Challenges Remain for Asia’s Economies, PIMCO’s Cyclical Outlook

In the following interview, PIMCO’s Luke Spajic, executive vice president and portfolio manager in Singapore, Tadashi Kakuchi, executive vice president and portfolio manager in Tokyo, and Adam Bowe, executive vice president and fixed income portfolio manager in Sydney, discuss the conclusions from PIMCO’s quarterly Cyclical Forum in March 2016 and how they influence our Asian outlook and investment strategy.

Q: What is PIMCO’s outlook for growth in China? 

Spajic: The economic challenges China faces have never been more pressing, and in light of these, we think official GDP growth is likely to end up in the range of 5.5%‒6.5% this year, versus the target of 6.5%.

While we recognise the significant challenges facing the Chinese economy, including how to deal with non-performing loans, we do not believe these will be a source of systemic risk over our cyclical horizon of six to 12 months.

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Q: Turning to Japan, the Bank of Japan (BOJ) surprised investors with the introduction of negative interest rates in January. What is PIMCO’s outlook for the economy? 

Kakuchi: We expect trend-like GDP growth of 0.25%‒0.75% in Japan for the 2016 calendar year. The BOJ introduced negative rates on reserves to stimulate private demand, but we expect its effectiveness will be limited. Borrowing rates in Japan are already very low, and the Japanese private sector (both households and companies) is a net saver, so negative rates are unlikely to stimulate 
private demand.

In fact, demand for housing loans has been lackluster as demographics remain a headwind, and there is no sign of pickup in long-term growth expectations by Japanese corporates, which would tend to lead to capital expenditures. Therefore, we see a very muted impact from negative rates, aside from potential depreciation in the Japanese yen.

Q: What is PIMCO’s outlook for growth in Australia? Do you expect further rate cuts from the Reserve Bank of Australia (RBA)? 

Bowe: China and Japan are Australia’s largest trading partners, so the complicated growth and policy environments that both economies continue to face mean external headwinds for Australia will likely persist over the cyclical horizon.

Focusing on the domestic economy, while Australia’s headline real growth rate has remained resilient, the composition reflects an economy that is becoming increasingly imbalanced as it transitions away from mining-led growth. As investment in mining continues to wind down, businesses outside the resource sector, as well as the government, have kept their spending belts relatively tight.

There is one balance sheet that is responding to easier monetary conditions, but unfortunately, it has the least capacity to do so – namely, households. The reliance on households and housing for growth has led to an increase in household leverage and house prices from already elevated levels and is creating an uncomfortable imbalance that is unlikely to be sustainable over the long term. Going forward, we expect less of a housing tailwind and sluggish domestic demand, which in combination with a stronger Australian dollar more recently, will keep the prospect of further rate cuts from the RBA alive.

Q: What are the investment implications of PIMCO’s cyclical outlook for Asia? 

Spajic: The macro outlook for China continues to make more policy support necessary, both monetary and fiscal, and this is likely to put additional downward pressure on the yuan. Near term, policymakers have the will and the wallet to maintain currency stability, but if the pace of outflows continues at $50 billion‒$100 billion per month, we think a currency adjustment is much more likely. In fact, the further out we look the more likely it seems that the yuan will play a greater role in China’s economic adjustment. As a result, and despite the Fed’s more cautious approach to the U.S. hiking cycle recently, we continue to position portfolios for a stronger U.S. dollar against the yuan. Importantly, our outlook for a gradual and orderly devaluation of the yuan cannot be viewed in isolation. Indeed it is an important consideration informing our market positioning more broadly, including our constructive outlook for global credit markets and our expectation that the Fed will continue its gradual hiking cycle.

View and download PIMCO’s complete Cyclical Outlook for Asia-Pacific here.

You can also view and download PIMCO’s Global Cyclical Outlook from our website

By: Adam Bowe, Luke Spajic, Tadashi Kakuchi- April 2016

Disclaimer: All investments contain risk and may lose value. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

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