How to manage a portfolio amid ‘radical uncertainty’

U.S. bond manager PIMCO has identified “radical uncertainty” and “new neutral” interest rates as keys to its 2017 investment strategy.

Market players, such as Bridgewater Associates’ Ray Dalio, have suggested Donald’s Trump’s U.S. election victory has ignited “animal spirits” and could spur a virtuous cycle of market confidence and productive capital.

But since the U.S. election in November, markets have been romancing growth under Donald Trump and are actually in a “stable but not secure” macro environment, PIMCO analysts write in a recent 2017 cyclical outlook.

Read: Be skeptical of all the Fed hype

“Many of the secular drivers of low new neutral interest rates — demographics, inequality, the global savings glut, elevated debt levels and technology — are unlikely to change anytime soon,” PIMCO says.

There are big differences between risk and uncertainty, PIMCO adds. While risk can be can be quantified and priced based on statistical, uncertainty is an unknown that is here for the foreseeable future.

Uncertainty, the analysts write, “consists of the ‘unknown unknowns,’ the stuff that hits you before you know it, the things to which it is difficult or impossible to attach probabilities.” They add: “[M]ore than ever, we have to think about the outlook in terms of different scenarios and be open to scenario switching depending on the actual policies that get implemented.”

Read: Consumers to drive growth in 2017: RBC

The firm says it expects caution for its portfolio construction, with this approach:

• emphasize capital preservation and tail risks;
• reduce trades that rely on significant central bank support;
• protect yourself from “the asymmetric risk of rising yields and especially against negative yields”;
• focus on bottom-up security selection;
• use global teams find the best investment opportunities;
• take a “very selective” approach to the eurozone;
• be cautious in positioning and use active management to take advantage of volatility and market dislocation.

Also read:

How to improve your 2017 investment game plan

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.