Former Janus Henderson fund manager Bill Gross has told investors to ditch the US and look to Europe and other “shunned” parts of the stock market following financial markets’ race to pick the winners and losers of the Covid-19 crisis.
The Pimco co-founder (pictured), who retired from Janus Henderson last year to manage his own personal fortune, compared real interest rates between the US and Europe to make his point, highlighting their role in “archaic but commonsensical” earnings or dividend discount models.
Gross, who is known as the “bond king”, pointed to the inverse relationship between Treasury inflation-protected securities (Tips) yields and growth stock performance, whereby growth stocks rally as Tips yields decline.
He said: “Investors comparing returns on European stocks might be shocked to learn that 5-year, government-linked yields in Germany are a mere minus 115 basis points while in the US they are even more negative at a minus 130.
“Since crisis levels in March of this year, US 5-year real yields have declined by an astounding 180 basis points or 1.8%, while in Germany, to use an example, they are down a mere 60 basis points. All else equal, that differential explains a lot about the performance of individual global indices including the weakness in the dollar over the same time period.”
That could help explain the disparity in returns between European and US stocks, he said. In the year to date, the S&P 500 has returned 8.7% and the Nasdaq 33.7%, while the FTSE 100 has fallen 18.1%, according to FE Fundinfo. The CAC 40 has fallen 6.2% while the Dax is up 7.4%.
Gross said fiscal stimulus also has a role to play in the geographic disparities in stock market returns. “Germany and other European economies decided to inject lighter stimulus straight to corporations while the Treasury and Fed gave ‘helicopter’ handouts straight to individuals via unemployment benefits and other guarantees to put money right into workers’ pocketbooks.”
But he believed most, if not all the US fiscal stimulus is over.
“To continue to pump the economy in future years would require not just a $4trn deficit but a five or $6trn one. And to reduce the deficit to three or $2trn would actually be known in economist speak as ‘fiscal drag’ and would have to be made up by at least 6% to 7% real annual growth for years and years in the private sector – a Trumpian or a Bidenian dream I suppose but not realistic.”
He added that real interest rates would have to move lower as a result “which would require quantitative easing of unacceptable proportions”.
“An investor, not day trading on Robinhood, therefore, should begin to play defense via heretofore shunned sectors such as tobacco, banks and even – yes, foreign companies listed on European bourses that have not skyrocketed on dreams of back-to-normal economic prosperity followed by even lower artificial real interest rates.
“There is little money to be made almost anywhere in the world – Covid 19 vaccine or no.”
See also: Janus Henderson shakes up bond fund as Bill Gross retires
