Mark R. Kiesel
The global economy continues to face numerous challenges in the near term, including the U.S. fiscal cliff, Europe’s sovereign debt crisis and the emerging markets’ transition to a slower rate of economic growth. Over the medium to longer term, the demographics of aging populations are likely to collide with rising and unsustainable public sector debt levels in many areas of the world. In fact, persistent and chronic fiscal deficits in several developed economies could reach the point where austerity, spending cuts and tax hikes may become inevitable. As a result of these significant, and increasingly structural, impediments to global growth, central banks around the world have implemented a comprehensive and aggressive program of unconventional monetary policy measures and stimulus, resulting in an unprecedented expansion of balance sheets. Despite these enormous efforts, monetary policy will likely not provide a long-term solution to what are ultimately fiscal, political and structural issues. While near-term cyclical challenges may justify increasing activism by global central banks, government debt levels for many developed markets need to be addressed to reduce growing structural barriers to longer-term economic growth.As the world’s central banks go “all in” to help offset fiscal tightening, increasingly dysfunctional political processes in the U.S. and elsewhere have resulted in politicians kicking the can down the road in order to avoid addressing longer-term structural barriers to growth. At the same time, many nations have become more divided and, as is increasingly the case in the U.S., politicians appear more inflexible and entrenched. The heightened polarization of the U.S. political system has now reached a tipping point where many would argue the American system of government has lost effectiveness and its ability to function productively for its constituents.Political leaders in America, as well as around the world, will need to work together more in order to effectively address the global economy’s lingering fiscal issues and structural barriers to growth. Simply put, political leadership is now a necessary condition for global policymakers to be effective in coordinating and implementing policies that can reduce public sector debt burdens, promote pro-growth tax reforms and stimulate near-term private sector growth. Around the world, we believe nations must put differences aside, work together and go for growth.Investors should go for growth as well. We still see many opportunities for investors despite numerous headwinds and a subpar economic growth outlook. In this environment, investors should focus on bottom-up research in specific sectors and companies that can grow significantly faster than their economies. In the U.S., the energy and housing-related industries offer investors these opportunities. In emerging markets, investors looking for growth should consider Asia gas distribution and gaming, as well as Latin America banks.U.S. energy industryIn our March 2012 Global Credit Perspectives, “Game Changer,” we described in detail the energy revolution taking place across America. PIMCO has focused on bottom-up analysis of the U.S. energy industry for years, and we continue to see numerous opportunities across the exploration and production (E&P), gathering and processing, oil field services and pipeline sectors. Why? Growth!U.S. production of crude oil across America is at a 15-year high and is now growing at 15% or more annually, the fastest growth rate in over 40 years (Figure 1). Several unique characteristics have given America’s energy industry numerous advantages relative to the rest of the world, including technological progress, a breakthrough in horizontal drilling, the industry’s strong access to capital markets and well-established and sophisticated gathering and processing, pipeline and rail networks across the country. In addition, the U.S. energy sector’s relatively strong infrastructure and oil field services, “take away” capacity, refining base and technological and operating expertise provide logistical strengths.
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