Gross Says China Uncertainty Among Greatest Risks to Markets

Feb 05, 2014 5:56 am ET

(Updates with comments from Jim O’Neill in 15th paragraph.)

Feb. 5 (Bloomberg) -- Bill Gross, who oversees the world’s biggest bond fund at Pacific Investment Management Co., said the pace of economic growth in China is among the biggest questions in developing nations and the largest risks for markets.

“I call China the mystery meat of emerging-market countries,” Gross said yesterday during an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “Nobody knows what’s there and there’s a little bit of bologna, so we’re just going to have to wonder going forward through this year as to the potential problems in China and other emerging markets.”

Bologna sausage is a type of cold meat, also known as Baloney.

Global shares have been falling this year as signs of slowing recoveries in the U.S. and China come at the same time the Federal Reserve is reducing bond purchases and emerging- market currencies slump. Bonds beat stocks last month for the first time since August as fixed-income securities worldwide enjoyed their best start to a year since 2008.

Uncertainty about China’s growth this year is adding to investors’ unease and demand for the safest of assets, Gross said.

“The last wild card, Erik, in terms of emerging-market space, obviously is China,” Gross said. “Is it 6 percent? Is it 7 percent? Is it 5 percent?”

Buying Treasuries

China’s economy grew 7.7 percent in 2013, the same rate as in 2012. Expansion is forecast to be 7.4 percent this year, the weakest pace since 1990, based on the median estimate in a Bloomberg News survey.

Pimco has been buying U.S. Treasuries maturing in four- to five-years this week, sticking to the strategy outlined last year amid expectations the Fed will hold short-term rates through the year even as it reduces asset purchases, Gross said.

“Emerging markets are getting cheaper,” Gross said. “The problem is emerging markets have problems. Take examples such as Brazil and Turkey. These are countries with widening current- account deficits. These are countries which, by necessity in order to stabilize their currency, have to raise interest rates and put their economies at risk in terms of slower growth.”

The performance of the $237 billion Total Return Fund over the past three years puts it ahead of 67 percent of similarly managed funds, gaining 4.7 percent over the period, according to data compiled by Bloomberg. It has returned 1.64 percent this year, placing it in the 55 percentile.

Fund Holdings

The proportion of Treasuries and government-related debt in the fund was 45 percent in December, compared with 37 percent in the previous month, based on the latest data from the company’s website. Gross held emerging-market bonds at 6 percent in the fund in December and raised non-U.S. developed debt to 6 percent, from 4 percent in November, the data show.

Eaton Corp. Chief Executive Officer Sandy Cutler said China’s economy is accelerating, buoyed by increases in consumer spending, bringing growth in line with the country’s public pronouncements.

China may have inflated the extent of its expansion by a factor of two in recent years, masking weakness as government infrastructure spending fell and individuals hadn’t yet picked up the slack, Cutler said yesterday in a telephone interview. The rebound means China’s indicators are closer to giving an accurate reading, he said.

Slow Growth

Eaton sells products across consumer and industrial markets, including hydraulics for construction equipment, auto parts, lighting for homes and buildings and electrical goods. The Dublin-based company does business in China across all those segments.

The worst start for emerging-market stocks in four years is creating a buying opportunity, according to Jim O’Neill, the former Goldman Sachs Asset Management chairman who coined the term BRIC countries in 2001.

“Some places in the emerging world have got some real problems, but that to be described as some kind of emerging- market crisis is frankly kind of ridiculous,” O’Neill said yesterday in an interview on Bloomberg Radio. “We probably are closer to a good opportunity to buy some of these things rather to join in the panic.”

‘New Normal’

Gross sees a global marketplace and economy marked by slow growth. This will persist “for a long, long time. Certainly in the U.S. we saw some bad numbers over the past few days and we wonder whether or not that 3 percent growth rate in 2014 is for real,” he said.

Pimco popularized the term “new normal” in 2009, which describes an era of lower returns, heightened government regulation, diminishing U.S. clout in the world economy and a bigger role for developing nations.

American factory output expanded in January at the weakest pace in eight months and China’s official Purchasing Managers’ Index decreased to a six-month low as production and orders slowed. The U.S. Institute for Supply Management’s factory index decreased to 51.3 from 56.5 in the prior month, the Tempe, Arizona-based group’s report showed. Readings above 50 indicate expansion.

The MSCI Emerging Markets Index fell yesterday to a five- month low. Central-bank rate increases in Turkey, India and South Africa last week failed to contain January’s 3 percent selloff in emerging-market currencies.

“We have highly levered global financial positions with hedged positions that are moving back and forth based on emerging market countries -- based on their growth rates or their expected growth rates,” Gross said in the interview. “To the extent that that growth rate comes down, then risk assets become more at risk and more volatile.”

Pimco, a unit of the Munich-based insurer Allianz SE, manages over $1.9 trillion in assets.

--With assistance from Wes Goodman in Singapore.

--Editors: Dave Liedtka, Paul Cox