Recent events from China’s tightening, Euro-zone sovereign risk, to US policy towards banks have illustrated just how important it has become for investors to consider this question: is it wise to invest alongside the governments, or not?
This question is relevant not just for bond investors and credit investors, but also for equity investors.
PIMCO was known to invest alongside the US government when the government was trying to contain the financial crisis, and reaped huge benefits by doing so. However, it is clear from Bill Gross’s Investment Outlooks in recent months that the bond shop has changed its tune:
If 2008 was the year of financial crisis and 2009 the year of healing via monetary and fiscal stimulus packages, then 2010 appears likely to be the year of “exit strategies,” during which investors should consider economic fundamentals and asset markets that will soon be priced in a world less dominated by the government sector. If, in 2009, PIMCO recommended shaking hands with the government, we now ponder “which” government, and caution that the days of carefree check writing leading to debt issuance without limit or interest rate consequences may be numbered for all countries.
PIMCO’s New Normal has an inherent bias against equities. It argues that in this post-crisis world of de-leveraging, re-regulation, and de-globalization, there will be little growth, and hence little upside for equities. This is the year to preserve capital.
Sweeping arguments of this sort appear more self-serving than helpful to individual investors, however. If you’re an equity investor, we think the government factor will continue to play a large role. Investing in equities in 2010, by and large, is investing in economic recovery alongside the government efforts to spur growth and create jobs. No doubt, government actions also represent a great source of risk.
