PIMCO : Hopes and fears of what the Trump presidency might bring over the secular horizon

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The first principle is that the distinction we normally make between secular (three to five years) and cyclical (six to 12 months) forces and timeframes is fuzzier than usual in this new macro environment. Both hopes and fears of what the Trump presidency might bring over the secular horizon
are driving current market moves, which in turn might create powerful feedback loops between markets, the economy and actual policies over our cyclical horizon, both in the U.S. and abroad. And so we spent more time than usual at a Cyclical Forum discussing secular forces and their interaction with cyclical trends, aided by the presence and insights of several of PIMCO’s advisors, including Ben Bernanke, Michael Spence, Gene Sperling and Ng Kok Song.

The second principle, agreed by a majority but not unanimously after a heated debate, is that while markets are romancing a “New Paradigm” of permanently higher U.S. growth, inflation and equilibrium interest rates, we believe that our secular New Normal / New Neutral theme remains intact, at least for now. Many of the secular drivers of low New Neutral interest rates – demographics, inequality, the global savings glut, elevated debt levels and technology – are unlikely to change anytime soon.

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Investment conclusions

Against the backdrop of a highly uncertain outlook and fatter than usual tails, we expect to be cautious in overall portfolio construction, sticking closely to our secular framework that emphasizes these key factors:

  • A focus on capital preservation and a focus on tail risks, not just the most likely baseline

  • De-emphasizing trades that rely on a high level of central bank support

  • Guarding against the asymmetric risk of rising yields and especially against negative yields

  • Focusing on bottom-up security selection

  • Utilizing our teams across the world to find the best investment opportunities

  • A very selective approach on the eurozone

  • Careful overall portfolio positioning combined with active management to take advantage of periods of volatility and market dislocation

The experience of the past year has highlighted political risk and central bank policy exhaustion. At a time of fair to expensive valuations and less liquid financial markets, we have seen that it does not take much to prompt bouts of market volatility. By keeping portfolios lighter on risk and by being tactical and flexible as active managers, we can prepare for and look to benefit from market turning points. We think that patience will be rewarded.

Article written by Pimco. December 2016

Source : https://global.pimco.com/insights/economic-and-market-commentary/cyclical-outlook/into-the-unknown


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