PIMCO has a new investment catchphrase: Stable, but not secure.
The Newport Beach, Calif. investment giant's most recent outlook calls for growing and heightened uncertainty, thanks in part because governmental policies have reached the point of exhaustion. “On the margin, we're using increased caution,” said Dan Ivascyn, Pimco's group chief investment officer.
Pimco came up with the term “the new normal” to describe an era of below-average economic growth following the financial crisis, followed by "the new neutral" in 2014 to describe the ongoing low-interest rate environment. Now the firm has coined a new moniker to highlight what it sees as diminishing returns from global monetary policies coupled with increased political instability.
Pimco's most likely scenario for the next three to five years: U.S. GDP growth at 1.5% to 2% per year and inflation at 2%. The fed funds rate will probably rise to 2% to 3%.
In Europe, Pimco sees lower growth — between 1% and 1.5%. “On policy, we see the European Central Bank continuing to do the heavy lifting,” write PIMCO authors Andrew Balls, Richard Clarida and Mr. Ivascyn. The authors see
China growing at 5% to 6%, also with 2% inflation.
What worries Pimco is that central bank policies could be losing effectiveness and that massive debt overhangs could threaten the global recovery. “…We now believe that there is a material risk globally – if not necessarily for the U.S. – that the unconventional monetary policies in place today will be insufficient to maintain global growth, close output gaps and bring inflation to target,” the authors say.
The government's other engine of economic stimulus, fiscal policy, could potentially help world economies. The U.S., Japan and China all have room to boost their economies through infrastructure spending, for example.
The risks facing the world economy warrant caution, Pimco says. Those risks include China and the
eurozone, as well as monetary policy exhaustion, political gridlock and the rise of populism.
“These potential shocks to the global economy increase the prospects for permanent debt write-downs over the secular horizon,” the authors say.
In short, Pimco feels there's little room for policy error by central banks, although the volatility left in central banks' wake could open up opportunity for active managers. Pimco is optimistic on emerging markets, thanks in part to a relatively stable U.S. dollar. Another good value: U.S. Treasury Inflation-Adjusted Securities, or TIPS.
The biggest risks: Increasingly experimental central bank policy, unsustainable debt levels and increased political uncertainty. The plunge in oil prices, despite its recent rebound, has resulted in instability in Nigeria, Iraq and Venezuela, Pimco notes in a separate post.
Nevertheless, Pimco's latest take “Is not an overly alarmist outlook,” Mr. Ivascyn said. “In the 12-18 month period, we're fairly constructive. But toward the end of that horizon, we want to tilt more towards an overall conservative position.”
