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Top 10 Takeaways From the European Investment Summit 2019: Dealing With Disruption

Our annual Investment Summit aimed to help investors find opportunity in these challenging times.

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Over 400 clients attended our annual Investment Summit in London, which aimed to help investors navigate and find opportunity in these challenging times. Speakers included: Ben Bernanke, former chair of the U.S. Federal Reserve (Fed); former U.K. Prime Minister Gordon Brown; Daniela Schwarzer, director of the German Council on Foreign Relations; Chris Johnson, senior fellow at the Center for Strategic and International Studies; Nobel laureate Richard Thaler; PIMCO’s Chief Executive Officer, Emmanuel Roman, and PIMCO’s Global Economic Advisor, Joachim Fels. Here are the main takeaways:

1. GEOPOLITICAL UNCERTAINTY IS HERE TO STAY

The future of global stability is threatened by escalating tensions between the U.S. and China, which may well prevail. We may be heading towards a world with two separate systems.

Populism is becoming more prominent because it is fed in part by economic insecurity, which makes people want to take back control of their lives. Cultural pessimism, or nostalgia for how countries used to be, is also boosting nationalism, which sometimes turns into protectionism. This may lead to reduced global trade, which could slow growth and put pressure on governments at a time when monetary policy is almost exhausted. In Europe, where interest rates are so low, calls for increased fiscal easing are especially prominent. Despite European Central Bank (ECB) President Mario Draghi saying the answer is fiscal policy, Germany and other European countries’ willingness to turn the fiscal taps on is still limited.

2. BREXIT UNCERTAINTY WON’T GO AWAY

We should expect a period of prolonged uncertainty, with or without a deal. Such uncertainty will have an inevitable impact on people’s confidence in the economy, while the U.K. will face a challenge re-establishing trading relationships with the European Union and building new ones with other countries in the world. This may lead to a weaker economic climate and some easing from the Bank of England.

3. INVESTORS ARE HUMAN        

Traditional finance assumes that investors make rational decisions that lead to optimised risk/return portfolios, but the reality is different. We are all human and, as such, may be affected by certain investment biases, such as loss aversion and overconfidence. One way to mitigate these biases is to acknowledge them (for more information, please see our behavioural material here).

4. FIRMS SHOULD FACTOR IN THE HUMAN FACTOR

PIMCO’s Chief Executive Officer Emmanuel Roman said that the firm has partnered with the University of Chicago Booth Center for Decision Research because behavioural science can improve investment decisions, strengthen client relationships, and help build talent.

5. THIS TIME MAY BE DIFFERENT…          

This summer’s inversion of the U.S. Treasury yield curve may not bear the same recession signs that it did in the past. This is because the term premium is structurally low, pressured down by safe-haven demand and interest from European and Japanese investors, who seek higher yields in the U.S.

Still, ongoing trade conflicts continue to be a threat to the global economy. The recent Fed rate cuts are acting as insurance against a downturn spreading from U.S. manufacturing to other sectors of the economy. At present, though, the U.S. should avoid a recession due to strong consumer confidence, low levels of consumer debt and a healthy jobs market.

6. LAGARDE CAN HELP TURN ON THE FISCAL TAPS IN EUROPE   

Europe needs coordinated fiscal stimulus to fuel growth. Incoming ECB President Christine Lagarde could help persuade European countries to follow this course of action, as at the moment there is reticence to increase fiscal spending. This is happening while Europe is facing prospects of a Japanification effect, namely two decades of stagnation.

7. THE NEXT FIVE YEARS WILL BE DIFFERENT FROM THE LAST 10

Major secular drivers have the potential to significantly disrupt the global economy, financial markets, and investors’ portfolios over the next three to five years. Investors have become accustomed to high returns with low volatility, but we are likely to have lower returns and higher volatility ahead.

8. WE ARE IN A WINDOW OF WEAKNESS

Growth has slowed and we have reached a period of heightened vulnerability in the face of three swing factors, which may determine if this is a window of weakness into recession or recovery:

  1. Trade policy – our base case is that while a limited trade deal is possible, the tensions between the U.S. and China are likely to remain on a low boil rather than cooling down permanently.
  2. Monetary policy – if the Fed underdelivers relative to market expectations, it could lead to a significant sell-off in risk assets and a tightening of financial conditions.
  3. Fiscal policy – the main upside risk to economic growth, apart from a comprehensive trade deal, is that fiscal policy in major economies becomes more expansionary. But where there is a way for expansionary fiscal policy, is there any will?

9. NEGATIVE YIELDS THREATEN PASSIVE INVESTORS

Active management can help fixed income investors seeking positive returns in an environment dominated by $15 trillion of negative-yielding debt. Active selection of fixed income assets can help mitigate the effects of such negative-yield dominance, especially prevalent in major high-quality indices – those generally accessed by passive investors. Instead, active managers can use their experience and expertise to select specific areas in a bond yield curve, or less well-known parts of the vast fixed income universe, such as Danish mortgage bonds or commercial mortgage-backed securities.

10. ESG AS A FACTOR

Whether it is climate change, a lack of internal diversity, or a wave of populism, poorly resolved environmental, social, and governance (ESG) issues are going to disrupt businesses and societies alike. This is why at PIMCO, we see ESG as a factor in any solid credit and sovereign research process. As one of the world’s leading capital allocators, we assess risks from all sides, including environmental, social, and governance factors. Integrating this lens in our investment process and analysis will only help us frame a better and more-long term picture of any asset.

In the midst of disruption, PIMCO’s strategies are designed to help investors meet a range of portfolio needs – view our Investment Solutions to see which one suits you best. 

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Disclosures

PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London, E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication.| PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963), PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) and PIMCO Deutschland GmbH Swedish Branch (SCRO Reg. No. 516410-9190) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Spanish Branch and Swedish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act, the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008 and the Swedish Financial Supervisory Authority (Finansinspektionen) in accordance with Chapter 25 Sections 12-14 of the Swedish Securities Markets Act, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser.

Past performance is not a guarantee or a reliable indicator of future results.

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification does not ensure against loss.

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.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. It is not possible to invest directly in an unmanaged index. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2019, PIMCO.

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