The U.S. economy will disappoint investors by expanding at a rate of 1.75 percent over the next year, said Ramin Toloui at Pacific Investment Management Co., which runs the world’s biggest bond fund.
The risks are skewed toward even slower growth, Toloui, an emerging markets portfolio manager, said on a conference call. Growth will fall short of the consensus forecast, which is 2.6 percent for the year ahead, according to Pimco. Investors should add to their emerging-market holdings, Toloui said.
“We’re still seeing a tentativeness in the financial sector to take risk” in the U.S., said Toloui, speaking from Pimco’s head office in Newport Beach, California. “The overall alignment of facts point toward a much more cautious conclusion about the trajectory of the U.S. economy.”
Toloui spoke as Federal Reserve officials debate whether to increase the central bank’s Treasury purchases to stimulate the economy. China raised borrowing costs yesterday for the first time since 2007, sparking speculation the decision will slow one of the engines of the global economic expansion.
Japan will continue to have the lowest growth in the world, Toloui said.
Emerging markets will outperform developed ones because they have lower levels of debt, greater capacity to expand private demand and bigger infrastructure needs that will require government investment, according to Pimco.
“This doesn’t suggest a golden age for emerging markets,” Toloui said. “Emerging-market growth will be impaired by difficulties in the industrial world.”
China’s central bank lifted its benchmark one-year lending rate to 5.56 percent from 5.31 percent. The deposit rate was increased to 2.5 percent from 2.25 percent.
“Stimulus and credit growth is now being reduced as China tries to take the edge off of exuberance in real estate and other asset markets,” Toloui said. “That’s being done in a measured way that we think will transition to more stable rates of growth in China.”
China contributed about 1.75 percentage points to global gross domestic product growth during the deepest part of the financial crisis and the recovery in the first half of 2009, Pimco estimates. The crisis, which threw the U.S. into an 18- month recession starting in December 2007, resulted in $1.82 trillion of losses and writedowns at banks and financial companies worldwide.
U.S. Debt Holdings
Chicago Fed President Charles Evans said the U.S. central bank would need to buy securities on a large scale several times to carry out his preferred strategy of raising inflation temporarily. Fed Chairman Ben S. Bernanke said Oct. 15 that that there appears to be a “case for further action.”
Bill Gross, who runs the world’s biggest bond fund at Pimco, cut holdings of government-related debt in September, according to the company’s website. The $252 billion Total Return Fund’s investment in government debt fell to 33 percent of assets from 36 percent the previous month.
Pimco’s emerging-market holdings climbed one percentage point to 12 percent, the highest in data going back to 2000 on the company’s website. Pimco is increasing its focus in emerging markets such as India, China and Brazil, Douglas Hodge, the chief operating officer, said on Oct. 14.
The Total Return Fund handed investors a gain of almost 12 percent in the past year, beating three-quarters of its peers, according to data compiled by Bloomberg.
Pimco, a unit of Munich-based insurer Allianz SE, managed $1.1 trillion of assets as of June 30.
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