By Sam Forgione
NEW YORK May 14 U.S. economic growth will not
be "much greater" than 2 percent over the next three to five
years, while global inflation will likely pick up, Pimco, the
giant bond firm, said on Tuesday in its investment outlook
Inflation may become "higher and less stable" globally over
the next three to five years, while China's growth will remain
in the range of 6 to 7.5 percent, Mohamed El-Erian, chief
executive and co-chief investment officer of Pimco, said in the
firm's Secular Outlook.
In light of its growth horizon and view that central banks
have "distorted" the pricing of assets, El-Erian said Pimco will
continue to reduce exposure to risky assets.
"Especially with ever-elevated prices, and absent a
favorable growth shift, we will continue to bring down risk
postures of portfolios," El-Erian said.
The firm's Pimco Total Return Fund, the world's largest
mutual fund, increased its allocation of U.S. Treasuries
holdings to the highest level in over a year in April, to 39
percent from 33 percent in March, data from Pimco's website
showed last week.
Pacific Investment Management Co., a unit of European
financial services company Allianz SE, had $2.04
trillion in assets as of March 31. El-Erian runs the Newport
Beach, California-based firm with Bill Gross, Pimco's founder
and co-chief investment officer.
El-Erian said a break-up of the euro currency is still
possible, though not very probable, and said Europe will face
additional debt restructurings. He said returns on financial
assets may fall over the next three to five years.
On the outlook for the global economy, El-Erian gave broadly
contrasting scenarios for either high or low growth, saying the
global economy is in a state of "stable disequilibrium."
The lower growth scenario, he said, would worsen financial
instability and political dysfunction in Western economies.
Central bank policies worldwide will likely change over the
next three to five years, something that "will not be a smooth
process," El-Erian said. He painted a mixed picture of the
benefits of monetary easing, saying it has helped the business
models and finances of U.S. banks, but has done little to spur
investment by larger companies, which instead have focused more
on cost control.
El-Erian said that peripheral European countries, given high
unemployment and "fragile debt dynamics," are on the brink of
either a "sunny" or "stormy" economic scenario.
"In the interim muddle through, the slowest economies and
vulnerable sectors elsewhere face a growing risk of
'zombification,'" El-Erian said. He defines zombification as the
notion that institutions' contribution to growth deteriorates
On Japan, El-Erian said the country's economy will undergo
an initial surge in growth, but will be "challenged" by
structural reforms and an "increasingly less accommodating
regional and global context."
The Bank of Japan last month said it would inject about $1.4
trillion into the country's economy in less than two years to
fight deflation, mainly through purchases of long-term Japanese
El-Erian also said Pimco sees social issues playing a more
critical role in the outlook for Western economies, but he does
not see a major improvement in Western politics.
"It is sad to admit but, absent much greater social
pressures (which no one wishes), we see little basis for
predicting a major political and institutional revival over the
next three-to-five years in the West," El-Erian said.
El-Erian said investors should focus on investing
opportunities that are not influenced by the "wave" of global
stimulus measures as a means of gaining returns while generally
seeking less risk.
He also warned against investing in currencies that are
influenced by central bank stimulus and that also do not
maintain a reserve currency status.
Ultimately, real economic growth will be crucial to gaining
returns on investments, El-Erian said.
"Long-term investors should realize that, in addition to
balance sheet strength, the resumption of acceptable and
sustainable levels of real economic growth is critical," he