LONDON (Reuters) - The recovery in the U.S. housing market and Ireland's return to capital markets suggest the global economy might be emerging from the financial crisis, but a massive bubble is building in core sovereign debt, says Allianz Global Investors.
"It is the first time since this crisis started that we can say there are things falling into place that give us some hope that we might see some light at the end of the tunnel," Andreas Utermann, chief investment officer at Allianz Global Investors told the Reuters Global Investment summit on Wednesday.
"The first area that looks much better is the piece that got us into trouble in the first place: the U.S. housing market."
He said that financial markets, distracted by fiscal cliff worries, had not yet fully factored in the housing rebound.
U.S. single-family home prices rose in September for an eighth straight month, a survey showed on Tuesday, the latest indication that the housing market recovery is now entrenched, turning around after a collapse that helped trigger the global financial crisis.
In the euro zone, Ireland's progress and its success in attracting foreign investors such as U.S. asset manager Franklin Templeton was another reason to consider that "on the margins" things are better than 12 months ago.
"Ireland is very impressive. The Irish have partied for 10 years and they know that and they've paid the price ... They got their act together," said Utermann, whose firm manages more than 300 billion euros in assets.
"Maybe in 2013 they're coming out and that would be a sign to the market to say yes, the euro zone crisis can be resolved. There is a way."
The yield on Ireland's benchmark 2020 bond has fallen to 4.5 percent from 8.5 percent at the end of last year, helping Franklin Templeton's $64-billion Global Bond Fund to earn a return - on paper - of nearly 13 percent over a 12-month period to the end of September.
Other overseas investors have bought into the Irish story, particularly since the summer when Dublin successfully sold five- and eight-year paper, its biggest test of market sentiment since a crippling banking crisis forced it out of bond markets in the autumn of 2010 and into an EU/IMF bailout.
Utermann said the biggest risks for next year were the euro zone taking a turn for the worse - markets calling Spain's bluff if it does not ask for a bailout, the U.S. fiscal cliff and tensions in the Middle East.
He warned of a "massive bubble" of negative real interest rates on core sovereign bonds including U.S. treasuries and German bunds.
"It's got to be the biggest bubble out there. The question is not only can it burst - it must burst ... Yields will need to normalize, that will happen when central banks stop QE (quantitative easing)," he said.
"You can own them in maturities up to three to four years and, for the last two years, you got to know you might need to buy and hold them."
Utermann said he did not expect a significant move away from risk-on/risk-off trading in global markets next year. Equities would fare better than bonds overall, he said, forecasting equity returns in the mid- to high single digits in 2013. He said he would favor big dividend stocks, including pharmaceuticals.
Other assets that looked interesting included some local currency-denominated emerging market debt, such as offshore yuan and Polish government bonds, as well as infrastructure debt. He said he was "moderately constructive" on commodities.
Uternmann disagreed with a number of summit participants who have cited China as one of the top three possible risks for next year. All the evidence from Allianz's operations in China suggested the slowdown would be temporary, and the economy would turn more to consumption, in a stable political environment.
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Additional reporting by Shadia Nasralla and Sinead Cruise; Editing by Susan Fenton