World News

PIMCO sees short, severe recession; positioned defensively

By Kate Duguid

NEW YORK (Reuters) – Pacific Investment Management Co (PIMCO), one of the world’s largest investment firms, told clients on Thursday the coronavirus outbreak is likely to cause a short and severe recession, and that the risks of a slow recovery or a relapse will keep its investment strategy defensive for the time being.

The global economy is likely to begin to recover in the next six to 12 months, it said in a note. But that could easily be jeopardized by the unprecedented nature of the crisis, the potentially high rate of corporate defaults and the possibility of a resurgence in infections after the recovery has begun, said Joachim Fels, global economic adviser at the Newport Beach, California-based firm.

“There is no precedent and thus no good playbook for the global recession that is currently unfolding,” said Fels.

“In this highly uncertain environment – as PIMCO has done during previous periods of extreme dislocation – we will focus on a defensive approach at a time of heightened volatility. We will look to position to take advantage of normalization of market conditions over time but, for now, we believe a caution-first approach is warranted in an effort to protect against permanent capital impairment.”

For now, that means a preference for U.S. government debt, high-grade corporate debt, high-quality assets that may currently be mispriced – including U.S. agency mortgage-backed securities and Treasury Inflation-Protection Securities – and caution around lower-grade credit and emerging markets.

PIMCO had $1.91 trillion assets under management as of Dec. 31, 2019.

The scope of the Federal Reserve’s and global central banks’ fiscal and monetary response to the pandemic and the strength of the U.S. economy going into the crisis will make it possible to avoid an economic depression, PIMCO wrote.

Still, investors should be prepared for a materially different economic landscape and a significant defaults among highly levered companies. Although those conditions may ultimately create investment opportunities, PIMCO is not yet seeking them out, it said.

The rate and pace of defaults among companies with high debt loads and no access to fiscal or monetary stimulus funds will play a large role in determining the nature of the crisis, PIMCO said.

If current government endeavors to stem to spread of the virus fail, global economies could remain shut for longer than currently anticipated, it added, saying that would push highly levered, cash-poor companies into default.

Conversely, if the virus is suppressed but then reappears, companies stressed during the first wave of infections may default during the second, prolonging and worsening the second economic downturn, the investment firm said.

(Reporting by Kate Duguid; Editing by Dan Grebler and Tom Brown)