PIMCO is shifting to a more cautious stance on Europe in light of the rise of populist parties across the Continent, according to one of its most senior staff.
Andrew Balls, CIO of global fixed income, said PIMCO had changed its previous approach to Europe, which had seen it overweight European sovereign assets and taking on other Continental risk assets, in light of the changing political landscape.
“Given the very difficult outlook, given the rising risk of populism, we should have a more cautious stance,” he said while discussing the $1.5trn (€1.3trn) manager’s house view following its most recent secular forum.
His comments come after the Austrian presidential runoff elections, which saw an independent candidate affiliated with the local Green Party narrowly defeat the candidate of the right-wing FPÖ, as well as growing support for both right and left-wing populist parties in France and Spain.
Balls added: “Our bias is simply to be pretty neutral in terms of euro-zone exposure and to be very careful about less liquid parts of the European markets in our traditional portfolios. ”
He explained that PIMCO’s traditional portfolios would avoid “high-risk, less liquid” European assets and cited concerns about the confiscation of assets in Portugal – following the Bank of Portugal’s decision in late December to impose losses on €2bn of bonds issued by Novo Banco.
He also cited discussions in Austria to impose haircuts on bonds issued by Heta Asset Resolution, a bad bank, whose issuance were meant to be guaranteed by the federal state of Carinthia.
PIMCO owns Heta bonds and in March was reported to have filed a lawsuit against Carinthia.
It is also affected by the Bank of Portugal’s decision regarding Novo Banco debt.
“It seems perfectly plausible, over the next 3-5, you’re going to have more and more cases where European governments or regional governments look to do bail-ins to address problems of excessive leverage, in the case of the euro-zone,” Balls said.
“So, we’ll start off being very cautious about our euro-zone exposure.”
Brexit not systemic risk
Discussing the likelihood of the UK’s leaving the EU following the 23 June referendum, PIMCO managing director Mike Amey said the company believed there was only a 40% chance of a so-called Brexit.
Amey said the 60% likelihood the UK would remain was consistent with its initial assessment, and based on the risk of discussions around immigration, or another unforeseen event, swaying the vote.
But the manager was largely unconcerned about the risk of Brexit for the wider global economy.
“We would agree that, if we do vote to leave, growth would probably slow down to a ballpark of zero, or slightly above,” he said.
“We don’t think it’s a systemic event in terms of its influence on the world. Clearly, it would be a big issue for the UK, but we don’t think this is an event that potentially derails the global economy.”