NEW YORK U.S. bond giant Pimco expects global economic growth to accelerate over the next year while being vulnerable to negative economic surprises from Japan, a note published on the firm's website said on Thursday.
The firm, whose Pimco Total Return Fund is the world's largest bond fund, is cautiously optimistic on world economic growth and expects it to be between 2.25 percent and 2.75 percent within the next 12 months, up from 2.2 percent in the past year ended June 30.
The firm expects U.S. and European fiscal policy to have less of a negative impact on global growth going forward and sees private sector confidence strengthening, Pimco Managing Director Saumil Parikh wrote in the firm's "cyclical outlook."
"First, fiscal policy (in the U.S. and Europe) is likely to be less of a drag on global growth in the year ahead than the year just passed, although we expect U.S. sequestration to affect growth over the next few months," Parikh wrote.
The note showed Pimco expects U.S. gross domestic product growth to range between 2 percent and 2.5 percent within the next year, up from 1.7 percent as of June 30.
The Newport Beach, California-based Pimco said in its Secular Outlook in May that U.S. economic growth would likely not be "much greater" than 2 percent over the next three-to-five years.
Pimco, which stands for Pacific Investment Management Co., had $1.97 trillion in assets as of June 30, according to the firm's website. The firm is a unit of European financial services company Allianz SE (ALVG.DE).
Parikh said Japan's economy is dependent upon the continuation of aggressive monetary stimulus policies.
"Any volatility or deviation in policy that induces a growth drag will likely result in large downside surprises in the Japanese cyclical outlook, which remains the biggest known unknown for global growth in the year ahead," Parikh said.
In an unprecedented move, the Bank of Japan announced on April 4 that it would inject $1.4 trillion into the nation's economy in less than two years to fight deflation, mainly through purchases of long-term Japanese government bonds.
With regard to emerging markets, Parikh said that China, Russia, Mexico, and Brazil will see the fastest economic growth while India, Turkey, and Indonesia may need "assistance from international balance sheets during the cyclical period ahead."
China will be the main emerging market economy to watch in 2013 in light of upcoming policy decisions, Parikh added. The firm said in May that it planned to add more global emerging market assets to its European portfolios.
Pimco also forecast that global headline inflation will pick up to between 2 percent and 2.5 percent within the next year, up from 2 percent as of June 30.
In his September letter to investors, Pimco founder and co-Chief Investment Officer Bill Gross recommended long-duration Treasury Inflation-Protected Securities (TIPS) to protect against future inflation.
Gross's flagship Pimco Total Return Fund, the world's largest mutual fund with $251 billion in assets, is down 2.5 percent this year, ahead of 40 percent of peers, according to investment research firm Morningstar.
The fund has been hit by the bond market selloff that began in late May on signals that the Federal Reserve was considering winding down its $85 billion in monthly bond-buying this year.
(Reporting by Sam Forgione; Editing by L Gevirtz)