July 30 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund atPacific Investment Management Co., said investors should favor debt and stocks of “strong” companies, and assets in emerging markets with improving economic growth.
Investors in riskier assets will get “haircuts” because U.S. economic growth will be closer to 3 percent than the range of 5 percent to 7 percent for the past 15 years, Gross said. The U.S. economy will begin to recover in the second half of 2009, he wrote in his August investment outlook on Pimco’s Web site.
U.S. corporate bonds are outperforming Treasuries in 2009, the first time in three years, as signs of improvement in the economy led investors to seek higher-yielding assets. Franklin Templeton Investments, a mutual fund company that oversees $450 billion, and JPMorgan Chase & Co., the second-largest U.S. bank, are also recommending company bonds.
“There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields,” Gross wrote. “A journey to 3 percent nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low yielding returns for government and government-guaranteed assets at the bottom end.”
Gross also favors emerging markets where growth prospects are “tilted upward,” according to the report.
‘Tangible Earnings’
“Stock prices will ultimately depend on tangible earnings growth in the form of increased dividends, not green shoots hope,” Gross wrote. High-risk bonds, commercial real estate and lower-quality municipal bonds “may suffer,” the report said.
Federal Reserve Chairman Ben S. Bernanke used the term “green shoots” in an interview aired March 15 on CBS Corp.’s “60 Minutes” to describe signs of improvement in the economy.
U.S. corporate bonds rated A to AAA by Standard & Poor’s returned 7.3 percent this year, according to indexes compiled by Merrill Lynch & Co. The U.S. Treasury Master Index handed investors a 4.9 percent loss, according to Merrill. MSCI’s World Index of stocks has returned 13 percent so far in 2009.
The Templeton Global Bond Fund is avoiding debt issued by the U.S., the U.K., and Germany and has sold Japanese yen it purchased last year, said John Beck, the company’s co-director of international bonds.
‘Bullish View’
Templeton is favoring U.S. bank debt and municipal bonds, Beck, who is based in London, told reporters on July 27 during a trip to Singapore. The company, which is in San Mateo, California, is also investing in a mix of local-currency and dollar-denominated securities in emerging markets, he said.
JPMorgan has a “bullish view” on high-grade corporate bonds, it said in a report July 24.
“Money continues to be allocated to the high-grade bond asset class,” said the report by JPMorgan analysts including Eric Beinstein, co-head of U.S. credit strategy, in New York.
For the week ended July 22, high-grade bond funds drew $1.4 billion, above the 13-week average of $1 billion, the report said.
The Federal Reserve said yesterday that most of its 12 regional banks detected a slower pace of economic decline in June and July, further signs the worst U.S. downturn in at least five decades is closer to an end.
U.S. Contraction
The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.52 trillion of writedowns and credit losses at banks and other institutions and sent the global economy into its first recession since World War II.
The U.S. economy shrank 1.5 percent in the second quarter according to the median forecast in a Bloomberg News survey of economists before the Commerce Department reports the figure tomorrow. The first-quarter contraction was 5.5 percent.
Gross’ $161 billion Total Return Fund returned 10.9 percent in the past year, beating 96 percent of its peers, according to data compiled by Bloomberg. Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.
To contact the reporter on this story: Wes Goodman in Singapore atwgoodman@bloomberg.net.
