Global markets unlikely to recover to historical norms: hedged global bonds offer great value says PIMCO
- PIMCO has challenged conventional mean reversion assumptions due to deleveraging of private sector balance sheets, re-regulation, and slower growth coming from large developed nations
- Much of the developed world is burdened with debt and structural problems which will continue to weigh down market returns
- Despite low nominal global bond yields, investors in Australian dollar hedged global bonds can still earn attractive yields well above the cash rate
PIMCO has today challenged claims that global asset markets are set to correct to historical norms, highlighting high levels of developed world debt and significant structural issues which are likely to prevent a conventional recovery.
Tony Hildyard, Senior Vice President of PIMCO, opposed market opinion that bonds, in particular global bonds, were overvalued as such views were based on conventional mean reversion assumptions.
“Conventional mean reversion asset allocation assumptions commonly look at current asset prices and assume markets will correct to their “historical” relationship established over the last few investment cycles,” Mr Hildyard said.
“We believe these mean reversion based recommendations are out of date as they ignore current economic realities in a world struggling to recover from the liquidity and leverage driven excesses that ended with the global financial crisis.”
“A significant proportion of historical economic growth can be traced back to excess liquidity and leverage (borrowing) and we believe this is unlikely to be repeated in the near-term.”
“In fact, for the first few years of the corrective phase, global growth has the potential to trend even lower as deleveraging and high unemployment constrain consumers,” Mr Hildyard said.
He said PIMCO aimed to be forward looking and identify themes that will dominate investment markets in the next few years and position clients’ portfolios to benefit while reducing risk. The fund manager’s base view for developed markets like the US is that official interest rates will remain close to zero for the foreseeable future, inflation will remain subdued and economic growth will stay around 2% per annum lower than historical experience.
“Yet Australian investors, notwithstanding the current economic climate, can still seek attractive returns above the cash rate when accessing global assets hedged back into Australian dollars,” Mr Hildyard said.
Mr Hildyard emphasised that in a low growth environment, global bonds are a compelling investment option, despite the current low level of nominal yields. While PIMCO sees limited scope for further interest rate driven capital gains, the manager believes bonds will continue to offer an attractive yield for a prolonged period with little inflation pressure.
“The positive yield curve with cash rates pinned at low levels will also provide ongoing value to a canny investor,” he said. “And, for the forward looking investor, actively managed bonds remain an attractive and relatively safe option,” Mr Hildyard said.
