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    Relying on Rocket Power

    Today we participated in a teleconference with Pimco which was presented by head of European portfolio management, Andrew Balls. The call covered Pimco’s cyclical outlook including an update on their global economic outlook and financial market trends. Pimco is well known as a global fixed income management company headed up by Bill Gross. They have managed money since 1971, over this time producing superior returns and growing their assets under management to over $840bn as at 30 June 2009.

    Pimco have been strong exponents of a ‘new normal’ paradigm that we’ll experience in the next 10 years, this outlook is diametrically opposed to what for the past 15 years has been considered ‘normal’ . In this state we’ll see higher inflation – although this factor still has some time before it will become apparent – increased regulation of markets and economies, de-leveraging, and hence more saving and less consumption. All these factors will contribute to lower economic growth going forward, and it is around this framework that Pimco bas their investment decisions.

    Within this longer term framework they take a look at shorter term outlook to make more tactical decisions. On a one year view they see that the global economy is going to come out of the deep recession (indeed many countries have already come out of recession) but the recovery isn’t going to be as strong as the consensus view that we’re going to experience a V shaped recovery.

    They describe economic growth/recovery coming from 3 rockets, namely:
    • Rocket 1: Government
    • Rocket 2: Inventory levels
    • Rocket 3: Private sector

    In the latter half of 2007 and into 2008 as private sector demand began to drop off, first slowly and then more rapidly, and companies de-stocked we saw that rockets 2 and 3 were in reverse, and this is what plunged the world into a recession. The tail end of 2008 and into 2009 has seen co-ordinated government stimulus (both fiscal and monetary) which coupled with a re-stocking around the world has helped economies come out of recession.

    Rocket 3 is still not assisting which is what needs to happen to ensure that the strong recovery becomes sustainable. The private sector has been scarred and areas that in the past have been leading indicators in improved private sector spend, namely vehicle and housing demand, have been largely conspicuous in their absence, and Pimco expects this trend to continue.

    Re-stocking is a once off rocket. Government spending can only happen as long as they are able to borrow. The world requires an improved appetite from the private sector in order to return to ‘old normal’ levels of growth on a sustainable basis.

    In summary Pimco believe that swift government action has prevented a global recession, but that growth going forward will be more muted. This more muted growth means that return expectations need to be lowered.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-09-30, 18:05:41, by Mike Email , Leave a comment
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