PIMCO has added its considerable weight to the funds manager consensus view of a positive outlook for international growth next year – if not in Australia. Even the 40 per cent drop in oil prices contains more good news than bad.
The latest PIMCO “Cyclical Forum” report, published last week, says that the drop in oil prices over the past three months is the most important new development to consider for the global macroeconomic outlook for 2015.
“Oil price drops of similar or greater magnitude have occurred several times over the past 30 years, coinciding with major economic recessions in some cases (1991, 2001, 2008) and faster global growth in other cases (1993, 1998). So, what does the current drop in oil prices mean for global growth in 2015?” the report says.
Well, it depends on what has caused the oil price drop. In this case, PIMCO believes, supply has been the predominant driver, rather than flat or reduced demand. Historically, this leads to an acceleration in growth.
The report says that 70 per cent of the oil price drop has been driven by upside surprises in supply growth. And 30-40 per cent of the reduction in demand growth is coming from increased energy productivity, such as fuel-efficient vehicles, rather than slower economic growth.
“PIMCO expects global growth to accelerate in 2015, from around +2.5 per cent (year-over-year) this year to +2.75 per cent next year – an incrementally rising tide, we could say,” the report says.
“The majority of this improvement comes from our view that supply-driven declines in oil prices serve as a fundamentally positive terms of trade shock for a majority of global economies, and further, the transfer of incremental petro-dollar cash flows from producers to consumers will result in the acceleration of money velocity, which will also support higher economic growth next year.”
The main investment themes for next year are:
> underweight interest rates
> TIPS (inflation-linked bonds) are attractive
> a mixed backdrop for risk assets (such as equities)
> picking spots in Europe and Japan
> favour non-agency mortgages (sub-prime loans) in the US
> overweight US dollar
> select opportunities in emerging markets.
PIMCO, the world’s largest bond manager, seems to have some pull in Washington. The latest forum was attended by Ben Bernanke, the former chair of the US Federal Reserve.