US-based bond management specialist, PIMCO, has expressed on-going concerns about the sustainability of the US economic recovery.
PIMCO managing director Bill Powers says the real question the company has had for some time is what the second half of 2004 looks like, particularly when “you remove the tremendous refinancing stimulus provided by lower interest rates”.
“Lower rates gave people the ability to pay more for homes and also presented opportunities for mortgagors, not only to refinance at lower rates but also to extract equity from their homes,” he says.
However, Powers says, this refinancing wave has largely ended and the economic stimulus it provided has begun to taper.
“The recent auto sales numbers and housing numbers and decent Christmas sales indicate that the consumer has not rolled over, but to extrapolate a lot of growth from these levels I think would be a mistake,” he says.
“To see stronger growth in the second half, you’ve got to see corporations engaged or you’d have to have an expectation that the US is somehow going to benefit from overseas demand and a dramatic change in net exports,” Powers says.
He says PIMCO believes that while inventories will be positive and exports slightly positive, the world won’t be beating down the door.
“And given the secular decline in manufacturing in the US, it’s not as big a component to turn around the economy as it once could have been,” Powers says.
Looking at investment strategy, he says PIMCO is a big fan of European positions.
“We have euribor positions on the front end and also out to five-year bund contracts, and we think those positions will significantly outperform the US over our 12-month horizon,” he says.
