Pimco Getting More Defensive But Shunning Gold
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(Kitco News) - Warning signs continue to flash in financial markets as another global investment firm recommends investors take a defensive position; however, gold doesn’t appear to be on the menu.
In its asset-allocation midyear outlook, $1.5 trillion investment firm Pimco said “while our base case is for many of the known tail risks to remain at bay, clouds have started to gather again on the horizon -- too many to ignore.”
Among risks the firm sees for financial markets include President Donald Trump’s administration inability to deliver on its ambitious agenda of fiscal stimulus, deregulation and tax reform. The firm also sees uncertainty surrounding the Federal Reserve’s plan to shrink its balance sheet, as well as the European Central Bank slowing its bond-purchase program. Pimco is also concerned about the disappointing inflation profile globally and in equities markets, plus high earnings-per-share consensus estimates that could be difficult to meet in the third quarter.
With interest rates around the world at extremely low levels, the analysts noted that the global economy is “driving with a spare tire” ahead of the next recession.
“Balancing the risks against the backdrop of buoyant markets, it is a good time to pause and scan the horizon for new directions the markets may take,” they said in the report. “And after reviewing the landscape, we conclude that the lack of near-term positive catalysts combined with current valuations does not offer sufficient margin of safety to support a risk-on posture.”
In the current environment, Pimco said that it is underweight U.S. equities with a slightly positive allocation to European stocks.
In the report, the firm is the most optimistic on real assets, with an overweight rating; however, despite the growing defensive sentiment, Pimco is underweight gold. The analysts say they see the most potential in U.S. Treasury Inflation-Protected Securities (TIPS).
“Inflation expectations have risen recently, yet we believe there is still value in TIPS as the market is underpricing U.S. inflation risks,” they said. “While we expect U.S. inflation to remain muted in the near term, longer-term risks remain.”
Pimco is shunning the precious metal as prices push to their highest level in two months, with many analysts eying $1,300 an ounce as the next major test for the market.
Gold has seen a strong recovery recently, rallying off of July’s four-month low due to rising safe-haven demand and expectations that low inflation will keep the Federal Reserve from raising interest rates a third time in December.On interest rates, Pimco said while the Federal Reserve could start to shrink its balance sheet, the central bank could be close to ending its newest hiking cycle in the new low neutral rate environment.