Europe finds itself in a similar position to Japan as the continent faces a “lost decade,” said Pacific Investment Management Co., which manages the world’s biggest fixed-income fund.
The muddling through by European policy makers will have to end as low economic growth and weak demand are jeopardizing stability, Andrew Bosomworth, managing director at Pimco, told reporters in Germany’s financial capital of Frankfurt today.
“Zombification” can’t continue in Europe, Bosomworth said. “Europe risks losing competitiveness, while further debt restructuring is highly likely. Downside risks dominate.”
The European Central Bank cut its key interest rate to a record low of 0.5 percent this month as the 17-nation euro region struggled to emerge from recession. Economic confidence dropped more than economists forecast in April and inflation of 1.2 percent is the slowest in more than three years.
Pimco, a unit of Europe’s biggest insurer Allianz SE (ALV), managed $2.04 trillion of assets as of March 31. Pimco is run by Mohammed El-Erian and Bill Gross, who earned the nickname the “Bond King” in media outlets and was named fixed-income manager of the decade by Morningstar Inc. (MORN) in January 2010.
Aggressive monetary policy has inflated asset prices to the degree that some sectors are increasingly looking like bubbles, Bosomworth said. That situation makes it harder to find assets still tied to fundamentals, he said.
“Hyperactive monetary policy has caused prices of stock and bonds to rise about 8 percent per year since 2008, twice the rate of the global gross domestic product,” Bosomworth said. “That can’t continue.”
Europe’s growth outlook means Pimco is shunning long-dated government securities and prefers to invest outside the euro area, Andrew Balls, head of European portfolio management at the firm, said on May 15.
Pimco increasingly sees indications of speculation in Europe in collateralized loan obligations and continuing dilution of clauses to protect investor rights, Bosomworth said.
The continent faces economic contraction of as much as 1 percent a year for the next three to five years, while the U.S. will grow at about 2 percent annually in the medium term, Bosomworth said. Individual areas like the housing market will be of considerable importance for growth, he said.
While China will grow as much as 7.5 percent per year and turn into a consumer economy, Brazil, India and Russia face serious headwinds in the long run, Bosomworth said. Industrial nations devaluing their currencies for competitive reasons may further curb the potential of these countries, he said.