Gov't shareholders are 'the new normal' - Pimco
GLOBAL - Asset management house Pimco is advising investors will have to rethink the investment selections they make and how they define what makes a good investment in the coming years to take into account the impact of wide-spread state ownership.
Speaking at an Allianz Global Investors briefing in London yesterday, Mohamed El-Arian, chief executive of Pimco, said investments in companies or financial offerings would need to reflect what he now labels "the new normal", as he predicts there is further government intervention to come for all sectors of the global economy and this may in the future determine in which direction a company's share price might rise or fall.
"We are in a crisis that will continue to move, we are going towards a new normal," noted El-Arian.
"While no-one can tell you what it is going to look like, the balance between government and private sector is shifting in terms of owner control. You can no longer predict asset values without putting in the role of the government. It is no longer a referee but a referee and player."
He continued: "We have to very quickly, as an investor, figure out what side the government is playing on. Banks are being de-risked very quickly. But they are moving from very expensive properties on the Monopoly board to become the utilities. And all the non-banking and financial companies will feel the impact of this deleveraging."
His comments relate to what Pimco sees as a required new order for investor returns, as the importance of dividend income, for example, has reappeared on the radar of investors, yet what dividends will be paid could be influenced by whether the company is in any way state-owned.
El-Arian has predicted investors will look more at dividends and the cash strength of companies, as well as the risk management over coming months when considering whether to invest in a firm as investors need to adjust their thinking towards looking for security as well as gains.
"There is a fundamental shift in the mindset. We are going from an age of entitlement, where [people] owned homes they could not afford, to an age of thrift where capital preservation is the norm.
"If you believe, as I believe, we are on a bumpy journey to the next situation we owe it to our clients to reflect this. It is not enough to ask how capture the upside but how to capture the upside while protecting the downside. There is recognition that to protect the downside you have to give up some of the upside," added El-Arian.
More specifically, he is also predicting pension funds and institutional investors will redefine how they allocate the assets within the portfolio and the terms set, as he believes investors will shift their mindsets "from asset class to capital structure" to cope with a major realignment of cyclical dislocation.
That said, one of the sectors Pimco is now warning might need to be considered as a global bubble set to burst is the government bonds sector.
On the back of such huge ongoing intervention, states wil have to issue massive sums of government paper to finance the initiatives, however, this will in turn lower the value of the government bond market already held through the ongoing flight to quality, argued El-Arian,.
"We estimate that over a 12-month period the US [government] will be issuing $2.5trn, and the margin of error is +/- $500bn. When you look at the outlook for treasury bills, you have to factor in this issuance which is why we caution about longer-dated bills," added El-Arian.
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