Market recovery priced in: PIMCO
Although the global economy is expected to make good progress on the path to recovery in 2021, much of it is already priced in, according to PIMCO.
In its ‘Cyclical Outlook: Bounded Optimism on the Global Economy’, Joachim Fels, PIMCO global economic advisor, and Andrew Balls, chief investment officer of global fixed income, said vaccinations and fiscal support should lift the global economy in 2021, but three key risks called for careful portfolio positioning:
- An onset of fiscal fatigue (in which governments return to a more cautious stance) which would be a significant risk to the expected economic recovery, particularly in the second half of this year and more so in 2022;
- With China exhibiting strong growth momentum coming into 2021, they expected policymakers to refocus on deleveraging in the course of this year; and
- The greatest uncertainty in the economic outlook stemmed from potential “scarring effects” that could inhibit or even prevent a swift return to pre-pandemic levels of consumer spending as well as corporate investment and hiring decisions.
“Following an outsized contraction of economic activity in 2020, global output and demand are likely to rebound strongly this year,” the report said.
“We expect the current renewed weakness due to lockdowns in major economies to give way to accelerating gross domestic product (GDP) growth from around the second quarter, driven by the broadening rollout of vaccines and continued fiscal and monetary policy support.
“Coming off a low base, world GDP growth in 2021 is expected to be the highest in more than a decade.”
The report said central banks would likely continue to keep borrowing costs low in order to enable ongoing fiscal support for years to come.
“Policy rates are likely to remain at present levels in the foreseeable future or could even be reduced further in some countries. Asset purchases are likely to continue throughout, and likely well beyond, 2021,” the report said.
“Fiscal policy remains a key swing factor in our cyclical outlook. Most governments are likely to keep propping up household incomes via transfers and supporting companies via loan guarantees, subsidies, and tax breaks.”
The firm said while risk markets could continue to perform well over the coming months in response to broadening vaccine rollout and policy stimulus, investors might have become too complacent considering the risks.
“We see this as a time for careful portfolio positioning and not for excessive optimism or risk-taking,” the report said.
“Given the overall low level of yields, tight spreads, and low volatility, we plan to place significant emphasis on capital preservation and careful liquidity management.
“Once the easy pandemic recovery trades have played themselves out, we expect a difficult market environment.”
According to FE Analytics, over the previous 12 months to 30 November, 2020, the best-performing PIMCO fund was the ESG Global Bond fund which returned 6.36%, and the worst performing was the Target Return fund (1.1%).
Best-performing PIMCO funds over the previous 12 months to 30 November 2020
AUTHOR
Chris Dastoor
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