Mohamed El-Erian’s Brand New Guide To The Global Economy, And How To Invest In It

Recovery in G-7 countries is slow in overall terms and relative to history. The unemployment rate in these countries now exceeds that of emerging economies and their deficit and debt indicators have worsened. The average market risk for advanced economies is worse than emerging economies.

Working off this setting, PIMCO’s annual Secular Forum focused on the direction global markets would take over the next three to five years. Speakers former British Prime Minister Gordon Brown, TIME Magazine’s editor-at-large Mark Halperin, economist Dambisa Mayo, and U.S. managing editor of the Financial Times, Gillian Tett also spoke of investment positioning for this period.

In a new report called Navigating the Multi-Speed World, PIMCO chief Mohamed A. El-Erian summarizes the talking points:

  • Debt woes continue to be a problem in advanced economies where projected rates of economic growth are below the rate needed to beat debt and deficit problems. “Some are already flashing red, and they will force even more difficult decisions between restructuring and the massive socialisation of losses”(e.g., Greece). Others are flashing orange (e.g., the U.S.), and already require future sacrifices, most likely through a combination of higher inflation, austerity and, importantly “financial repression.”
  • Balance sheets are skewed. Liabilities haven’t been dealt with they’ve just been shuffled. Multinationals show healthy balance sheets, major banks are recovering, and unwilling to spend while government’s are deteriorating under mounting debt.
  • Advanced economies will face about 2% growth and persistently high unemployment that becomes more structural. Disparities in income and wealth will get worse driven by higher inflation and financial repression. Debt and deficit concerns will grow and at al east one EU country will have to restructure its debt.
  • Policy makers and politicians will be unable to address structural problems that currently hamper the global economy based on their beliefs of the inherent resilience of certain economies or that gradualism is sufficient. While many will just push the problems further down the line.
  • Sovereign creditworthiness will change, with advanced countries worsening while emerging world improves.

And the implications for investors:

  • Investment returns from advanced economies will be limited.
  • There are some principles to factor into a portfolio namely, hedge against inflation and currency depreciation, minimize exposure to negative impact of financial repression and exploit differentiation in balance sheets and growth potential. 
  • Investors will need to make security selections carefully. Factors to consider include glob aly yield curves, government bonds by country, corporate exposures through stocks and bonds, foreign exchange positioning and the dominance of tradeable sectors.
  • Investors will have to rethink strategies that have served them well in the past as they could just end up causing damage in the future.
unemployment chart

[credit provider=”PIMCO”]