Giant pension firm Pimco sees a 70% chance the world economy enters a recession over the next three to five years as ultra-loose monetary policy from the US to Europe comes to a halt.
Marc Seidner, chief investment officer of non-traditional strategies at Pimco, 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, Mr 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,” Mr Seidner said at the event organised 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,” he said.
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 US 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 US yield curve, as measured by the gap between 2-year and 10-year yields has flattened to about 23 basis 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, he said.
One bright spot is private credit in areas such as direct lending and stressed and distressed corporate loans, according to Mr 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%,” he said. Pimco has over $1.7 trillion in assets (€1.4trn) under management.