These 3 risks mean 2021 is ‘not a time for excessive optimism’ for markets, says Pimco

These 3 risks mean 2021 is ‘not a time for excessive optimism’ for markets, says Pimco

Investment gurus at bond-fund giant Pacific Investment Management Company, or Pimco, warn that the path to global economic recovery in 2021 is fraught with risks.

The next 12-18 months aren’t “a time for excessive optimism,” the firm’s global economic adviser and CIO of global fixed income warned in a Tuesday note. Though easy fiscal and monetary policies have helped lift prices for stocks and corporate bonds, the boost already has been digested by risk assets, leaving investors vulnerable if the cyclical recovery does not pan out as expected, they said.

In particular, Pimco’s Joachim Fels and Andrew Balls think three key risks could deflate reflation hopes: deleveraging in China, fiscal fatigue and economic scarring from the pandemic-driven downturn.

Chief among these is the risk that policy makers in major economies might lose the will to push forth additional fiscal stimulus policies, resulting in a dwindling support going forward that could hamper an economic recovery in the second half of 2021 and in 2022.

“The reality of large deficits” could start to raise doubts in governments across developed economies, resulting in curtailed spending and tapering of asset purchases, the team wrote.

Another concern is how much China’s effort to cut back on credit growth could hamper the global recovery.

Previously, attempts by the second-largest economy to tighten financial conditions have been blamed for slowing growth of emerging market economies, which remain dependent on China’s massive appetite for commodities and raw materials.

To avoid jeopardizing growth, Beijing’s economy should look to strike a balance between its deleveraging efforts and supporting businesses, the Pimco team wrote.

But any efforts to strike that balance “in a highly leveraged $14 trillion economy is fraught with difficulties, which implies a real risk of overtightening causing a sharper-than-expected growth slowdown with negative global repercussions in economies and sectors heavily dependent on demand from China,” they warned.

Yet another concern was whether the behavioral changes wrought by the pandemic-driven downturn would be lasting. If consumers turned more cautious and businesses become less willing to invest in the future, the Pimco team thinks economists may be forced to trim their rosy growth forecasts.

So what does this all mean for investors? Take care when piling on the reflation bets.

“The post-pandemic recovery will not kick-start another decade-long bull market. Rather, once the easy pandemic recovery trades have played themselves out, we expect a difficult market environment,” Pimco said.

In markets on Tuesday, the S&P 500

and Dow Jones Industrial Average

were roughly flat to slightly lower, pulling away from record highs set at the end of last week.

The 10-year Treasury note yield

rose 4 basis points to 1.18% as traders made room for new debt issuance and looked forward to additional fiscal spending under the incoming Biden administration.

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