Major investment management firm PIMCO has come out with its asset allocation outlook for 2017, predicting that policy shifts observed worldwide should have a major impact.
“We’re moving from an era of monetary policy dominance to one where fiscal policy is going to become more important,” said Mihir Worah, PIMCO’s chief investment officer for asset allocation and real return. He noted a recent Fed rate hike that the firm expects to be followed by several others this year, along with the ECB’s reduction of its quantitative easing program.
“Fiscal policy is likely to become more important as we see governments become more willing to run fiscal deficits if needed,” he said.
He also noted a trend away from globalization to de-globalization. “Globalization [has been] a big driver of global markets over the last 30 years … [but] there’s a realization that some parts of the population may have been left behind,” he said. For this reason, the firm believes investors should be more careful about investing in emerging markets going forward.
Finally, Worah cited a probable shift from deflation fears to fears of high inflation. Factors such as commodity price corrections, hawkish Fed declarations, and a strong dollar had previously stoked fears of low inflation and slow economic growth in the past couple of years, but Worah says those will give way to fears of reflation or high inflation. This has convinced the firm to allocate more toward reflationary assets.
“For example, TIPS or Treasury inflation-protected securities are pricing only 2% per year inflation in the United States for the next ten years,” he said. “We think inflation is likely to be higher than that.”
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