PIMCO Highlights 'New Neutral' Thesis on Global Markets; Offers 3 - 5 Year Outlook

PIMCO’s view is that the world remains in The New Neutral, and importantly that asset markets now broadly reflect this development in their prices. This has significant ramifications for the evolution of asset prices and for how investors should approach multi-asset portfolios over the next three to five years, which we refer to as the secular horizon.

At the center of our New Neutral thesis is the belief that even as central banks raise rates, they will do so slowly and prudently, and that the neutral rate over the coming cycle – meaning a rate that is neither simulative nor contractionary – will be lower than in cycles past (a rough benchmark for the U.S. is closer to a 2% average policy rate than the traditional 4% assumed by many). We don’t foresee an inflation problem, even as we move away from an era of extremely limited price increases. Low interest rates and moderate inflation together support a muted but prolonged business cycle, and we believe this combination helps to sustain current asset valuations.

So why does our New Neutral thesis have significant ramifications for multi-asset investors over the secular horizon? We would argue that the tailwind from ever-lower policy rates and contracting term premia witnessed over the past 30 years is largely past us. Moreover, current valuations – as most assets already price in the reality of lower rates – are likely to constrain potential returns going forward.

Therefore investors must adjust to a world where returns on asset classes and the paradigm for constructing optimal portfolios over the next five years are unlikely to resemble those of the last five or even 30 years. Investors will need to be more dynamic and tactical in their overall asset allocations, and they should approach portfolio construction with even more differentiation as they allocate risk to individual positions. It is still possible to achieve compelling returns, but we believe the role of active portfolio management has become more important, and more necessary, than ever.

The full Outlook (pdf format) can be downloaded here.

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