Global markets should brace for a “rude awakening” in the next five years, with a high probability of recession as geopolitical risks and impending quantitative tightening prompt a return to normal cyclical movement, says Marc Seidner, chief investment officer of non-traditional strategies at PIMCO.
Seidner, speaking at the Portfolio Construction Forum in Sydney today, provided a dark medium-term vision for investors, citing “radical populist backlashes against conventional policy and increasing risk of geopolitical conflict” as likely catalysts for the downturn.
“The future is becoming increasingly uncertain,” Seidner said. “Expect more volatility. Expect a recession.”
He points to a combination of factors, including negative interest rates and an over-reliance on quantitative easing, as reasons why investors are in uncharted waters.
“We make educated guesses as to what we think will work in the future but the problem today is that there’s no historical analogue,” Seidner explained. “When was the last time investors faced 10 years of extraordinarily low interest rates? When have we seen negative nominal interest rates in two of the largest economic regions of the world and an accumulated $24 trillion of assets on central bank balance sheets? When was the last time central banks interfered with, participated in or, dare I say, manipulated financial market prices as they have in the last few years?” Seidner asked. “Never. There is no analogue.
“[Quantitative easing] was a tide that lifted all boats, but is it a poor assumption to say that as QE turns into quantitative tightening the rising tide may go out rapidly?” Seidner continued. “As that tide goes out, do you want to be positioned over a soft, sandy bottom or hard, rocky coral?”
Seidner explained any further fiscal stimulus, “this late in the game”, was more dangerous than helpful and could hinder expansion.
“The safety net for monetary policy is much thinner, and much less robust than it has been in the past,” he said. “There’s much less money in the coffers.”
He ended the presentation with a dire warning.
“As you’re thinking about your baseline over the next three to five years, at least on a global basis, factor in the possibility of a recession,” Seidner said. “Our probability of a recession over the next five years is 70 per cent.”
