In its latest quarterly outlook, PIMCO evaluated the possibilities for the global economy and financial markets with a decidedly bearish tone. Senior portfolio manager Saumil Parikh, a managing director, generalist portfolio manager and member of PIMCO’s Investment Committee, spoke about what the company sees ahead in an opinion piece.
The company has devised an investment strategy for the next three to five years that it terms the “New Normal,” which shows global aggregate demand falls short of global aggregate supply—partly because globalization has risen so rapidly.
Developed economies and emerging economies will diverge greatly during this period, thanks to the myriad problems facing developed countries that include debt and deregulation. Emerging nations have healthier economies and a greater potential for a boost in consumption than austerity-ridden economies in the euro zone and beyond.
Because of debt deleveraging in Europe and the debt ceiling woes of the U.S., as well as inflation in Asia and Latin America, PIMCO sees global growth as “very modest,” only 1-1.5% after inflation for the next 12-18 months. Estimates for 2011 were 2.7-3%, and for 2010 had been 4.1%.
The global economy is being drained rather than grown, with three factors accounting for the situation:
- A rise in global imbalance, with consumer cyclical slowdowns;
- the inability of global policymakers to reach consensus and take decisive action; and
- the need for deleveraging and reregulation.
Going further, the U.S., the consumer of last resort, is expected to experience zero growth in 2012, with the deficit debate and resulting loss of consumer confidence leading to a further pullback in consumption and perhaps a rise in savings. A move in fiscal policy from expansion to contraction is the driver, and short-term interest rates expected to remain at or near zero for perhaps as long as five years.
Europe’s economy is expected to contract by 0.5-1%, with the International Monetary Fund playing more of a stabilizing than forestalling role in the debt crisis, because of an expected rise of the need for recapitalization of banks and sovereigns.
“Unfortunately,” said Parikh, “that means we argue things will get worse before they get better.” Investment choices, made in consideration of these and additional factors, lean toward independent monetary policy, low credit or inflation risk, strong emerging market credits and long-term inflation-protected securities.