SUMMARY

  • Recession risks have diminished, and we are more confident in our baseline forecast of a moderate recovery in global growth this year.
  • But monetary policymakers now have even less space left to guard against future recessions.
  • Thus, while “time to recession” has likely increased with last year’s monetary easing, so has “loss given recession.”
  • Considering the outlook, we seek to invest with a bias to higher-quality positions, a very close focus on portfolio liquidity, and a diversified approach to generating income.

As a turbulent year for the global economy, financial markets, and politics recedes in the rearview mirror, we look ahead into 2020, mapping out both the likely path and the potential roadblocks for the economy and investors. This outlook draws on the work by PIMCO’s portfolio managers, economists, and analysts in preparation for our recent quarterly Cyclical Forum, the lively discussions among our investment professionals at the event itself, the presentations by our sector specialists during the following two strategy days, and the investment conclusions drawn by our Investment Committee afterward.

Last year was not for the fainthearted: Global growth was “synching lower” and entered a “window of weakness,” the U.S.–China conflict and Brexit uncertainty provided dark mood music, climate concerns took center stage amid extreme weather around the globe, and protests against the political establishment reverberated through Hong Kong, Lebanon, Chile, Ecuador, and many other places. And yet, spurred by global monetary easing led by the U.S. Federal Reserve’s dovish pivot in early 2019, both equities and bonds had a year of stellar returns.

Looking ahead, we don’t pretend to know what 2020 will bring in terms of economies, politics, and markets – nobody does. But in order to invest, we must couple our rigorous bottom-up portfolio process with taking an educated guess on the most likely baseline and, even more importantly, the skew of risks and opportunities around that baseline compared with what is priced into markets. That’s why we spend much time at our quarterly forums mapping out different scenarios with the help of data, models, and premortems (as recommended by PIMCO advisor and Nobel laureate Richard Thaler) in order to check our biases, challenge our own and others’ consensus views, and generate investment ideas that will help us manage the risks and target the opportunities we identify.