PIMCO Warns Investors to Rethink Asset Allocation

(July 19, 2012) — Investors need to rethink asset allocation and look for opportunities in emerging market government bonds, along with real estate and commodities, according to Curtis Mewbourne of Pacific Investment Management Co. (PIMCO).

The managing director and head of portfolio management for PIMCO’s New York office says that asset classes are likely to be affected by the dire economic situation in Europe, and more broadly, by high debt levels in developed countries.

“Investors need to monitor the situation in Europe, whether they are directly invested there or not, because of the systemic implications of a potential shock to Europe’s banking system or sovereign debt,” he writes in a report. “The eurozone has the second largest economy and the largest banking system in the world, and the slowdown that we are already seeing in emerging market growth is partially driven by slower demand for goods and services from Europe.”

Meanwhile, fixed-income investors should concentrate on whether countries control their own currencies and can monetize their debts. “Those that can may be greater inflation risks. Those that cannot may be greater credit risks,” Mewbourne warns.

Amid market volatility and lower returns, Mewbourne says that emerging market government bonds, real estate, and commodities, may partially replace traditional domestic equities.

In terms of emerging opportunities that investors should be thinking about, Mewbourne says that markets are still healing from the financial downturn of 2008 and 2009. “This requires a very active focus, as those opportunities can be in sectors that have become more credit sensitive and require more resources to review,” he writes. “Given the geopolitical landscape, we expect overshoots in currency and commodity markets to result in buying opportunities.”