Global asset markets are unlikely to correct to historical norms, with high levels of developed world debt and significant structural issues likely to prevent a conventional recovery, according to Pimco.
Pimco senior vice president Tony Hildyard opposed market opinion that bonds, in particular global bonds, were overvalued, as such views were based on conventional mean reversion assumptions.
“Conventional mean reversion asset allocation assumptions commonly look at current asset prices and assume markets will correct to their historical relationship established over the last few investment cycles,” he said.
“We believe these mean reversion-based recommendations are out of date as they ignore current economic realities in a world struggling to recover from the liquidity and leverage-driven excesses that ended with the global financial crisis.”
A significant proportion of historical economic growth can be traced back to excess liquidity and leverage, and Hildyard said this is unlikely to be repeated in the short term.
“In fact, for the first few years of the corrective phase, global growth has the potential to trend even lower as deleveraging and high unemployment constrain consumers,” he said.
However, Hildyard said Australian investors, notwithstanding the current economic climate, can still seek attractive returns above the cash rate when accessing global assets hedged back into Australian dollars.
He added that in a low-growth environment, global bonds are a compelling investment option despite the current low level of nominal yields.
“The positive yield curve with cash rates pinned at low levels will also provide ongoing value to a canny investor. And, for the forward-looking investor, actively managed bonds remain an attractive and relatively safe option,” he said.
