Pimco overweight on global equities; says U.S. stocks 'fairly valued'

[January 21, 2015] By Jennifer Ablan

NEW YORK (Reuters) - Pacific Investment Management Co said on Tuesday it has placed an overweight position on global equities, particularly European and Japanese equities, and is underweight on global government bonds and other securities that reflect interest rate exposure.

U.S. equities, following double-digit gains in the S&P 500 last year, are "fairly valued," Pimco said in its 2015 Asset Allocation Outlook report, adding that it expects stocks in Europe and Japan to outperform the United States.

Overall, Pimco said investors may need to brace for another challenging year due to uneven global economic growth and high valuations.

Mihir Worah, chief investment officer of asset allocation and real return for Pimco, said valuations in European and Japanese equities "are more attractive, their central banks are easing and there is potential for upside surprises in earnings growth."

Worah said key risks to this view are the effectiveness of the Bank of Japan's policy and the ability of the European Central Bank to deliver versus what are now high market expectations.

Pimco said its emphasis in 2015 will be on exploiting relative value opportunities across asset classes rather than "bold 'beta bets' that have been sufficient over the past few years."

On spread products, Pimco recommends that investors selectively choose individual credits in non-agency mortgage-backed securities, investment grade bonds, high yield "junk" bonds and emerging markets credits "where attractive spreads can offer diversified sources of portfolio carry, with careful credit analysis helping to identify strong credits and avoid defaults," Worah said.

Economic growth in the United States should pick up to levels of around 3 percent, Worah said. Pimco said what is probably not yet fully reflected by the rate markets is the view that the U.S. economy is likely to grow at a robust 3 percent rate in 2015, the output gap will continue to shrink and the Federal Reserve is likely to start hiking.

"This means we expect to have an underweight to global rates over the cyclical horizon relative to what a well-diversified portfolio would normally have," he said.

Newport Beach, California-based Pimco, a unit of Allianz SE, reported late Friday that it had $1.68 trillion in assets under management as of Dec. 31, down from $1.87 trillion as of Sept. 30.

Worah is one of three managers on the Pimco Total Return Fund, the world's largest bond fund, and manager of the Pimco Global Multi-Asset Fund.

(Reporting by Jennifer Ablan; Editing by David Gaffen, Leslie Adler and Diane Craft)

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