October 15, 2020
21:30
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Shares and bonds will yield less in the next five years than in the last ten years, warns Joachim Fels, chief economist of the fund giant Pimco. “The crisis is reducing long-term potential growth.”
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As every year, Pimco has invited external specialists to discuss the prospects for the next three to five years. The fund giant, which manages $ 1,920 billion, tries to estimate how the world economy, policy, politics and financial markets will evolve.
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Disruption is on the rise
“Four disruptive trends will be even more pronounced in the coming years than they are now,” said Fels, presenting the outlook. Three of them are accelerated by the corona crisis. First, China’s advance as an economic superpower will accelerate as it recovers from the pandemic faster and stronger than other countries. The conflict between the US and China will escalate. Secondly, the pandemic will increase income and wealth inequality and therefore populism. ‘
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The number of zombie companies is on the rise due to the stimulus from governments and central banks.
Joachim Fels
Chief economist Pimco
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“Third, the corona crisis is amplifying the technology’s disruptive impact,” says Fels. ‘There will be many losers and fewer winners among companies. Losers include brick-and-mortar stores and travel-related industries such as hotels and convention centers. The winners are large tech companies. ‘
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Finally, according to Fels, climate risks also create winners and losers. ‘Governments will try to slow down climate change with more regulation and CO2 taxes.’
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Weak growth prospects
Fels is pessimistic about the growth outlook. ‘Over the next one to two years, we will be catching up to the pre-crisis level. But more importantly, the crisis is reducing long-term potential growth. I see three reasons why we are moving from low growth to even lower growth. ‘
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“The rise in uncertainty is depressing business investment,” says Fels. Moreover, the expected long period of relatively high unemployment undermines the qualifications of workers and that weighs on labor productivity. Finally, the number of zombie companies is rising due to the stimulus from governments and central banks. ‘
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Interest remains low
Central banks will keep interest rates low and perhaps even cut it if a new crisis emerges, Fels says. He notes that central banks alone cannot meet the inflation target. Central banks need help from fiscal policy. Nobel laureate Milton Friedman was wrong in saying that inflation is always a monetary phenomenon. Inflation is now a budgetary phenomenon. ‘
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Central banks need help from fiscal policy. Inflation is now a budgetary phenomenon.
Joachim Fels
Chief economist Pimco
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Many observers expect a more active, expansionary fiscal policy. Fels says that is not certain. ‘Other scenarios are conceivable. In the US, a political stalemate is possible after the November 3 elections. A return of austerity policy is possible in Europe. ‘
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Lean years for investors
Fels has a gloomy message for investors. Most assets are expensive. The next five years will be very different from the last ten. Over the past ten years, returns have been high and volatility low. The next five years will be the other way around: lower returns and higher volatility. ‘ The report refers to history. “There is no shortage of examples where investors achieved zero returns or an even worse result for several years.”
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“The consensus is that in a context of negative real interest rates, equities will yield more than bonds,” says Fels. ‘We disagree. It is possible that the share of corporate profits in gross domestic product (GDP) will decline after the increase in recent years. Globalization is making way for de-globalization, there is an evolution from shareholder value to stakeholder value and after deregulation, re-regulation might come. ‘
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Opportunities
Still, Pimco sees opportunities for investors. Among other things, it mentions emerging markets, because valuations there are lower. Fels prefers Asia and especially China. ‘Chinese government bonds are attractive. The returns are relatively high and the yuan is likely to rise. The heavily punished Russian ruble and Brazilian real may also rebound. ‘
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Corporate bonds also offer opportunities, according to Fels. In the developed country government bond markets, Fels sees more potential in US and Italian government paper than in German government bonds.
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Over the past ten years, returns have been high and volatility low. This will be reversed for the next five years.
