PIMCO sees low-return environment likely for next 3-5 years

By Kate Duguid
NEW YORK (Reuters) - Despite the rebound in risk markets this year, Pacific Investment Management Company (PIMCO) expects low returns for all asset classes over the next three to five years as the global economy recovers from the coronavirus pandemic.
The investment giant's outlook, released on Wednesday, argues that given the current high valuations in credit and stock markets and the likelihood of interest rates staying near zero, investors should expect earnings to stagnate or decline as a percentage of GDP.
Credit and stock markets have been bolstered this year by investor hunt for returns. With interest rates near zero, stock prices have risen and borrowing costs for riskier companies have fallen. However, given the economic realities of the pandemic, revenues - especially in sectors such as travel, entertainment, and hospitality - are not recovering quickly and central banks are unlikely to intervene to prevent defaults from rising.
"With historically low returns and high stock valuations, it makes sense for portfolio managers and asset allocators alike to lower their return expectations instead of expanding too far and stretching the quality spectrum too wide in hopes of maintaining historical return levels," said PIMCO.
A new wave of coronavirus infections or the development of a vaccine could dramatically change the outlook for financial markets. This could also apply to other fiscal incentives.
The European Union's recovery package, which will distribute the funds in the course of 2021, has made the bloc better economically. Further fiscal stimulus could improve the outlook for the United States, but the chances of that won't likely be determined until after the November 3rd US elections.
US President Donald Trump said Tuesday the White House would pull out of business negotiations until after the elections. He later retired and said he would back up a couple of standalone bills.
Fiscal policy will also play a key role in whether the Federal Reserve will hit its inflation target in the short term. The central bank announced earlier this year that it would keep inflation above target for a period of time, averaging 2%.
"While central banks, including the Fed, have the means to provide backing for asset markets in times of crisis, the credible achievement of their inflation targets requires an instrument they cannot control: fiscal policy."

(Reporting by Kate Duguid; Editing by Paul Simao)
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