Pimco’s Gross: Invest in Overseas Stocks, Closed-End Bond Funds

Wednesday, 21 Nov 2012 08:07 AM

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Investors should put their money into overseas stocks and closed end bond funds, said Bill Gross, founder of fund giant Pimco.

Slow growth and low yields in the United States make such venues attractive options.

“Both from the standpoint of stocks and bonds, an investor wants to go where the growth is. There are countries that should grow faster than Euroland countries, and countries that should grow faster than the United States. They would be the big obvious ones: China and Brazil, and even Mexico,” Gross told U.S News & World Report.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

Investors in fixed income should consider closed-end funds, which issue a fixed number of shares and trade like stocks.

“The magic to them is that many of them are slightly levered: They borrow basically at zero percent or close, and then reinvest back into their asset class,” Gross said.

Such use of leverage makes yields more attractive.

“Municipal closed-end funds with bonds that yield typically 4 to 4.5 percent can be turned into a 6 to 7 percent tax-free investment on the basis of this borrowing and the mild leverage.”

Looking at the broader economy, investors can get used to what Pimco describes as a “new normal,” a global economy focusing on paying down debts, which will slow growth for some time to come.

“[I]n 2008, the world was too highly levered and ever since it’s been in the process of de-levering, which means that consumers and businesses cannot take on the same amount of debt that they did in the past. Don’t think that anytime soon we’re going back to the ‘old normal’ because these cycles of de-levering are biblical in nature,” Gross said.

Inflation rates are due to creep higher as well, thanks to loose monetary policies carried out by central banks around the world, namely cuts to benchmark interest rates and liquidity injections into their respective economies.

“Slower growth and higher inflation — that’s not a positive, by any means. Individuals would want it to be just the reverse,” Gross said.

“The de-levering and the check-writing on the part of central banks, that’s really what produces the situation.”

Big banks are looking to emerging markets for growth these days, including Deutsche Bank, which wants to see pretax profits from foreign retail branches to approach 1 billion euros by 2015 to offset sluggish activity in more mature markets.

“A stagnating (European) population threatens growth opportunities in the long run. That is why retail business in emerging markets is of great significance,” Rainer Neske, head of private and business clients, told Reuters.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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