At our recent London Investment Summit, we were delighted to host nearly 400 clients to celebrate 20 years of PIMCO in Europe. PIMCO investment professionals were joined by Ben Bernanke, Gordon Brown and Ngaire Woods, for a free flowing discussion ranging from politics and protectionism to machine learning and investing.
Here are our top ten takeaways:
1. Be careful in defining populism
In the first panel discussion, “Politics, Populism and Trade”, we sought to frame today’s political climate and its implications for investors. Ngaire Woods started by reminding us of the danger in defining populism as simply being synonymous with “the people” and equating it with anything that appeals to them. She told us instead to focus on three markers that may or may not be present in populists, but are dangerous for societies and could disrupt the investment order. First, an exclusive strand of nationalism; second, a denigration of the rule of law; and third, an erosion or subversion of democratic institutions.
Ngaire Woods frames today’s populist landscape
2. The world has changed – and it isn’t going back
It was also noted how even a few years ago, few people would have predicted the election of President Trump, Brexit, or the hollowing out of centrist governments across Europe. Three main reasons were cited for the change: Economic discontent, cultural pessimism, and rising anti-political sentiment, the consequences of which are slower trade growth, lower rates of immigration and growing fiscal pressures on governments. None of the factors are likely to change in the near term and they could be a potent mix should the economic cycle turn again.
Lupin Rahman, Gordon Brown, Andrew Balls, Ngaire Woods and Gene Frieda
3. Politics trumps economics
Tied to the discussion of populism was much debate about trade wars, including the observation that “protectionism begets protectionism” and political imperatives trump economic ones. Related to this was the rising risk of expropriation and nationalisation, both in the financial sector and in infrastructure. Andrew Balls noted that we’ve already seen acts that were against the rule of law in the eurozone and that expropriation could be a significant risk in the next slowdown.
Gordon Brown, Andrew Balls and Ngaire Woods discuss politics and populism
4. China will play by the rules or create its own
The US and China are locked in what one speaker termed a “battle for technological supremacy” that will play out over years not months. China has spent the last thirty years focusing on economic growth while working within the bounds of the existing international order. The question for the next ten to twenty years is whether China will continue to do so, or whether it will seek to set up its own regional order, ushering in a new economic cold war. Our panellists agreed that markets appeared fairly sanguine about trade issues in the short term but may be failing to appreciate the potential for a longer term systemic shift.
Craig Dawson, Head of PIMCO Europe, Middle East and Africa
5. It’s an alpha not beta world in emerging markets
In discussing trade tensions and China, the impact on emerging markets (EM) was top of mind. Lupin Rahman talked us through how EM performance was a function of both beta and alpha; beta driven by geopolitics, global market sentiment, and US and Chinese growth; alpha driven by idiosyncratic risks such as domestic policy. Quantitative easing has made EM a beta play for the last decade but these tailwinds are now fading – and a slowing global growth environment will create headwinds. There’s still opportunities for investors but it’s about differentiating within the asset class and being selective.
Lupin Rahman on the impact of trade tensions on emerging markets
6. The centre can hold
Despite the rising dangers, Ngaire Woods believes that politicians can still win from the centre ground. However, three decades of technocratic policy making need to give way to a more transformative and redemptive style. To succeed from the centre politicians need to listen to voters, be able to deliver messages in a simple way and adopt a more optimistic message of change.
7. Quantitative easing could happen again
With the ten year anniversary of Lehman Brothers’ bankruptcy top of mind, many audience questions centred on the efficacy of quantitative easing (QE) and whether this tool could be deployed again in a future recession. Our speakers discussed the Federal Reserve’s actions during the last crisis, sharing the view that QE was largely successful, with the economies that implemented it first recovering quicker than those that delayed. It was also argued that many of the negative side effects had not been realised, and as such QE would likely form part of the central bank toolkit in the next downturn should interest rate policy reach its limits.
Mike Amey, Geraldine Sundstrom, Joachim Fels and Nicola Mai
8. It’s not all doom and gloom
Being optimistic as a bond investor can sometimes be a stretch, but we nevertheless managed to extract some silver linings from our panellists. The underlying strength of the US economy and its institutions was highlighted as a source of optimism by Andrew Balls, as was the flexibility of the UK economy, which we think will prove resilient even in the face of Brexit uncertainty. Lupin Rahman also talked about the growing movement among voters in emerging markets to hold governments accountable on measures of transparency and corruption.
9. The robots are coming (but they can’t do it alone)
Technology was a theme throughout the day and we heard from Emmanuel Sharef on how PIMCO is integrating machine learning techniques into its investment process. Emmanuel highlighted how PIMCO is using big data to better model mortgages and to extract more real time data on the economy. However, he also noted that while these techniques can do a lot, we’ve found they’re at their most powerful when paired with insights from subject specialists.
Emmanuel Sharef on how PIMCO is using machine learning
10. Stay flexible, be a liquidity provider
The final panel of the day sought to tie together big picture themes into actionable investment ideas. PIMCO’s portfolio managers characterised the environment as “late cycle but not end cycle” with Geraldine Sundstrom arguing it was too early for investors to retrench completely. Instead they should focus on “moving up the quality ladder” in both fixed income and equities. Mike Amey shared similar views and stressed the need to focus on liquidity and “not stretch in the final innings”.
PIMCO portfolios managers Mike Amey and Geraldine Sundstrom, with global economic advisor, Joachim Fels
While emphasising a defensive but flexible stance, our panellists noted that pockets of opportunity still exist. Joachim Fels pointed to Doctor Copper, in recognition of how commodities typically outperform in the final stages of an economic cycle, Geraldine Sundstrom sees value in Japanese equities, and Mike Amey likes US ten year TIPS.
For more insights on investing in a world of increased political and economic uncertainty, read PIMCO’s latest Cyclical Outlook, “Growing, But Slowing”
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