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Mix-Ansicht- Unser Mann von der Allianz, ein begeisterter Fan des Loonie - kingsolomon, 16.11.2004, 17:58
Unser Mann von der Allianz, ein begeisterter Fan des Loonie
-->By ROMA LUCIW
The Globe and Mail
Monday, November 15, 2004
Exporters hoping for respite from the soaring Canadian dollar shouldn't bet on relief any time soon. In fact, they should prepare for an even stronger loonie in the years to come, says Bill Gross, the world's most influential bond fund manager.
Mr. Gross, the founder and chief investment officer of Pacific Investment Management Co., expects the U.S. dollar to extend its decline against the loonie and other currencies as American politicians scramble to correct a record trade deficit.
An anemic U.S. job market, soaring oil prices and sluggish U.S. economic growth will continue to prompt investors to shun the greenback in search of higher returns elsewhere, including Canada.
“Over the long-term, the inevitable direction for the U.S. dollar is down,” Mr. Gross said in a telephone interview from his Newport Beach, Calif. office.
“It has been so long since it was even plausible to talk about the Canadian dollar going up versus the U.S. dollar that many Canadian readers likely still do not believe it can happen in the long-run,” Mr. Gross said. “That is typical of long-term secular reversals. In fact, the fundamentals are there.”
The Canadian dollar has climbed 9 per cent in the last three months and last week breached 84 (U.S.) cents for the first time in 12 years.
Canada's balanced budget, an economy that is more commodity-based than the U.S., and growth that appears to be “more stable and soundly-based” than in the U.S., will underpin the Canadian currency in the coming years.
Throw in the likelihood that the Bush administration will continue to allow the U.S. dollar to slip in a bid to make U.S. goods more affordable abroad and to correct its massive trade gap, and you have few reasons to buy the U.S. currency over the loonie or the euro.
“In contrast to Europe and Canada, the U.S. is currency-naive,” he said.
Pimco, a unit of German insurance giant Allianz AG, has nearly $400-billion (U.S.) in assets under management, including the flagship Total Return Fund, which is the world's largest bond fund. The Total Return Fund has posted an average annual 8.8-per-cent return since opening in 1987.
“In addition to the currency, I still like the Canadian bond market. I am generally more positive on Canada than the United States,” Mr. Gross said.
His bets on the Canadian dollar have yielded him a return of 15 per cent over the past nine months, he said.
Mr. Gross said that while short- and long-dated Canadian bonds have outperformed their U.S. peers, he is, however, concerned that the Canadian dollar could surrender a portion of its recent gains in the coming weeks as some traders lock in gains toward the end of the calendar year.
But short-term volatility will not derail the long-term trajectory of the Canadian dollar and Canadian dollar-denominated assets.
In contrast to Canada, the U.S. economy is mired with problems, Mr. Gross said. Job growth will remain “anemic,” he said, as long as it remains more profitable for companies to hire workers in Asia.
“The outlook for jobs in the U.S. is certainly not a good one, especially when you have the central bank raising interest rates as sort of another strong headwind that did not exist several years ago.”
Job growth is critical for the U.S. economy and the U.S. dollar since consumer spending accounts for nearly two-thirds of U.S. GDP.
Oil is also casting a cloud, Mr. Gross said, and has likely shaved 0.3 per cent from GDP growth and slowed inflation by the same amount. “It is irrefutable that $46 (U.S.) a barrel oil is more onerous than $30 a barrel. You can feel it every time you fill up your gas tank.”
Oil has dropped 16 per cent since hitting a record high $55.67 on Oct. 25, but is still up 44 per cent so far this year.
With the U.S. consumer bogged down with historically high levels of debt, Mr. Gross doubts the U.S. Federal Reserve will have to raise interest rates much further to cool the economy and rein in inflation.
“I am under the impression that we will get a hike in December and at that point, we pause and take a fresh look. I suspect that if we get that slow economy, that the Fed will stay there for a substantial period of time.”
The Fed raised its benchmark interest rate to 2 per cent from 1.75 per cent last week.
The path of the greenback, Mr. Gross said, is the “wild card” for U.S. stocks, which he expects will fare as poorly as U.S. bonds in the next two to three years.
He forecast returns of between 4 and 5 per cent for those who put their money into U.S. stock markets. “Investors that continue to believe in the tooth-fairy of double-digit returns are bound to be disappointed.”
Equity indexes in Canada and Europe are trading at more reasonable price-to-earnings ratios, he added.
One major shift that is likely to happen at some point in the next few years is that Asian central bank will likely ease their policy of increasing their holdings of U.S. dollars and U.S. dollar-denominated securities, Mr. Gross said.
“I don't look at foreign central banks to be the kind stranger that allows the U.S. to continue to consume beyond their means,” he said. “When you get interest rates at relatively low levels and one of the reasons why they are at these levels is because central banks are buying our market, then you have to be leery and suspicious that at some point, that this will diminish. That casts a bearish tone to the U.S. market as opposed to the Canadian market.”
Bond investors, meanwhile, should recognize that this is a period of accelerating inflation, Mr. Gross said. He recommends that bond investors choose inflation-protected securities such as Treasury Inflation-Protected Securities or TIPS.
“A bond investor in 2005 probably has a return of 4 per cent max to look forward to, in the TIPS market a little bit higher than that. But our salad days are over, just like the salad days for the stock market are over,” he said.
“It is a changed environment and investors simply have to be content with that and protect themselves as much as possible with inflation-protected securities.”
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