Gross, the manager of the $281bn Pimco Total Return Fund, the world’s largest mutual fund, said: “The ‘cult’ of equity or better yet the cult of ‘total return’ for both bonds and stocks is over, if that definition presumes a resumption of historical patterns anywhere close to double digits.”
The manager pointed out that asset prices ultimately depend on the ability of the real economy to grow – but highlighted the persistent problems holding this back.
Last month, the International Monetary Fund revised down its global growth forecast to 3.3% in 2012 and 3.6% in 2013. The US economy is expected to expand by 2.2% this year, while the UK and the eurozone are predicted to contract.
Gross argued that the Federal Reserve’s quantitative easing programme has failed to achieve its intended aim and has shored up the US economy by encouraging consumption rather than investment. This effect will only be temporary, the manager warned, and the US economy’s growth will soon fall again.
Weak policy responses by monetary and fiscal authorities are failing to offset the negative effects of private sector deleveraging, he continued, meaning global growth will remain depressed and the yields on US Treasuries and other assets will stay low for the foreseeable future.
“Portfolio strategies should acknowledge bite-sized future returns and the growing risk that the negative consequences of misguided monetary and fiscal policy might lead to disruptive financial markets at some future point,” Gross said.
