Key takeaways from PIMCO's cyclical outlook
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PIMCO recently published its Cyclical Outlook for global growth, inflation, trends, and transitions likely to affect the investment landscape in 2017. Below are some key takeaways.
With Trump, Brexit, Italy's "No" vote and China's currency woes, the world economy and markets have embarked on a journey into the unknown.
As co-author Andrew Balls and I noted, the only certainty in our view is that the "tails" in the distribution of potential macro outcomes have become fatter--that is, more extreme scenarios, which usually have a low probability of taking place, have become more likely.
The downside, or left-tail, risks are defined by rising debt, monetary policy exhaustion and the populism-powered transition from globalisation to de-globalisation.
By contrast, upside, or right-tail opportunities may emerge from potential deregulation, awakening animal spirits and the accelerating transition from exhausted monetary policy to growth-supportive fiscal policies.
3 key macro transitions in 2017
The path for the economy and markets will likely be determined by how three difficult transitions play out on the cyclical (six- to 12-month) horizon:
• The transition from monetary to fiscal policy, which has gained speed with the European Central Bank tapering the monthly run-rate of its asset purchases to 60 billion euros, the Bank of Japan abandoning its money supply target in favour of a yield target, and the next US administration likely to embark on a more expansionary fiscal policy.
• The transition from globalisation to de-globalisation, which has been underway for some time but looks set to accelerate as governments in the US and elsewhere will likely become more inward-looking.
• China's currency regime transition from what was a US dollar peg until August 2015 to the current quasi-basket peg to what may become a managed or even free float of the yuan.
Investors should consider a patient approach and aim for capital preservation until the veil of uncertainty over future policies starts to lift.
With markets prone to overshooting and undershooting and likely to swing back and forth between our secular New Neutral and a potential "New Paradigm," better opportunities to deploy liquidity should emerge in the course of 2017.
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Joachim Fels is PIMCO's global economic advisor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.
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