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Bill Gross, founder of the world's biggest bond fund, says emerging market stocks, oil, gold and inflation protected US bonds are his favoured long-term picks in a financial market he thinks will be dominated by slowing economic growth and faster inflation.
In this monthly Investment Outlook column, published on the PIMCO website, Gross says government-led austerity, in both developed and developing economies, will be a measurable drag to global GDP measurably over the next decade as our focus shifts from consumption to debt reduction amid aging demographics and slowing technological boosts to productivity.
"The real cause of slower economic growth lies hidden in a number of structural as opposed to cyclical headwinds that may be hard to reverse," Gross wrote. "While there are growth potions that undoubtedly can reduce the fever, there may be no miracle policy drugs this time around to provide the inevitable cures of prior decades. These structural headwinds cannot just be wished away as we move "forward" whether it be to the right, the left or dead center."
Gross, who is also PIMCO's co-chief investment officer, outlines four key drivers to what he has previously dubbed the "new normal" of below trend economic growth in the years to come: debt, globalization, demographics and technology.
"Developed global economies have too much debt - pure and simple - and as we attempt to resolve the dilemma, the resultant austerity should lower real growth for years to come," he wrote.
He argues that the world will see diminishing returns from the advancement of emerging market economies such as China, India and Brazil and that ageing populations in the developed world will act as a "silent killer" to potential growth and change the nature of consumption patterns.
"Demography is destiny, and like cancer, demographic population changes are becoming a silent growth killer," he wrote. "Almost all developed economies, including the U.S., are gradually aging and witnessing a larger and larger percentage of their adult population move past the critical 55-year-old mark ... low birth rates and a significant reduction in demand have imperilled Japan for several lost decades now. A similar experience will likely turn many developed economy "boomers" into "busters" within the next several years."
Gross says non-dollar emerging market stocks, commodities such as oil and gold and US municipal debt securities and government bonds that protect against inflation are his top investment picks. At the same time, he says investors should avoid longer-dated government bonds from Germany, the US and the United Kingdom as well as the financial stocks issued by banks and insurance companies.
"The list to a considerable extent reflects the view that emerging economy growth will continue to be higher than that of developed countries. Their debt on average will remain much lower, and their demographic age much younger," Gross argued. "In addition, the inevitable policy response of developed economies to slower growth will be to reflate in order to minimize the impact of the aforementioned structural headwinds."
"The 30-year Treasury hit its secular low of 2.50% in July and such a yield may seem ludicrous a decade hence. Investors should expect future annualized bond returns of 3 percent to 4 percent at best and equity returns only a few percentage points higher."
He does mitigate his somewhat gloomy outlook with caveat that could spark faster global growth in the near term, including cheaper sources of energy such as natural gas and a resurgent US housing market.
"In addition, unforeseen productivity breakthroughs may be just over the horizon. How many gloomsters could have forecast the Internet or any other technical breakthrough before it actually happened?" he asked. "Jules Verne we are not."
Newport Beach, California-based PIMCO, a unit of Allianz SE, manages around $1.82tn in assets. It's benchmark Total Return Fund manages around $278bn, around 20 percent of which are US Treasuries, and has gained around 12 percent over the past year, according to data compiled by Bloomberg.