PIMCO: Asia-Pac Growth to Be Below Market Consensus

"We expect emerging Asia growth below the market consensus due to its less aggressive policy responses compared to 2008-2009," PIMCO's Asia-Pacific portfolio managers have asserted.  

(January 23, 2012) — The Asia-Pacific region is likely to grow at a slower rate than the market is predicting due to its economic actions, fund giant Pacific Investment Management Co. (PIMCO) has warned, despite the area still boasting of its growth story.

Robert Mead, Isaac Meng and Raja Mukherji, members of PIMCO’s Asia-Pacific Portfolio Committee, said the Asia-Pacific region was less affected than others by Eurozone turmoil but contagion was still a risk through direct trade and the regional production chains that characterized Asia’s export-oriented economies.

The group was discussing its cyclical economic outlook for the region over the next six to 12 months.

According to a report by Mead, Meng, and Mukherji, the global economy to grow by 1.0%-1.5% in 2012, which is significantly slower than 2.5% growth in 2011 and 4.1% in 2010. “That said, European banks have provided less financing to Asia-Pac than to other emerging regions, especially Eastern Europe. The Asian banking sector is generally better prepared than its global peers: capital ratios are adequate and quality of capital is relatively high; non-performing loan ratios are still at historically low levels and banks have built up high reserves,” the repot stated.

Commenting on key risks for China’s economy in 2012, PIMCO — which manages more than $1 trillion in global assets and is one of the world’s largest asset-management firms — forecasts that GDP will slow to around 7% on the year by the fourth quarter of 2012, which is 1.5 percentage points below the consensus. “…Banks are under asset quality and capital constraints, while the shadow banking system, which historically funded private sector property investment, also faces deleveraging pressure. As growth slows and commodity and property prices soften, we expect inflation to slow sharply, potentially piercing the lower bound of the 3.5%-4.5% forecast range, leaving room for stabilization policies to be implemented, eventually,” the report continued.

PIMCO further noted that in this environment, it favors Australian government bonds for their high credit quality, low-beta currencies such as the Chinese yuan, corporate issuers that have delevered, covered bonds, and mortgage-backed securities.

PIMCO has become increasingly vocal in its cautious view on the future of the global economy, popularizing the idea of a ‘new normal’ and urging investors to expect lower-than-average historical returns with greater regulation, lower consumption, slower growth, and a shrinking global role for the US. In September, Mohamed El-Erian, chief executive officer of PIMCO, asserted that there will be little-to-no economic growth in industrial nations over the next year as Europe’s economy contracts by up to 2%. Meanwhile, he said that the US will stagnate yet volatility will continue as a result of policymakers in Europe and the US having failed to take corrective action.

“For the next 12 months, the global economy will slow materially with advanced economies struggling to grow much above zero. Emerging economies will maintain faster growth, albeit not as high as the last 12 months,” Bloomberg cited El-Erian as saying during a September 24 interview in Washington. His comments came as world leaders gathered in Washington for annual meetings of the International Monetary Fund (IMF) and the World Bank.

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