Ahead of his presentation at the 2011 Morningstar Investment Conference in Chicago, PIMCO’s Total Return manager Bill Gross points investors to debt market opportunities outside the US. This is Part II of Gross’ interview, see Part I and Part II.
Eric Jacobson: Can you just give us a thumbnail thought about what some of the other sectors are that you've been more bullish on in the last several months that maybe were not as heavily weighted in the fund before, of course I'm talking about the EM and sovereign. Maybe you could just walk us through that?
Bill Gross: We're looking for countries with "cleaner dirty shirts" and with better balance sheets, and with basically higher real interest rates.
In United States, after inflation, interest rates are in a negative category, by the way. You receive less after inflation is taken into consideration than what you started with. So, we want a country with a decently clean balance sheet and growth prospects which offers something higher in terms of real interest rates, inflation-adjusted.
That occurs in countries like Germany or Canada or even Mexico, by the way. Mexico offers at least a positive real rate of interest with a decent balance sheet, despite problems that they've got with drugs and gangs and so on. But there are countries around the world which have relatively liquid bond markets that offer a more attractive real rate of interest compared to the United States.
In addition, it's important to think about how these bonds are denominated from the standpoint of currency. The dollar has not done well, and if the Fed continues to do what it's done in terms of keeping the policy rate at 25 basis points, which I think they will, then it's certainly much more attractive to get 1.25% in Euroland with a German bund or to get a higher yield in Canada or strikingly in Brazil to get 6% or 7% real interest rates compared to dollar alternatives.
So, investors simply have to look for other choices, if in fact the yield and the potential return from US Treasuries is typified by that average yield at close to 1.5% continues to exist.
Jacobson: One last issue there to ask about is, I think for a lot of folks, this is, as you've described, of course, something of a paradigm shift in the sense of, you've got countries today, you mentioned Brazil, Mexico, that are taking places in a very good core portfolio, that maybe five or 10 years ago would not have because of the risk factors.
Can you just give a little bit more of a thumbnail about--obviously you've mentioned debt to GDP as an example--but a thumbnail about what makes you more comfortable allocating assets to countries and so forth in markets that people maybe have to get a little more used to in seeing in a core fund.
Gross: That comes from our secular forums which we have every year and really projects for the next three to five years in terms of timeframe. But we are bullish from the standpoint of equities and bonds on countries which have relatively underdeveloped consumer sectors, and it's easy to envision in China. China investment as a percentage of GDP is close to 55%-60% whereas consumption is at 30%-35%. It's just flipped here in the United States, and so these countries--Brazil is a little more advanced in numbers towards the United States--but these countries have basically underdeveloped consumer sectors which haven't been subject to leveraging of credit and finance realisation of their economies, and therefore whereas in the United States and developed countries, this de-levering because of too much debt is taking place.
In these countries, they stand a good chance of levering, and levering safely, because they started with such a low level of debt to begin with. So, it's really a growth prospect, and it's a debt to GDP prospect in combination, which says, Eric, that yes, you know we're quite aware of the history of Brazil, and we're quite aware of when you take money out of the United States that it's not the old safe haven that we're simply used to by putting our money in the bank at the corner.
But on the other hand, you know, the world is changing. It's globalising and other countries are advancing more rapidly than the United States, and it's real a theme and an assumption that this time to a certain extent, it will be different.
Jacobson: Well, great. I think I need to let you go for the rest of the conference, but thank you so much.
Gross: Thank you.
Jacobson: We really appreciate you joining us.
Gross: It's nice to be here. Thank you, Eric.
Jacobson: For Morningstar, I am Eric Jacobson. Thank you.
