“Some of the key sectors that we’ve invested in and continue to like going into the second half of the year would be U.S. cyclicals, the ‘productivity basket,’ and what we define as renewable energy,” Nicola said.
“Those are the top three holdings that we’ve been focusing on, but our strongest conviction remains in European small-caps,” she explained.
“It all comes back to the domestic demand story and a pickup in domestic demand… For Europe, the ECB (European Central Bank) will likely keep interest rates low for much longer than the Fed, and so if you have supportive monetary policy and then likely fiscal policy, (like) the European Recovery Fund, we should start to see some of that money disseminated, which should be supportive for growth as well.”
Favorite cyclicals from the United States
“For us, the allocation to US financials is primarily driven by the fact that they are very attractive from a valuation standpoint, and we believe they will benefit from a higher rate environment,” she explained.
Similarly, she stated that the broader appeal to tech stocks is due to “tech doing well in a post-Covid world… the belief that these companies will continue to thrive as the world becomes more digitized.”
The “Productivity Basket,” one of Nicola’s key sectors of focus heading into the second half, “is comprised of a blended allocation to stocks of companies that provide productivity-enhancing technologies towards growing capital expenditure intentions globally,” PineBridge notes.
“We have been in cyclicals for a long time. This recovery and the reopening of several economies have aided cyclicals. Defensives are quite expensive in our opinion… We’ve steered clear of many of them. The key thing for us, and why we like the US, is that if we look at some of the trends we see over the next five years, whether it’s decarbonization, digitalization, or the shift toward technology-enhancing sectors, a lot of that is concentrated in the US.”
“Our allocation to U.S. cyclicals is there, as is a significant portion of our ‘productivity basket,’ which is made up of U.S. companies.”
Japan and the United Kingdom
Of course, the global growth outlook remains uncertain in a period dominated by the coronavirus pandemic and ongoing concerns about how the spread of the delta variant may affect the reopening of economies.
Nicola stated that PineBridge Investments sees opportunities in Japan and the United Kingdom, primarily because the countries are well-positioned to see domestic growth rebound and benefit from Covid vaccination drives.
“We see opportunity in Japan not only because Japan is likely to see a recovery as a result of global growth recovery, and it’s a good proxy for global growth, but also because as countries like the United States begin to achieve herd immunity and begin to use vaccine diplomacy, key allies like Japan will benefit.”
“We noticed that the U.K. is pursuing a very supportive fiscal policy as well as a very supportive monetary policy, and… In terms of vaccinations, they had a major push. So, in our opinion, these three elements were a major impetus for supporting an allocation to the United Kingdom. “Mid-cap,” she explained.“We chose mid-cap because the focus will be on domestic growth and the rebound in domestic recovery, which we do expect in the United Kingdom, especially now that Brexit is behind us and policy will remain supportive.”
In terms of inflation
“Inflation is persistent but ephemeral. So, the key risk for us is that inflation becomes persistent and sticky, rather than transitory,” Nicola explained. Another risk is a “policy mistake” made by central banks or fiscal policymakers that “stunts growth.”