The European debt crisis will be one of the most crucial factors affecting assets over the next three to five years, according to Pacific Investment Management Co.
“Investors need to monitor the situation in Europe, whether they are directly invested there or not, because of the systemic implications of a potential shock to Europe’s banking system or sovereign debt,” Curtis Mewbourne, head of portfolio management for Newport Beach, California-based Pimco’s New York office, said in a report obtained by Bloomberg News.
Assets may become more correlated as the sovereign crisis in Europe, high debt levels in developed countries such as the U.S. and debates about austerity versus growth affect markets, Mewbourne said. Investors should consider emerging-market government bonds as a replacement for some more traditional developed-market debt, he wrote. U.S. non-agency mortgages and municipal bonds, which require careful analysis because of credit sensitivity, also may represent buying opportunities, according to Pimco.
As bond payments come due next month, European governments are determined to avoid a reckoning with Greece, which triggered the debt crisis almost three years ago, while separate negotiations take place over aid for Spain’s banks. A downgrade last week by Moody’s Investors Service of Italy’s credit rating added to the fiscal concerns plaguing the 17-nation euro currency area.
Weaker demand for goods and services from Europe has contributed to the slowdown in emerging-market growth, Mewbourne wrote. Pimco, which oversees the world’s largest mutual fund, had $1.77 trillion in assets under management as of March 31.
Correlation among asset classes “is not set in stone,” Mewbourne said. “In some cases capital will move from one area to another, or fundamental economic differences will lead to divergence of asset classes.”