It’s a low-rate, low-growth world. But even as China slows and dynamics are set to shift for equity markets over the next three to five years, PIMCO sees opportunities for investors. Virginie Maisonneuve, Deputy Chief Investment Officer and global head of equities at PIMCO, discusses her long-term outlook for markets, sharing key conclusions from our annual Secular Forum in which investment professionals gather from our global offices for a detailed examination of markets and economies. Following this May’s Forum, PIMCO defined the global economy as approaching a New Neutral.
Q: What are the implications for equities if the Fed’s neutral policy rate is close to zero in real terms and 2% nominally in the years ahead as described in PIMCO’s New Neutral worldview?
A: Maisonneuve: There are several implications for equity investors of the low rate, low growth environment that we expect over the secular horizon. The combination of high leverage in the global economy (mostly due to elevated government debt, which is in turn due to actions undertaken during the crisis to ease systemic risk) and slack in the global economy (as shown by relatively elevated output gaps) is constraining the ability of central banks to normalize monetary policy quickly – therefore it is likely to come at a very measured pace. In other words, the patient is healing, but that doesn’t mean he can be taken off life support overnight! In addition, the combination of this environment together with key long-term trends that affect global supply and demand – namely the need to adjust to competitiveness in a lower-carbon economy, important demographic shifts globally and continued shifts in emerging markets – supports the case for lower long-term economic growth globally.
Also, current valuations are fair. Globally, they are not cheap, but neither are they expensive. And, in a world headed toward low real policy rates, equity risk premiums are exhibiting unusual characteristics relative to historical levels.