Good Morning!
Picture this.
Billions of dollars in savings stowed away by pandemic-restricted citizens is about to be unleashed into the economy. At the same time a “new fiscal orthodoxy” is pumping in billions more in an attempt to secure that recovery at whatever cost. Cap it off with a central bank intent on lifting inflation and achieving maximum inclusive employment.
What it adds up to is an economic boom “that is likely to be as strong as all but the most seasoned of analysts have witnessed,” says Pacific Investment Management Company.
Inflation expectations have already fuelled volatility in markets of late but Pimco warns that investors should brace for the “head fake” to come.
It sees a temporary spike over the next few months (the ‘head fake’), but then inflation’s rise will reverse as the economy fails to achieve full employment. It expects inflation to remain below central bank targets over the next one to two years.
“It is quite likely in our forecasts that the coming near-term rise in inflation won’t be sustained,” wrote Pimco’s Joachim Fels and Andrew Balls.
“But it also seems quite likely that financial markets will continue to remain focused on upside inflation risks in the near term and that volatility will continue to be elevated.”
Ah, that’s the rub.
Even if misguided, the market’s expectations of inflation will create a “difficult and volatile investment environment,” Pimco said, and investors should prepare for it with flexibility and liquidity.
Pimco forecasts that global GDP will grow by more than 6% this year, up from 5%. China’s growth will likely be 8% and the U.S. 7% or higher. Even the lagging eurozone and Japan are seen to achieve 4% and 3% respectively.
On stocks: Pimco expects to stay overweight on stocks, and sees opportunities in COVID-recovery areas like housing, industrial/aerospace, and some banks and financials. It favours stocks that are exposed to “fiscal stimulus, the cyclical recovery and secular disruptions in technology.” In regions, it likes the U.S. and Asia, areas likely to emerge from the pandemic first.
On bonds: “We do not expect any big shift in global yields as we leave the COVID period behind compared with the levels that were prevailing before the COVID shock. We believe that bonds continue to serve as both a store of value and a potent hedge for risk assets in terms of overall asset allocation.”
On commodities: Pimco sees a modest upside for commodities but no supercycle. While demand for oil is rising again and inventories are dropping that could change quickly if new supply comes online with rising prices. And the cost of renewable energy is falling.
“Given the importance of oil within the overall commodity complex along with continued technological innovation, we find a supercycle in commodities very unlikely.”
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