(Bloomberg) -- If you think financial markets have been strange the past 18 months, just wait. What lies ahead is an unfamiliar macroeconomic environment that’s undergoing dramatic changes, says Pacific Investment Management Co.

The firm released a report Wednesday warning that over the next five years the global economy will see “a more uncertain and uneven growth and inflation environment with plenty of pitfalls for policymakers.” 

Higher macroeconomic and market volatility will likely mean lower returns across fixed-income and equity markets, according to the manager, which oversees around $2.2 trillion in assets. But while overall capital market returns will likely be lower, increased volatility should spell opportunity for active fund managers, wrote Pimco.

Markets are already bracing for the prospect that major central banks will soon begin withdrawing the emergency support provided during the Covid pandemic, with the Federal Reserve widely expected to start dialing back asset-buying next month, while inflation risks remain a major source of disquiet.

Amid this, a number of more long-term structural changes are coming into play, including a global shift toward using more green energy, a bigger embrace of automation technologies and increased attention on global wealth inequalities.

Disruptive trends and more interventionist policies may make economic cycles shorter in length but bigger in amplitude, and with more variation between countries, said the report from Pimco’s Joachim Fels, Andrew Balls and Daniel Ivascyn. Periods of both much higher and much lower inflation are more probable, they wrote.

The world’s markets face “more uncertain, volatile, and divergent growth and inflation than in the New Normal decade leading up to the pandemic,” the report said.

Unprecedented support by central banks has inflated asset prices and may have contributed to medium-term financial market vulnerabilities, the money manager said. Pimco expects low central bank rates to continue and that they will anchor fixed-income markets globally. 

“Elevated debt levels and highly financialized economies as measured by wealth-to-income ratios will likely constrain central banks’ ability to push interest rates aggressively higher without causing severe economic pain,” it said. 

Here are some opportunities Pimco expects to find in the market:

  • Private Credit: Complex asset-based lending to companies is more attractive than traditional PE-sponsored loans to middle-market companies. The latter has seen tighter valuations and weaker lending covenants as the search for yield resulted in more money flowing to it. Residential mortgage lending also provides a “target-rich opportunity set.” The firm expects to continue to find opportunities in legacy loan portfolios across the U.S. and parts of Europe. Looking within specialty finance, it’s also bullish on higher-quality forms of consumer credit and asset-backed financing.
  • Commercial Real Estate: Core and core-plus assets that benefit from a Covid-19 recovery should be more lucrative than traditional fixed income and credit assets. Opportunities exist in acquiring or recapitalizing assets as companies “future-proof the next generation of real estate and incorporate ESG factors.”
  • Emerging Markets: Stronger growth and developing capital markets in Asia will likely mean good investment opportunities, even amid the risks associated with China and geopolitical tensions.
  • “We will look to take advantage of the illiquidity premium by pursuing opportunities in private credit, real estate and select developing capital markets,” Pimco said in the report.

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