PIMCO cautions against equity exposure amid global economic slowdown fear

Investors should approach equities and corporate credit markets cautiously over the next few months as global growth is likely to slow even further in 2020, advises US-based PIMCO, one of the largest asset managers across the globe that has nearly $1.8 trillion worth of assets under management.

As their base-case, PIMCO expects global gross domestic product (GDP) growth to slow further over the next several quarters and enter a ‘window of weakness’ as ongoing trade tensions and heightened political uncertainty in multiple jurisdictions continue to act as a drag on trade, manufacturing activity and business investment. It pegs the global growth between 2 – 2.5 per cent in 2020, slowing from the 2.7 per cent forecasted for 2019 and 3.4 per cent in 2018.

“It will be prudent to focus on capital preservation, to be relatively light in taking top-down macro risk in portfolios, be cautious on corporate credit and equities, to wait for more clarity, and to take advantage of opportunities as they present themselves,” wrote Joachim Fels, PIMCO’s global economic advisor in a recent co-authored report with Andrew Balls, their chief investment officer.

While labour markets have remained firm and consumer spending relatively solid in most advanced economies, PIMCO sees the slump in global trade and manufacturing increasingly affecting other economic sectors via sagging corporate profits, reduced hiring, and a pullback in business investment.

“On equities, our asset allocation team sees downside risks to profit growth, and favours a modest underweight equity position in multi-asset portfolios with an ongoing emphasis on high quality defensive growth positions,” the report says.

Region-wise outlook

Among major global economies, they expect US GDP growth to slow to 1 per cent in the first half of 2020 (H1-2020), down significantly from 3 per cent in the first quarter (Q1CY19) and 2 per cent in the second quarter of 2019 (Q2CY19).

“We see the global and the US economy entering a low-growth window of weakness, during which, they are more vulnerable than usual to adverse shocks, with heightened uncertainty about whether it is a window to recovery or recession. While a recession is not our base case, it doesn’t take much to tip over an economy that is moving along at stall speed,” the report says.

As regards India, PIMCO pegs the GDP growth for 2020 in the range of 6.5 - 7.5 per cent, while the consumer price inflation (CPI) during this period is seen between 3.5 - 4.5 per cent.

In contrast, GDP growth for emerging markets (EMs) as a whole in 2020 is seen in the range of 4.5 - 5.5 per cent with CPI inflation between 2.25 - 3.25 per cent.

Ongoing trade tensions, they believe, will exert a significant drag on Eurozone growth, somewhat offset by supportive domestic conditions, including easy financial conditions, some modest fiscal stimulus, and some remaining pent-up demand; while the GDP growth slowing in China is expected to slow to 5 per cent – 6 per cent in 2020, from an estimated 6 per cent in 2019.

Risks and opportunities

Trade policy and monetary & fiscal policies are the two main factors, PIMCO believes, will have a bearing on how global economy shapes up. On the other hand, they expect the US Federal Reserve to go in for additional easing over the next several quarters, thus dis-inverting the US Treasury yield curve and reducing recession risks.

“A further escalation of the trade war could easily tip an already slowing global economy into recession. On the other hand, a comprehensive trade deal between the US and China that removes a significant portion of the already imposed and prospective tariff increases could produce a synchronized reacceleration of global growth in 2020,” Fels and Balls wrote.