PIMCO deputy chief investment officer Andrew Balls said PIMCO expects the real growth rate for Europe to be between one and 1.5 per cent in the next three to five years.
Mr Balls said the neutral policy rates of close to zero per cent, modest trend-like growth and subdued inflation pressures are all “substantially reflected in the level of yield curves, peripheral spreads and European credit spreads”.
PIMCO expects bond market returns to be three per cent and equities five per cent.
Mr Balls said the low policy rates should, however, help to provide stability to market pricing and reduce downside risks once they are fed into valuation models across asset markets.
He expects yields to be lower in the eurozone than in the US, given the lower nominal growth path, predicting that 10-year German Bunds will generate a return of between one and three per cent and 10-year UK Gilts to be in the range of between 2.5 and four per cent.
“We continue to prefer the 5- to 10-year part of the core eurozone curve to 30-year sector as a structural trade, based upon the carry advantage and the very low level of eurozone long-dated bond yields reflecting liability-driven investment demand,” said Mr Balls.
Germany will benefit from the low rate environment and will experience the strongest growth, he added.
Mr Balls said France and Italy will lag behind Germany due to their lack of real structural reform; however, he said PIMCO still favours Italy and Spain over smaller eurozone markets due to their higher liquidity.
Slovenia also stands out as a case with the “potential to tighten significantly, given its underlying fundamentals and the liquidity premium”, he said.
Real rate growth in the UK will be around two to 2.5 per cent, according to Mr Balls, although high debt levels and fiscal tightening will constrain growth.
Mr Balls believes European credit valuations are fair overall, given PIMCO’s neutral expectations.
“There is a lot of scope for bottom-up security selection, as in other markets, and especially so given the ongoing normalisation but also the potential for volatility in the periphery,” Mr Balls said.
