PIMCO Exec: Global Expansion Weak at 1.5% Over Next 18 Months

In PIMCO's latest quarterly outlook, the firm has revealed that it is cutting its exposure to riskier assets and shifting to relatively high-quality investments.

(September 30, 2011) — Pacific Investment Management Co. (PIMCO) plans to scale back on its risk-taking.

In its latest economic outlook report, Saumil H. Parikh — a senior portfolio manager at PIMCO and a member of the company’s Investment Committee — notes that over the next 12 to 18 months, the firm expects the global economy to expand at a very modest real rate of 1% to 1.5%.

“We have been investing under a hypothesis we designated the New Normal, a worldview of the next three to five years, in which we see global aggregate demand continually falling short of global aggregate supply,” Parikh writes. “We see the world’s ability to consume goods and services at today’s prices below the world’s ability to produce them, in large part because of the rapid speed of globalization.”

He continues to note that he foresees developed economies and emerging economies facing very different economic destinies over the secular horizon. “The developed world continues to grapple with large debt overhangs, required deleveraging in the private sector and now in the public sector, and the reversal of financial deregulation in the aftermath of the financial crisis of 2008. We believe emerging economies, while not immune to the developed world’s problems, should be better positioned for secular growth, with their healthier balance sheets and potential for greater domestic consumption,” Parikh writes in the report.

Additionally, Parikh reveals PIMCO’s expectations for emerging markets, noting that the firm expects emerging economies (including China, India, Brazil and Mexico) to grow at a 4.5% to 5% real GDP rate over the next 12 months. “While this sounds quite high relative to our expected 0% to 0.5% growth in the U.S., it would represent the slowest growth rate for emerging markets in a decade, with the exception of 2009,” he says.

PIMCO, which manages more than $1 trillion in global assets and is one of the world’s largest asset-management firms, 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. Earlier this month, 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.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742