PIMCO is famous for its massive bond fund business, which was built from the ground up largely by Bill Gross.
However, the money management firm also operates an equities fund business led by Virginie Maisonneuve.
From the report (emphasis ours):
…Overall, however, the low rate environment will be supportive for stocks provided inflation remains subdued, as companies can take advantage of historically cheap financing. While bank lending remains constrained, particularly in Europe, good companies — such as Apple recently — are good examples of how companies are using low rates to tap the market for liquidity. This access to financing is particularly helpful to companies in sectors or activities with attractive demand profiles relative to overall demand in an otherwise slow growth world. This outlook means that investors should look for alpha and stock- picking skills as opposed to equity beta in the years to come. Strong teams with strong processes and proven ability to exploit market inefficiencies are key…
In other words, Maisonneuve thinks investors should try to beat the benchmarks by picking stocks rather than buying indexes.
Also, current valuations are fair. Globally, they are not cheap, but neither are they expensive. And, in a world headed toward low real policy rates, equity risk premiums are exhibiting unusual characteristics relative to historical levels. I believe that in a relatively stable environment, equity markets exhibit attractive expected-returns-to- valuations ratios, especially when considered versus other sources of investment returns, such as cash. In emerging markets (EM), valuations are in fact inexpensive, but there are other issues in EM, including the difficulties in Russia and the steep slowdown in growth in China. Those pressures are mostly priced in, however, and underweight investors should consider adding to their positions. While emerging markets have been hurt by the prospects of tapering and policy normalization in the U.S., the “New Neutral” outlook may help reverse some of those fears. The extent to which EM countries can use interest rates to manage their economies and limit upward pressure on their currencies will likely be the key differentiator in secular EM performance.
Volatility is another important consideration, and here, one must understand the relationship between a stable economic environment (low growth, low inflation, low rates) and equity markets volatility. While volatility as measured by the VIX index has come down sharply recently, we should expect bouts of volatility surges that coincide with unexpected pressures, political or otherwise, that might appear in a world with a delicate economic and geopolitical balance.
In other words, be prepared for a bumpy ride.
With all this in mind, Maisonneuve offers some vague investment themes:
…investors need to focus on the growth areas — regions, sectors and companies — that will benefit from solid fundamentals. Investors also should focus on super-secular trends that will be drivers of growth or change over the long-term horizon. Shifting demographics, climate change and a growing middle class in emerging economies will have profound effects on supply and demand dynamics, for example.
Certain industrials in the U.S. and globally stand poised to benefit from shifting global dynamics, particularly with regard to new energy, capital expenditure, productivity enhancements, energy efficiency and electricity generation, all of which show positive long-term trends. We are also bullish on consumption. Given changing demographics and an emerging EM middle class, we expect to see gradual increases in demand. Product innovation and brand recognition are essential there.
Generally speaking, she seems to favour growth stocks over value stocks. She also says she likes “companies that offer dividends likely to grow over time” and “strategies that can target alpha in emerging markets or globally by selecting good companies with solid growth potential and attractive competitive advantages should do well.”
Read the whole report at PIMCO.com.
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