Source: The Australian

Published 13 July, 2010

Australia remains at the top of Pimco's list for best economies in the developed world. 

AUSTRALIA had solid fundamentals and was a top investment destination, Pimco, one of the biggest global bond managers, said today.

Just a month after Pimco founder Bill Gross revealed that the renowned fixed-income player had begun investing in equities, Pimco said government bonds in developed countries were priced for a depression and a “new normal environment” would see financial markets behave differently to previous decades.

But despite increased concerns about Australia from overseas investors in the wake of Kevin Rudd’s now scrapped mining tax and concerns that China’s economy was slowing, the nation remains on top of Pimco’s list.

US-based head of global product management, David Fisher, said Australia, along with fellow mining-driven Canada, had the two features that Pimco finds attractive – low debt entering the global financial crisis and strong policy flexibility.

“Starting with a ladder, we would say those countries with solid fundamentals include in the developed world are places like Canada and Australia,” said Mr Fisher, outlining the investment group’s latest outlook for global financial markets.

“They’re very well exposed to the growth dynamics in the emerging world and particularly through the channel of commodity prices.

“The countries that represent the most risk are those that had relatively weak initial conditions coming into the crisis and that lacked policy flexibility.”

Mr Fisher’s comments came as HSBC forecast Asian emerging markets to continue to grow as trade increased and as investors, seeking higher-yielding returns, pumped capital into the region, amid weak growth and yields in many developed countries.

“We favour emerging market assets,” said HSBC chief economist Stephen King.

“Our currency strategists remain upbeat about emerging currencies, our equity strategists have recently upgraded their views on emerging equities while, in the fixed income space, we continue to believe that deleveraging will deliver remarkably low yields.”

But unlike Pimco, HSBC was more specific on Australian growth and tipped the figures to “disappoint both this year and next”, despite Australia’s stunning jobs creation.

HSBC’s report follows the International Monetary Fund last week upgrading Australia's growth forecast to rise from 3 per cent this year to 3.5 per cent in the year ahead.

Treasurer Wayne Swan in May also tipped the budget to return to surplus in three years and GDP growth of 3.25 per cent in 2010 11 and 4 per cent in 2011-12.

But despite the optimism, Mr Fisher warned of unrealistic expectations for equities as Australia and the US head into crucial reporting periods after a rough three months on stockmarkets.

“While we think bonds are priced for a depression, we think that equities are still priced for something more akin to the ‘old normal’ than the ‘new normal’,” he said.

“There’s still some scope for compression in PE ratios and we think that optimism over profit recovery is probably a little bit exaggerated in this environment of very, very weak growth, outside of a few countries such as Australia and Canada and the emerging world.

“So, on a relative basis, we would say that the returns in global bonds, while not spectacular, are certainly attractive.”

Speaking from Tokyo, Mr Fisher said Pimco saw opportunities in the US in the near term and had been shifting funds out of Europe and into “attractive” US treasuries.

“While interest rates are fairly low in the US - and again we do acknowledge that there’re some significant structural problems longer-term down the road for the US - we think that, very importantly, the US remains the flight-to-quality country,” he said.

“The US dollar being the reserve currency makes US treasuries the flight-to-quality asset.”

But despite obviously a seller of European debt, Mr Fisher played down the risk of default in the troubled periphery nations of Greece, Spain, Portugal and Italy.

He said European Central Bank’s monetary measures and governments’ austerity programs had helped, but longer term structural issues would hamper growth.

“Near-term, the liquidity issues have been addressed, but long-term solvency issues have not,” he said.

“The countries that you’d be most inclined to avoid would be those.”

These concerns have pushed Pimco to look at opportunities in developing world countries, in particular China, South Korea, Brazil and Mexico, but warned investors that likely restraint from central banks would not produce the returns on bonds of previous years.

“It’s difficult to see that type of 10 per cent return occurring over the next couple of years,” he said.