Rude awakening

The triggers for unpleasant surprises found within the financial markets have far-reaching effects on the global economy, which are diverse and difficult to predict. Within the framework of the annual "PIMCO Secular Forum", a meeting represented by high-ranking representatives from the financial sector, those potential causes for a possible crisis were discussed this year. The long-term outlook for 2018 is summarized under the title "A Rough Awakening".

On June 13, 2018, we were able to convince our esteemed colleague Joachim Fels, head of this forum, combined with his 31 years of experience in macro research, to present the results of this year's forum to us in a relaxed atmosphere during the Gutmann Expert Cocktail.

At the beginning of the cocktail, the duration of the current economic upswing was emphasized. Historically seen, the probability of a US recession over a five-year period is 70%. The phase in the current economic cycle, coupled with the fact that every Republican president since 1945 has experienced at least one recession, raises doubts about how long the upswing can continue.

A further risk factor mentioned by Mr Fels is found in a sudden increase in productivity. Although this would boost economic growth, it would also lead to higher unemployment and a rise in real interest rates.
He also expressed fears that our globalised economy could develop more in a protectionist direction with radical populists in power. A renationalization of important companies or entire industries can have a negative impact on growth and lead to higher inflation.

In view of the increasing uncertainties, the investment implications of the Secular Forum can be summarized as follows: High valuations and rising volatility due to lower support from central banks project the need for a more defensive positioning in the portfolio. Therefore, it is important to increase the flexibility within the portfolio in order to be able to act offensively in the event of a rude awakening.