Global growth is expected to slow but an economic recession is not imminent, the world’s largest bond manager PIMCO said in its most recent six to 12-month outlook for the global economy and markets.
Joachim Fels, PIMCO’s global economic advisor, and Andrew Balls, PIMCO’s chief investment officer, global fixed income, said the manager’s cyclical baseline sees this year’s economic divergence – with US growth accelerating but the rest of the world slowing – giving way to a more synchronised deceleration of growth in 2019.
“In our forecasts, the big three – the US, the eurozone and China – should all see lower GDP growth in 2019 than this year: growing but slowing,” they said.
While PIMCO reconfirmed its view that the economy is in a late-cycle environment, such an environment can last a long time like a “fifth set at Wimbledon without a tie break”.
“It can last if excesses and major policy mistakes are avoided. So, while being mindful of the risks of an early end, we think it is too early to run for the hills,” Fels and Balls said.
However, there is the potential for higher macro uncertainty and volatility, they said.
“Core inflation in the US is set to rise above the Fed’s target at a time when the labour market is tight. Populism is a risk in the outlook from the US to Italy to a number of systemically important emerging markets,” they said.
In terms of portfolio construction, the outlook’s authors said they thought it made sense to emphasise caution and the range of risks outside the baseline.
“We want to maintain flexibility to respond to both positive and negative shocks.”
PIMCO said the investment implications of its outlook meant the manager was modestly underweight duration; saw a steepening of the yield curve; was cautious on corporate credit; overweight structured credit; had a low scaling to currencies and emerging markets; was cautious on European peripherals and credit; favoured defensive equities over cyclicals; and viewed commodities as an attractive late-cycle investment.
