PIMCO’s annual Secular Forum, held this September, was the 40th in our firm’s 50-year history. At our 2021 PIMCO Super Secular Summit, we were delighted to be joined by clients from across Asia Pacific to share the conclusions from the forum and the implications of our secular outlook for investors.

At the summit, PIMCO investment professionals, along with Global Advisory Board member and former Federal Reserve Chairman Dr. Ben Bernanke, offered their insights into the key forces affecting the global economy over the next five years. Here are four takeaways from the wide-ranging discussion:

1. Green energy, technology, and social transformation will have far-reaching consequences

As we noted in our recent Secular Outlook, “Age of Transformation”, three broad trends will drive a major transformation of the global economy and markets over the coming years:

• The transition to green energy, as governments and corporates aim to reach net zero emissions by 2050, will require sizeable investment in renewables and divestment in so-called brown, or carbon-intensive, industries. The path to zero emissions will be bumpy, with investors having to deal with the problem of stranded assets along the way.
• Digitalization and automation have been turbocharged by the pandemic, with corporate investment in technology spiking over the past year and a half. While this will lead to better economic outcomes overall by creating new jobs and making existing jobs more productive, it will also create winners and losers. In addition, it could exacerbate income and wealth inequality, which in turn could foster greater populism and polarization in political systems.
• The push to address inequality will become more prominent. The Chinese government is now keenly focused on the goal of “common prosperity”, and the Biden administration in the U.S. has also expressed its intention to address the widening gap between the haves and have-nots.


2. There will be greater uncertainty, volatility, and divergence in growth and inflation

   The New Normal period of low but steady growth, below-target inflation, and subdued volatility in financial markets that marked the decade leading up to the pandemic is now over. In future there will likely be greater uncertainty and volatility, with shorter and bumpier economic cycles. We also think there will be more divergence between countries and regions owing to the three broad tends described above.

   Inflation will also be more volatile, and we continue to believe that inflation tail risks have increased in both directions, with periods of much higher, and periods of much lower, inflation becoming more probable. Fiscal activism and rising carbon prices will exert inflationary pressure, while productivity gains from technology will be disinflationary. Meanwhile, prevailing high debt levels create higher risk of debt deflation, with a negative growth shock potentially leading to a balance sheet recession.

   Although secular inflation risk is overall relatively balanced, it could be worth considering inflation hedges in areas such as U.S. Treasury Inflation-Protected Securities (TIPS) or commodities, where valuations have risen over the last several quarters but still look reasonably attractive from a longer-term perspective.



3. Lower return expectations call for active portfolio management

   The COVID-19 crisis prompted aggressive monetary and fiscal policy measures, which have dragged returns forward in time. Investors must therefore not only temper their return expectations for both equity and fixed income over the next five to 10 years, but also be prepared for greater uncertainty and volatility compared with the previous decade.

   In light of this, investors will need to become more creative and look at a wider opportunity set in pursuit of returns. In particular, it makes sense to adopt a more global outlook and embed additional flexibility. Investors might also want to consider allocating some of their portfolio to private market opportunities where illiquidity and complexity premia can help to generate attractive risk-adjusted returns relative to public markets.

   Moreover, it is worth stressing that the three broad transformative trends described above could lead to market dislocations that create attractive alpha opportunities for patient investors. Technological disruption and regulation around climate change, for example, will lead to uncertainty and complexity as well as opportunity, creating both winners and losers in the brown to green transition. All this suggests that active management of portfolios will prove especially important over the next few years.



4. Emerging markets and structured products could fare well

Emerging market (EM) valuations look reasonably attractive compared with much of the developed world. Asia in particular is expected to see strong growth and capital markets development. However, given uneven growth dynamics, heightened policy uncertainty, and ongoing trade frictions, investors need to be very selective, approaching EM as a broad opportunity set, not as a passive beta investment. While China’s push for common prosperity has intensified uncertainty in some sectors, we believe opportunities will emerge in other sectors, such as green energy. But with government policy and idiosyncratic risks likely to drive further divergence between issuers, careful security selection is required.

We are also broadly optimistic about structured products or collateralized opportunities, including mortgage-backed and other asset-backed securities. In a world beset with so much change and uncertainty, it is reassuring to have hard assets underlying your investment.

Finally, although we see upside risks to interest rates over the short term as economies continue to recover, over the secular horizon we expect rates to remain relatively range-bound, enabling lower but positive returns for core bond allocations. And we expect that bonds will continue to provide diversification benefits in terms of overall asset allocation.

For further details on our outlook for the global economy, read our latest Secular Outlook: “Age of Transformation.”