Economic and Market Commentary

Economic Disruptors and Swing Factors

The pandemic has amplified and accelerated four secular disruptors, and two key swing factors that could produce upside or downside surprises. We believe that being prepared is vital to investment success over the next three to five years.

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Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized

Text on screen: Candice Stack, Head of Client Management, Americas

Candice Stack: We titled our actual Secular Outlook, Escalating Disruptions, the theme of disruptions being one that we've spoken about for several years now. So with that backdrop, can you just frame what is our actual macroeconomic outlook for the next 3 to 5 years? And I think importantly, what has changed in light of the pandemic versus what components might be actually consistent relative to last year's secular outlook forecast?

Text on screen: Joachim Fels, Global Economic Advisor

Joachim Fels: We continue to think that investment success will be defined by being prepared for disruptions as they arise and to use those opportunities when the volatility happens to exploit those opportunities. So that hasn't changed. What has changed is that we think the pandemic has amplified and accelerated several of these secular disruptors that we have been talking about for quite some time now.

Text on screen: Escalating Disruptions – Crisis amplifies secular disruptors: Secular Disruptors - China, Populism, Technology, Climate

First of all, China's rise as an economic superpower, that in a way has been accelerated by the pandemic because they have been dealing with the pandemic much more efficiently and the economy has rebounded much more sharply. What this means is that the U.S. will likely continue to push back because it feels challenged as the leading, the dominant superpower, and we think this will not change under any administration. So whether you get a Trump or a Biden administration, the pushback to China will continue to be strong.

Second disruptor, populism. Inequality has been a major driver behind the rise of populism, and we think the pandemic actually increases both income and wealth inequality. So you're likely to see more polarization in the political spectrum, across the political spectrum, and this raises the risk of more extreme policy outcomes in the future.

A third disruptor, technology. The pandemic has turbocharged digitalization and the move from physical to virtual. And so this creates a lot of winners, but also a lot of losers. It actually may create more losers because there may only be a few very large winners from this accelerated move to digitalization, the large technology companies.

And then fourth but not least climate-related risks have come very much into the spotlight this year with weather events all around the world, This creates physical risks both for human lives and capital and for economic growth. It also creates transition risks as companies and also investors respond to the move from brown to green.

So overall, we think financial markets can ignore risks as long as they like, but in the end, the disruptions happen. And we want to identify and be prepared for those disruptions well in advance.

There are two key swing factors that will determine the precise shape of that cyclical recovery.

Text on screen: Escalating Disruptions – Crisis amplifies secular disruptors: Swing Factors: Virus, Fiscal Policy

The first one is obviously the health situation. On the downside, we may get more second waves. We're seeing some of this in Europe at the moment. Also here in the U.S. in some regions. But there's an upside risk, which is that we get a vaccine maybe earlier than expected and that it turns out to be effective and available. And a vaccine can really serve as a stimulant also for the economy. And speaking of stimulants and stimulus, fiscal policy, that's the second key swing factor. Depending on how active fiscal policy will be over the next few years around the world, that will influence the shape of the recovery.

Text on screen: Key takeaways – We expect higher volatility, Fiscal policy will be an important driver, Active management will be key

First of all, we expect higher volatility due to these four disruptors and potentially lower returns from public liquid asset classes over the next 3 to 5 years. Second point, fiscal policy as discussed will be a key driver, but the jury is still out on which way it will go. And then thirdly, active management and rigorous credit selection will be key for investors. We'll have to navigate the winners and the losers from the various disruptions that we discussed. And we continue to think success will be defined to be prepared for market volatility and then to use and pursue the opportunities that arise when the volatility hits.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

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All investments contain risk and may lose value. Management risk is the risk that the investment techniques and risk analyses applied by an investment manager will not produce the desired results, and that certain policies or developments may affect the investment techniques available to the manager in connection with managing the strategy.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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CMR2020-1027-1383433

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