Prior to the COVID shock, we had anticipated a difficult investment environment subject to a range of long-term disruptors, including China's rise, populism, technology, and climate-related risks. The pandemic has amplified these disruptors and created an even more challenging landscape for investors.
In our latest Secular Outlook, we discuss the importance of being prepared for a variety of disruptions and actively pursuing opportunities that arise when volatility occurs. As always, our outlook derives from our annual Secular Forum (this year held in September), which included PIMCO's global investment professionals and Global Advisory Board as well as distinguished guest speakers. This blog is a distillation of our outlook and investment implications.
The economic outlook
We forecast above-trend growth for a couple of years as the global economy emerges from the COVID recession. However, we think concerns voiced at our forum that "economic scarring" will weigh on potential output growth are warranted.
Three factors are likely to weigh on longer-term productivity growth: Longer spells of unemployment typically imply an erosion of individuals' skills, higher uncertainty will likely depress business investment for a long time, and an increasing "zombification" of the corporate sector is expected due to massive government and central bank support.
The two key swing factors that could produce upside or downside surprises are the state of the pandemic and the degree to which fiscal policy stays active or retreats. While more stimulus is already on the horizon in Europe, the outcome of the U.S. election in November will (hopefully) provide more clarity on the scope and nature of continued fiscal support.
Given the difficult near-term and longer-term economic backdrop, and with disruption likely to lead to repeated bouts of volatility in financial markets, we expect monetary policy rates in most advanced economies to stay low or go even lower for much or all of the next three to five years.
We view negative rates as a desperate tool with adverse side effects that become larger the longer rates stay negative (see "A Negative View on Negative Rates"). However, with bond yields already low or negative and yield curves flat, more central banks are likely to venture into negative (or more deeply negative) territory in response to future adverse shocks, along with further purchases across a wide spectrum of financial assets.
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