PIMCO sees short, severe recession; positioned defensively

By Kate Duguid

NEW YORK (Reuters) – Pacific Investment Management Co (PIMCO), one of the world’s largest investment firms, told clients on Thursday the coronavirus outbreak is likely to cause a short and severe recession, and that the risk of a slow recovery or a relapse will keep its investment strategy defensive for the time being.

The global economy is likely to begin to recover in the next 6-12 months, it said in a note. But that could easily be jeopardized by the unprecedented nature of the crisis, the potentially high rate of corporate defaults and the possibility of a resurgence in infections after the recovery has begun, said Joachim Fels, global economic adviser at the Newport Beach, California-based firm, which has $1.91 trillion assets under management.

“There is no precedent and thus no good playbook for the global recession that is currently unfolding,” said Fels.

“In this highly uncertain environment – as PIMCO has done during previous periods of extreme dislocation – we will focus on a defensive approach at a time of heightened volatility. We will look to position to take advantage of normalization of market conditions over time but, for now, we believe a caution-first approach is warranted in an effort to protect against permanent capital impairment.”

For now, that means a preference for U.S. government debt, for high-quality assets that may currently be mispriced – including agency mortgage-backed securities and Treasury Inflation-Protection Securities, high-grade corporate debt – and caution around lower-grade credit and emerging markets.

The scope of the Federal Reserve’ and global central banks’ response to the effects of the coronavirus and the strength of the U.S. economy going into the crisis will make it possible to avoid an economic depression, PIMCO wrote.

Still, investors should be prepared for a materially different economic landscape and a significant defaults among highly levered companies. Although those conditions may ultimately create investment opportunities, PIMCO is not yet seeking them out, it said.