How stable is the global economy, and what are the risks to that stability?
In PIMCO’s recently published Secular Outlook, “The Global Outlook: Stable But Not Secure,” authors Andrew Balls, Richard Clarida and Daniel Ivascyn explain how good investment opportunities remain, but investors must be compensated for growing and heightened uncertainty and risks of policy exhaustion over the three- to five-year horizon.
Here are the key takeaways:
Secular Outlook: Investment Risks
Left tail risks are building, with consequential implications for portfolios.
- In the absence of structural reforms, we are approaching the limits of central bank policy.
- Increasingly experimental policy is creating greater uncertainty and stretching valuations.
- Unsustainable debt levels mean that long-term risks of capital impairment or inflation are rising.
- Political uncertainty is increasing.
- Greater regulation and related reduced transactional liquidity are enhancing local market volatility
.… And Responses
- Be patient.
- Be tactical and flexible.
- Provide liquidity when others need it.
- Prepare for market turning points. This is one of the key advantages of active management.
- Avoid or underweight assets that solely or primarily rely on central banks to support valuations.
- Hedge against a tail scenario in which inflation overshoots central bank targets. Although this is unlikely in the near term, the risk is significant over our secular horizon.
Click here to learn more about the Secular Forum, where PIMCO investment professionals gather to debate and determine our three- to five-year outlook for the global economy and markets.