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:
- 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.
- 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.
- 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.