Pimco sees global growth ramping up in ’15 to 2.75%

Pimco, which has $1.87tn in assets under management, says its view reflects “improving household finances and confidence as well as increasing evidence that the economic recovery is becoming self-sustaining and broad-based”.

Says it expects economic growth in the US to grow between 2.75% and 3.25% in 2015; view backed by former Federal Reserve chairman Ben Bernanke, it says

Reuters

New York

Pacific Investment Management Co expects global growth to accelerate in 2015 to around 2.75% from around plus 2.5% this year, on expectations that supply-driven declines in oil prices were fundamentally positive, the bond giant said yesterday in its year-end Cyclical Forum outlook report.

Pimco said its view that the outlook for the US economy is incrementally positive is backed by former Federal Reserve chairman Ben Bernanke, who participated in Pimco’s Cyclical Forum last week at its headquarters in Newport Beach, California.

Pimco, which has $1.87tn in assets under management, said its view reflects “improving household finances and confidence as well as increasing evidence that the economic recovery is becoming self-sustaining and broad-based.”

In addition, Pimco said, “Bernanke suggested that monetary policymakers are likely to remain deliberate. They will look past the drop in headline inflation in the US next year, and will remain focused on the level and momentum of real growth as well as the progress of core inflation toward target in determining the proper future course of monetary policy.”

Pimco said it expects economic growth in the US to grow between 2.75% and 3.25% in 2015, up from an average of 2.4% this year.

On Wednesday, the Federal Reserve offered a strong signal that it was on track to raise interest rates sometime next year, altering a pledge to keep rates near zero for a “considerable time” in a show of confidence in the US economy.

The Fed said that inflation remains low, in part because of falling energy prices, but expects it to rise “as the transitory effects of lower energy prices and other factors dissipate.”

Pimco’s energy market experts said 70% of the drop in the price of oil is driven by upside surprises in supply growth, and some 30% and 40% of the reduction in demand growth is coming from increased energy productivity, such as via fuel-efficient vehicles, rather than slower economic growth.

Pimco’s group chief investment officer, Dan Ivascyn, who succeeded Bill Gross when he unexpectedly departed in late September, said supply-driven declines in oil are a boost for a majority of global economies, which is why Pimco expects global growth to accelerate to around plus 2.75% in 2015 from plus 2.5% this year.

“Declining oil prices will have a clear downside impact on global inflation readings next year,” Ivascyn said. “In most developed economies, headline inflation will likely go into negative readings in the early part of 2015, only to bounce back toward positive core inflation readings as we go into late 2015 and early 2016.”

Ivascyn said Pimco finds Treasury inflation-protected securities “attractively valued given their recent underperformance.

“Although we expect headline inflation (year-over-year) to trough below the zero bound in the next few months, this is more than reflected in TIPS valuations,” he said.

Last week, Gross, the co-founder of Pimco and now portfolio manager at Janus Capital Group Inc, said on a webcast that said Treasury inflation-protected securities “are getting pretty attractive” because there is now limited downside in terms of price.

On currencies, Pimco’s dominant cyclical view remains “the US dollar overweight versus other G-10 currencies as a result of diverging economic growth and, importantly, diverging central bank actions.”

Ivascyn said he expects both the euro and the yen to decline versus the dollar over the cyclical horizon despite significant weakening already. “We feel this decline in their currencies is a primary tool by which these regions can boost economic growth and also solidify inflation expectations.”

Pimco also remains favourable on eurozone peripheral bonds. Given expected central bank support, combined with improving earnings in Japan and attractive valuations in Europe, Pimco sees room for outperformance in those equity markets, Ivascyn said.

He added that Pimco continues to focus on the effectiveness of the Bank of Japan’s expansion of its already loose monetary policy and the ability of the European Central Bank to deliver on quantitative easing measures “versus what are now high market expectations.”