Australia’s long-term outlook might be challenged over the next there to five years, especially if China migrates towards a worse-than-expected outcome, according to PIMCO’s co-head of Asia portfolio management, Robert Mead.
He said in his new blog post that PIMCO’s base case called for Australia to keep growing moderately over the next three to five years, within a range of two to three per cent, and with inflation in the 1.5 and 2.5 per cent range.
Mead stressed that, on a positive note, Australia’s sovereign balance sheet was relatively healthy.
“But if there is any hint of a downturn in developed markets, or if China migrates toward a worse-than-expected outcome, the resilience of the Australian economy over the next three to five years will be extremely challenged,” he said.
At the same time, PIMCO’s managing director and global economic adviser, Joachim Fel, said that there were three factors that were cause for concern for the next recession.
Speaking yesterday during a media briefing on the June 2017 Secular Outlook, Fel said the number one risk was China, which had seen a combination of sharply rising debt levels for many years, followed by Europe and its potential for political instability, with a strong focus on Italy at the moment, and the exit from the unconventional monetary policy.
As far as Australia was concerned, he said it was a little bit different than other G10 economies, particularly in Europe, where they saw rebounding growth. Although the headwinds for the mining sector began to ease, the housing sector in Australia still looked less optimistic.
At the same time Fel said that “the Australian bond market would probably do a little bit better than other bond markets in the developed world”.
Speaking on broad investment themes, he said: “We think that given the elevated risk of a recession on the secular horizon over the next three to five years, it makes sense for the investors to gradually de-risk their portfolios, [while] our focus is really on capital preservation, but it’s about the return of capital rather than the return on capital.”
“We prefer the safer parts of the credit spectrum, that means that we’ve moved from – very broadly speaking – from high yield to investment grade, we’ve moved to higher rated credits.
“We like asset-backed securities, so in the US in particular we still like assets in the housing sector, like MBS [mortgage-backed security] because we think the US housing market is relatively solid,” Fel explained.
As far as asset allocation strategies were concerned, PIMCO said it preferred European and Japanese equities over US equities in the developed market space, while the emerging market equities still offered better opportunities than developed market equities.
