Bill Gross, who oversees the world’s biggest bond fund at Pacific Investment Management Co (PIMCO), said that the pace of economic growth in China is among the biggest questions in developing nations and the largest risks for markets.
“I call China the mystery meat of emerging-market countries,” Gross said on Tuesday during an interview on Bloomberg Television’s Market Makers with Erik Schatzker and Stephanie Ruhle. “Nobody knows what’s there and there’s a little bit of bologna, so we’re just going to have to wonder going forward through this year as to the potential problems in China and other emerging markets.”
Uncertainty about China’s growth this year is adding to investors’ unease and demand for the safest of assets, Gross said.
“The last wild-card, Erik, in terms of emerging-market space, obviously is China,” Gross said. “Is it 6 percent? Is it 7 percent? Is it 5 percent?”
China’s economy grew 7.7 percent last year, the same rate as in 2012. Expansion is forecast to be 7.4 percent this year, the weakest pace since 1990, based on the median estimate in a Bloomberg News survey.
PIMCO has been buying US Treasuries maturing in four to five years this week, sticking to the strategy outlined last year amid expectations the US Federal Reserve will hold short-term rates through the year even as it reduces asset purchases, Gross said.
“Emerging markets are getting cheaper,” he added. “The problem is emerging markets have problems. Take examples such as Brazil and Turkey. These are countries with widening current-account deficits. These are countries which, by necessity, in order to stabilize their currency, have to raise interest rates and put their economies at risk in terms of slower growth.”
The performance of the US$237 billion Total Return Fund over the past three years puts it ahead of 67 percent of similarly managed funds, gaining 4.7 percent over the period, according to data compiled by Bloomberg. It has returned 1.64 percent this year, placing it in the 55th percentile.
The proportion of US Treasuries and government-related debt in the fund was 45 percent in December last year, compared with 37 percent in the previous month, based on the latest data from the company’s Web site.
Gross held emerging-market bonds at 6 percent in the fund in December last year and raised non-US developed debt to 6 percent from 4 percent in November, the data show.
Eaton Corp chief executive officer Sandy Cutler said China’s economy is accelerating, buoyed by increases in consumer spending, bringing growth in line with the country’s public pronouncements.
China may have inflated the extent of its expansion by a factor of two in recent years, masking weakness as government infrastructure spending fell and individuals had not yet picked up the slack, Cutler said on Tuesday in a telephone interview. The rebound means that China’s indicators are closer to giving an accurate reading, he added.
Eaton sells products across consumer and industrial markets, including hydraulics for construction equipment, auto parts, lighting for homes and buildings and electrical goods. The Dublin-based company does business in China across all those segments.
Gross sees a global economy marked by slow growth.
This will persist “for a long, long time. Certainly in the US we saw some bad numbers over the past few days and we wonder whether or not that 3 percent growth rate in 2014 is for real,” he said.
PIMCO popularized the term “new normal” in 2009, which describes an era of lower returns, heightened government regulation, diminishing US clout in the world economy and a bigger role for developing nations.
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