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Balancing risks and opportunities in the multi-speed world
By Advisor Perspectives
At the Cyclical Forum in September, PIMCO investment professionals from around the world gathered in Newport Beach to discuss and debate the state of the global economy and markets and identify the trends that we believe will have important investment implications over the next 12 months.
While our baseline view for global economic prospects over the near term remains broadly unchanged since our previous Cyclical Forum in March, we see significant and in some cases widening divergences among the world’s major economies. Also, we see the balance of risks to the global economy tilted somewhat to the downside, in part because of diminishing returns of unconventional monetary policy and also the market volatility stemming from developments in China.
Our cyclical outlook has key implications for investors. In broad terms, we see global fixed income markets as anchored by our New Neutral secular framework for interest rates. Our cyclical views inform portfolio strategies across regions and asset classes.
The past several months have investors and policymakers reassessing global economic prospects amid elevated concerns over emerging market growth models and policy effectiveness. In the midst of these global uncertainties, PIMCO investment professionals gathered recently for our September Cyclical Forum.At our previous Cyclical Forum in March 2015, we concluded (as detailed in our post-forum essay) that the global economy was “Riding a Wave of Accommodation – Carefully.” Since then, while the “wave” of global monetary accommodation has if anything expanded in scale and in scope – and may well deepen further over our cyclical horizon – to date it has been insufficient to stave off a decline in commodity and equity prices or to discourage renewed fears of disinflation amid concerns that China will not be able to navigate the New Normal trajectory for growth and global financial integration they have set for themselves.Although the turbulence in global markets that followed the bursting of the Chinese equity bubble in June and the fallout from the devaluation of the Chinese yuan in August was the major financial event that has occurred since our March forum, our goal at the September forum – as at every forum – was to look ahead from initial conditions so as to formulate a baseline view for the global economy as well as to identify and assess the balance of risks to that baseline view. Our forum discussions benefited enormously from the active participation of and valuable contributions from PIMCO senior advisors Ben Bernanke, Mike Spence and Gene Sperling. Drawing on superb presentations from our Americas, European, and Asia-Pacific portfolio committees, as well as from our emerging market (EM) team, and following a very robust and wide-ranging internal discussion, we coalesced on a baseline view thatglobal economic prospects over the next 12 months remain broadly unchanged from where we saw them in March and are consistent with global GDP growth in the range of 2.5% to 3% and global inflation of 2% to 2.5%.
While this is our baseline cyclical view, the averages it represents mask significant and in some cases widening divergences among the world’s major economies. As we shall discuss further below, our baseline view for GDP growth in the U.S., eurozone, U.K. and Japan over the next year is actually consistent with a modest increasein the pace of growth for this group of countries versus the past year. On the other side of the ledger, we concluded that prospects for growth in China are clearly deteriorating, though we note the market consensus view is converging toward PIMCO’s more bearish forec