Improved prospects in emerging markets indicate that global growth is set to continue, but investors should be wary of becoming complacent under the current conditions, cautions Pimco.
In its September Cyclical Outlook, Pimco warned that accelerating emerging market growth could be undermined by a number of factors.
“While our baseline scenario of ongoing global growth helped by better EM fundamentals and supportive policy is relatively innocuous, there is no room for complacency for three reasons,” the company said.
Asset market pricings are currently priced “for a very benign result”, Pimco added, and this leaves them vulnerable to “even small negative surprises”. High debt levels coupled with the lessening impact of monetary policy pose longer-term secular risks as well.
Pimco noted that even if the secular risks were contained, “a lot can derail our, and the (similar) consensus, baseline forecasts even over the cyclical horizon”.
“In our view, the most relevant swing factors for the cyclical outlook are productivity, monetary and fiscal policy, and politics,” Pimco said.
A rise in productivity, though beneficial to profit margins, could alter the neutral interest rate, resulting in an adjustment in bond yields and subsequently putting pressure on equity markets, which Pimco explained have “long become addicted to monetary accommodation and low real interest rates”.
Likewise, changes in fiscal policy around the world could “shake up” financial markets, though Pimco said it was “not clear” whether or not that would be “a boon or a gift of poison”.
“While our cyclical outlook is for ongoing growth, policy that remains supportive and broadly range-bound markets, we remain focused on the secular theme of insecure stability at a time when market valuations, pretty much across the board, range from fair to rich,” Pimco said.
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