the U.S. economy is prompting U.S. bond giant PIMCO to favor stocks and some other risk assets, while seeking protection against inflation as the new U.S. government could implement policies that put upward pressure on prices.
The bond-focused asset manager, with $2 trillion in assets, expects interest rate cuts by major central banks to boost both stocks and bonds going forward, with the two asset classes providing diversification by moving in opposite directions.
However, it is also cautious on the trajectory of inflation, partly due to possible fiscal and trade policies under the impending new administration of U.S. President-elect Donald Trump.
“Although restrictive central bank rates have brought inflation levels down close to targets, the long-term fiscal outlook in the U.S. includes continued high deficits, and geopolitical surprises could cause a spike in oil prices or snarl supply chains,” portfolio managers Erin Browne and Emmanuel Sharef said in a note on Wednesday.
“Trade policies, such as tariffs, and deglobalization trends could also pressure inflation higher,” they said.
The Federal Reserve is largely expected to cut interest rates for the third consecutive time at its next rate-setting meeting in December.
At the same time, recent strong economic data as well as expectations of inflationary policies under Trump, such as tariffs and a clamp down on illegal immigration, have prompted traders to trim bets on how deeply the U.S. central bank will be able to ease rates.
PIMCO expects a so-called soft landing for the U.S. economy – a scenario where inflation keeps declining without an economic contraction – but it also favors strategies such as equity options to mitigate geopolitical and monetary policy risks.
It said it is overweight U.S. Treasury Inflation-Protected Securities (TIPS), which remained an “attractively priced hedge” against the risk of rising inflation.