Gross favors investments outside U.S., Europe

The global economic crisis is leading to a possible “developed economy” recession in Europe and the United States that may be hard to alleviate, according to Pacific Investment Management Co. LLC's Bill Gross
SEP 21, 2011
The global economic crisis is leading to a possible “developed economy” recession in Europe and the United States that may be hard to alleviate, according to Pacific Investment Management Co. LLC's Bill Gross. In this environment, the world's biggest manager of bond funds, the co-chief investment officer and founder of Pimco, favors investing in Australia, Brazil, Canada and Mexico, and in non-dollar currencies that have strong ties to the Asian continent. Although global equities are attractive because dividend yields in many cases are higher than bonds, they are vulnerable to faltering growth, he wrote in a monthly investment commentary published on Pimco's website last week. Strife between rich and poor people in the United States is sending Treasury yields lower, Mr. Gross wrote. The 10-year yield at 2.25% is “discounting a heap of trouble, and neither investor nor borrower may emerge from this brouhaha unscathed,” wrote Mr. Gross, who along with co-chief investment officer Mohamed El- Erian coined the term “new normal” more than two years ago to describe a possible long period of below-average growth and high unemployment for the U.S. economy. “We prefer the "cleaner' dirty-shirt countries of Canada, Australia, Mexico and Brazil, where higher yields and more pristine balance sheets prevail,” he wrote.

EUROPEAN CRISIS

Mr. Gross boosted the $245 billion Total Return Fund's investment in Treasuries to 10% of assets in July, from 8% in June, Pimco said on its website last month. He cut cash equivalents and money market securities to 15%, from 29%, the lowest level in the fund's cash holdings since January. The crisis in Europe has the most “immediacy” because one or more members such as Greece, Ireland or Portugal may be forced to leave the euro, causing liquidity concerns that would destabilize other regional bond markets unless the European Central Bank stepped in to buy more securities, Mr. Gross wrote. European confidence in the economic outlook in August plunged the most since December 2008 as a persistent debt crisis roiled markets and clouded growth prospects across the 17-nation euro region. An index of executive and consumer sentiment in the single- currency region fell to 98.3, from a revised 103 in July, the European Commission said last week. That is the lowest since May 2010.

SLOWER GROWTH

The European Central Bank began buying Spanish and Italian government bonds Aug. 8 to stop the debt crisis from spreading to the euro region's third- and fourth-biggest economies. European Central Bank President Jean-Claude Trichet said last week that it is reviewing its assessment of inflation risks on slower growth in the euro area. The region's growth slowed to 0.2% in the second quarter, its worst showing since it emerged from the recession in 2009. The U.S. economy expanded less than previously estimated in the second quarter, underscoring the weakness that has prompted the Federal Reserve to mark down its growth forecasts. Gross domestic product climbed at a 1% annual rate from April through June, down from a 1.3% prior estimate, revised Commerce Department figures showed Aug. 26.

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