Pacific Investment Management Co. sees a 70% chance the world economy will enter a recession over the next five years as the current ultra-loose monetary approach in the United States and Europe ends.
Marc Seidner, chief investment officer of non-traditional strategies at Pimco — an Allianz asset-management unit — warned investors should expect increased volatility as monetary easing turns into monetary tightening. With traditional assets expensive, they can find some shelter in private markets, Seidner, who has more than 30-year investment experience, said at a conference in Sydney.
If you are thinking about global investing and global portfolios, you have to enter in a possibility of a recession in the next three to five years,” Seidner said at the event organized by Portfolio Construction Forum. “Quantitative easing was a tide that lifted all boats. If we were trying to look for historic analogues to the current environment in terms of monetary policy and possible unwind in the period to come, there are none.”
The comments come as the world’s biggest economy heads for its best growth since 2005, buoyed by robust domestic demand and the impact of tax cuts. The Federal Reserve remains on track for further interest-rate hikes this year, despite a meltdown in emerging markets, rising geopolitical risks and mounting political headaches for the Trump administration.
The U.S. yield curve, as measured by the gap between 2-year and 10-year yields, has flattened to about 0.23 percentage points, a level unseen since 2007.
Investors don’t have much flexibility in their investment decisions in the current environment of low interest rates, unattractive credit spreads, high equity valuations and flat yield curves, Seidner said.
One bright spot is private credit in areas such as direct lending, stressed and distressed corporate loans, as well as real-estate focused offerings including non-qualified U.S. mortgages and commercial development loans in the U.S. and Europe, according to Seidner.
“The opportunity set in private markets continues to expand and that we believe it to be a very significant, profitable and fruitful area for investors,” he said. “Instead of earning 5% or 6% , one can earn 10%, 11%, 12%.”
New York-based Seidner, who helps run Pimco’s Dynamic Bond Fund and sits on Pimco’s investment committee, left the company briefly in 2014 before rejoining the bond titan later that same year. He also worked with fixed-income veteran Mohamed El-Erian at Harvard University’s endowment.
The Newport Beach, California-based asset manager oversees $1.7 trillion in assets
— Read Advisors Make the Case for Short-Term CDs, Bonds and Treasury Bills, on ThinkAdvisor.