(pictured: Andrew Balls)
One of the signals from Brexit, the adverse effects of which PIMCO believes will mainly be contained within the UK for the time being, may well be that Donald Trump could, conceivably, become president of the US and global markets would likely react negatively.
In a summary of its latest thoughts, published last Friday, PIMCO’s Andrew Balls, the CIO of global fixed income, Mike Amey, head of sterling portfolio management, and Philippe Bodereau, global head of financial research, say that the world is “stable but not secure”.
Andrew Balls said: “One such risk is the threat of growing populism and its political and economic consequences. This trend makes us cautious on Europe over the secular horizon, and the results of the [UK] referendum are consistent with this view.
“That said, for now at least, we think Brexit is principally a UK event, with global knock-on effects contained. In the UK we expect a reduction in growth in the range of 1 to 1.5 percentage points over the next four quarters, dropping the growth rate to close to zero per cent. We think it is likely that the Bank of England will react by cutting its policy rate from the current 0.5 per cent,” Balls said.
“Who becomes US president is a question of significant global importance and so the election of Donald Trump, where there is much uncertainty surrounding his views and suggested policies, would likely elicit a negative reaction from markets. Hillary Clinton, by contrast, is a much more known candidate. Overall, the EU referendum in the UK reinforces the need to pay attention to populism and political risks in the coming years, including in the US.”
In terms of opportunities to arise from the volatility, PIMCO sees the banking sector as having the most dislocation in valuations and therefore presenting buying opportunities.
Balls said: “More broadly we have a positive view on corporate credit, particularly of higher quality sectors, and in asset-backed securities – relatively low risk and high quality exposures that our colleague Dan Ivascyn calls ‘bend but don’t break’ spread positions. We also continue to think that U.S. TIPS are attractively priced and offer valuable protection against the possibility of higher U.S. inflation over the coming years.”