Pimco's Prophecy: Stop Relaxing! Use Rallies to Accumulate Cash

(Bloomberg) -- Pacific Investment Management Co. has a message for investors: It's time to stop taking the markets for granted.

Investors have become too complacent and monetary, fiscal, trade and geopolitical risks abound, Pimco's Richard Clarida, Andrew Balls and Dan Ivascyn said in a report issued Wednesday. There's a 70 percent chance of a recession in the next five years, they said.

“We believe that many market participants today are too relaxed, that medium-term risks are building and that investors should consider using cyclical rallies to build cash to deploy when markets eventually correct -- and possibly overshoot -- as risks are repriced,” the executives said in Pimco's annual "Secular Outlook" for the next three to five years.

Pimco's forecast is being issued as stock markets reach record highs, the U.S. economic recovery enters its ninth year and Donald Trump's election has spurred optimism for pro-business reforms.

“One thing that's happened is all asset classes are 10 or 15 percent more expensive than they were a year ago,” Clarida said in a telephone interview. “So a lot of good news is already priced in.”

China Growth

Downside risks for the economic outlook since last year include reduced prospects for China's growth rate, which may slow to 5.5 percent from the current pace of 6.5 percent, and the eurozone, which is likely to average 1.25 percent over next five years, Pimco said.

U.S. growth is likely to continue at 2 percent. Inflation will likely be 2 percent on average and the Federal funds rate will be at 2 percent to 3 percent, they said.

Of real concern for the global outlook is that policymakers are “driving without a spare tire” because of limited tools -- caused by big balance sheets and low- or negative-interest rates -- to deal with a recession.

“Policy measures may not be sufficient to counter the next downturn, whenever it materializes,” the report said.

Investors should consider adding emerging markets assets outside China, which are well-positioned to demonstrate healthy growth and returns, Ivascyn and his colleagues said. Long-term rates on Treasuries and mortgage-backed securities are also likely to rise as the Federal Reserve winds down its balance sheet.

Pimco's outlook was shaped by a three-day forum this month with input from consultants including former Federal Reserve Chair Ben Bernanke, ex-U.K. Prime Minister Gordon Brown, former U.S. House Speaker Newt Gingrich and ex-European Central Bank President Jean-Claude Trichet.

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net.

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alan Mirabella