Pimco dials down risk as global economy, policy risks pick up

LONDON (Reuters) – The limited ability of central banks to counter a slowdown in global growth and the rising likelihood of a US recession are among the risks that warrant a more cautious approach to investing in the coming years, US money manager Pimco said on Thursday.

The global economic and monetary-policy environment still remains conducive to investors seeking the relatively high returns from risky assets such as stocks and emerging-market currencies, but high valuations and tight spreads warrant a greater degree of caution.

“Valuations look fair, and in some cases rich,” said Andrew Balls, Pimco’s chief investment officer for global fixed income. “The bottom line is we will have a focus on capital preservation... and it’s time to be cautious in terms of our portfolio positioning. Having a little less risk in our portfolios makes sense.”

“We expect a lower return environment on the equity side as well as fixed income,” he told reporters at a briefing in London. “We won’t respond by increasing the overall credit risk in the portfolios, but rather [look to] relative value trading.”

The US economic expansion is already into its seventh year, so the chance of recession soon is growing. Balls put that at around 70%, adding that even though the Federal Reserve is normalizing policy, it might still be hamstrung when the slowdown comes.

The euro zone is a few years behind the United States and is experiencing a relatively strong economic rebound. But the European Central Bank is still some way off raising rates or withdrawing stimulus, making it even less able to counter a downturn.

Balls said one area he and his colleagues are wary of is Italy. A 10-year yield of 2.20% currently is nowhere near enough of a return given the country’s political risks, lack of growth and high debt levels, he said.