Salient to Investors:

Tomoya Masanao at Pimco said:

  • Investors should be wary of high-yield borrowers as slowing growth in Asia threatens profitability.
  • China will average 6 percent to 7.5 percent annual growth during the next 5 years versus 9 percent annual for the past 5.
  • Companies in Asia outside Japan almost tripled junk bond sales in 2013 from the same period in 2012, data compiled by Bloomberg show.
  • The slow-growth landscape favors higher-quality credits and warrants caution on higher yielding names in an environment where profits will be challenged, and the emphasis should move away from risk assets that have benefited purely from the central bank liquidity wave in which valuations have become detached from fundamentals.
  • The Bank of Japan is finally joining the hyperactive monetary policy experiment but the sustainability of gains will depend on implementation of structural policy reforms.
  • Net exports and investment that previously fueled China’s growth are reaching their limits.
  • Each $1 of new credit in China is generating 20 cents on average of GDP, versus 60 cents before the financial crisis.

EPFR Global said fixed-income funds posted their biggest weekly outflows on record.

Bill Gross at Pimco said Treasuries are the place to be after raising holdings of US government debt to the highest level since July 2010. Gross said the three-decade bull market in bonds probably ended at the end of April.

Ramin Toloui at Pimco said:

  • Prospects for export-led growth are inhibited by China’s large size in a global marketplace deficient in aggregate demand due to high indebtedness in the developed world.
  • Investment cannot play its previous role in driving growth because it’s already risen to almost 50 percent of GDP from 35 percent in 2000.
  • China needs to shift to greater reliance on household demand – latent demand for consumer goods and services such as health care is likely enormous.

Australia will have a “new normal” of slower growth as the intensity of Chinese policy stimulus subsides and expansion outside of Australia’s mining sector remains subdued. Robert Mead at Pimco sees a ‘new neutral’ level for policy rates, which should be lowered from 5.5 percent to 3 percent. Pimco said Australian government bonds should be a relatively attractive asset for high incomes and capital gain potential.

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