Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said structural headwinds may reduce real economic growth below 2 percent in the U.S. and other developed nations.
“The biblical metaphor of seven years of fat leading to seven years of lean may be quite apropos in the current case with the observation that the developed world’s growth binge has been decades in the making,” Gross wrote in his monthly investment outlook posted on the Newport Beach, California-based company’s website today. “We may need at least a decade for the healing.”
With globalization, technological and demographic changes restricting growth, investors should seek returns from commodities such as oil and gas, U.S. inflation-protected bonds, high-quality municipal debt and non-dollar emerging market stocks, Gross said, reiterating earlier recommendations.
Long maturity developed country bonds in the U.S., U.K. and Germany should be avoided, as well as high-yield debt and financial stocks of banks and insurance companies, Gross wrote.
Investors should anticipate annual returns of 3 percent to 4 percent from bonds at best and equity returns only a few percentage points higher, Gross wrote.
Federal Reserve Chairman Ben S. Bernanke recently confirmed “Pimco’s new normal, which has been in place for three years now, laying the blame in part on the financial crisis, diminished productivity gains, and investment uncertainty due to the near-term fiscal cliff,” Gross wrote. “We do not disagree. However, there are numerous structural headwinds that may reduce real growth even below the new normal 2 percent rate that Bernanke has just confirmed, not only in the U.S. but in developed economies everywhere.”
Pimco Chief Executive Officer Mohamed El-Erian, who shares the title of chief investment officer with Gross, popularized the term new normal as a way of describing a period of muted growth in developed nations, high unemployment and deleveraging in the aftermath of the 2008 financial crisis.
Gross domestic product grew at a 2.7 percent annual rate in the third quarter, up from a 2 percent prior estimate, revised figures from the Commerce Department showed on Nov. 29.
Gross, the founder of Pimco, raised the proportion of U.S. government and Treasury debt in his flagship $285 billion Total Return Fund (PTTRX) to 24 percent of assets in October, the first increase since April, as investors speculated the Fed would add to stimulus measures through more asset purchases, according to the latest available company data. Mortgages remained the fund’s largest holding at 47 percent.
Treasuries have returned 2.6 percent in 2012, while mortgages gained 2.5 percent, according to Bank of America Merrill Lynch indexes.
The Total Return Fund gained 11.7 percent over the past year, beating 96 percent of its peers, according to data compiled by Bloomberg. The fund has returned 8.34 percent over five years, outperforming 97 percent of competitors.
“Developed economies have too much debt -- pure and simple -- and as we attempt to resolve the dilemma, the resultant austerity should lower real growth for years to come,” Gross wrote.
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