PIMCO predicts decline in equity returns

Bloomberg

Saumil Parikh

Returns from U.S. equities will decline from their historic averages over the next decade as the U.S. economy grows at a slower pace, a new report from Pacific Investment Management Co. predicts.

Equities will return an annualized 4% to 5.1% in the coming five to 10 years, down from the historical rate of almost 10%, Saumil Parikh, a managing director and portfolio manager who leads PIMCO's cyclical forum, said in a November asset allocation report posted on the firm's website Tuesday.

“If investment in the U.S. economy does not pick up substantially over the next five to 10 years, the unsustainability of large public sector deficits will put tremendous pressure on corporate profits and their ability to keep up with nominal GDP growth,” Mr. Parikh said.

William H. Gross, PIMCO's founder and co-chief investment officer, said in his August investment outlook that the cult of equity was dying and returns of 6.6% above inflation, known as the Siegel Constant, wouldn't be seen again. In his September outlook, Mr. Gross said stocks would still outperform bonds, even as returns for both would be stunted.

The U.S. will have slower economic growth because there will be more retirees than workers and productivity will decline because of less investment, Mr. Parikh said. Growth in nominal GDP will slow to 4% to 5% from an average of 6.4% over the past 110 years, he said.

“These forecasts reflect the environment of financial repression the U.S. economy finds itself in today due to deleveraging, and one that we see persisting to some degree over the next five to 10 years,” he wrote.