Five—Make That Six—Global Disruptors for Investors

If you take the view that any recession we encounter over the next few years is likely to be shallow, Pimco’s experts are generally in agreement with you. “Our baseline outlook is for lackluster global growth, low inflation and ‘New Neutral’ interest rates over the next three to five years,” the investment manager says in its latest Secular Outlook commentary. “A shallow recession followed by a sluggish recovery remains likely.”

The recovery is predicted to be sluggish because, Pimco says, there’s limited room for central banks to move the needle with conventional monetary policy, while the effectiveness of quantitative easing is limited. “Fiscal policy might well become more aggressive to overcome a recession” since central banks are “pretty much scraping the bottom of an empty barrel” with their go-to tools.

A shallow recession followed by a relatively slow recovery may not appear to be especially strong medicine to swallow. “However, this relatively benign baseline is only one of several realistic alternative scenarios that investors need to consider over the secular time frame,” according to Pimco.

At a three-day gathering that provided the consensus for Pimco’s latest outlook, experts identified five secular trends that have the potential to disrupt the global economy, financial markets and investors’ portfolios in the next three to five years. There’s also a “supersecular” factor that Pimco considers “important for our clients, our industry and our firm over an even longer-term horizon.”

The five secular trends: China, which could be disruptive in any of three ways; evolving populist movements; demographics (i.e. an aging population) that contribute to slower economic growth; technological change; and financial market vulnerability.

The longer-term, supersecular trend is climate instability. “Weather-related shocks look set to become more frequent with global warming and have the potential to wreak havoc with economic activity and inflation, and thus could make it more difficult for investors and central banks to separate the noise from the signal,” says Pimco.

Moreover, Pimco notes that investors will have to factor in additional government responses to climate and other environmental risks in the form of regulation, carbon taxes and public investment. “These will create many winners and losers in the corporate sector, which in turn will require active management of credit and default risks.”

All of these potential disruptors, combined with stretched valuations, have created “a difficult investment environment that we believe favors caution, flexibility and liquidity over yield-chasing,” Pimco says. “That said, a disruptive market atmosphere should also provide attractive opportunities for active investors.”

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