NZ and Australia are among a group of countries most at risk of recession during 2024, according to a new PIMCO analysis.
Authored by PIMCO economist, Tiffany Wilding, and fixed income chief investment officer, Andrew Balls, the note published last week says those economies “with more interest-rate-sensitive, variable-rate debt markets are likely to slow at a faster rate (e.g., Australia, Canada, New Zealand, and Sweden), led by weaker consumption growth”.
But even the US won’t escape the economic gravity with the nation’s “standout strength” set to “fade over our six- to 12-month cyclical horizon”.
The bond manager suggests the US will join the rest of the developed world in “stagnation or mild contraction” as the year plays out as the impact of inflation, fiscal restraint and higher interest rates bite.
In line with consensus forecasts, the PIMCO paper suggests central banks are poised to cut rates this year as conditions deteriorate – albeit that the easing may come later than currently priced-in but going further than many expect.
“… central banks do not tend to cut rates ahead of downturns, instead easing only after recessionary conditions appear and then delivering more cuts than markets anticipate,” the analysis says. “In the longer term, we continue to expect neutral policy rates to decline to levels similar to, or slightly above, those seen before the pandemic.”
The journey to lower rates, however, won’t be a smooth one with some lingering uncertainty around the path of inflation as well as myriad other economic, geopolitical and market risks pointing to a wide range of potential outcomes.
Amid such high levels of uncertainty, PIMCO says bonds remain more “attractive relative to equities”.
“We view fixed income investments as broadly appealing over our cyclical horizon, given attractive yields and valuations as well as the potential for resilience across multiple economic scenarios,” the paper says. “Such resilience is especially important in the wake of the increase in geopolitical risk and market volatility over the past two years. Because attractive yields can be found in high quality bonds, investors do not need to step down in credit quality.”
PIMCO favours developed market bonds with opportunities in emerging market debt and select credit sectors also in view.
The manager is upbeat, too, about the prospects for private debt as banks – especially in the US – “offload future lending obligations, or exit certain business lines entirely”.
“… we anticipate what could be some of the best lending vintages across private markets since the global financial crisis,” the paper says. “Even amid robust activity in corporate direct lending, which has recovered from most of the spread widening that happened since mid-2022, there is still significant need for flexible solutions to complex capital structure problems, many of which could offer equity-like returns in the near- to intermediate-term, in our view.”
With almost US$1.9 trillion under management, PIMCO is the largest fixed income investment firm in the world, serving as underlying manager for many NZ fund and KiwiSaver providers including the Harbour Asset Management-owned Hunter strategy.