Financial companies will be hard-pressed to meet long-term growth expectations as decades of credit expansion come to an end and central-bank policies and tighter regulations squeeze profits, according to bond investor Bill Gross.
Banks such Citigroup Inc., Bank of America Corp., Credit Suisse Group AG, Deutsche Bank AG and Goldman Sachs Group Inc. are trading far below their pre-crisis highs as the credit growth that has fueled the global economic expansion in the past appears to near its end, Gross said in his monthly outlook posted Thursday. The recent selloff in global bank stocks shows investors recognize that future returns on equity for the industry "will be much akin to a utility stock," he said.
"Banking/finance seems to be either a screaming sector ready to be bought or a permanently damaged victim of write-offs, tighter regulation and significantly lower future margins," wrote Gross, co-manager of the $1.26 billion Janus Global Unconstrained Bond Fund. "I'll vote for the latter."
Gross likened the troubles of the financial system as a driver of economic growth to the inevitable demise of the sun. It's a climate that's also challenging for insurers and pension funds, according to the 71-year-old billionaire, who joined Janus in 2014 after decades at Pacific Investment Management Co.
"You should be aware that our finance based economic system — which like the sun has provided life and productive growth for a long, long time — is running out of fuel and that its remaining time span is something less than 5 billion years," he said.
The 89-member Standard & Poor's 500 Financials Index was down 7.9 percent this year through yesterday, compared with a drop of 2.8 percent for the full S&P 500 Index.
Insurance companies may struggle to meet liabilities for storm, accident and death coverage because of slowing investment returns, he wrote. They "cannot cover claims as conveniently as they could in the past" because of smaller gains from stocks and bonds.
The low-rate environment has also made it harder for pension funds to meet obligations in places such as Puerto Rico and Detroit, he wrote. And households are struggling to save for college, retirement or medical emergencies.
Along with bank stocks, Gross recommends avoiding high-yield debt and "momentum driven investments" such as German Bunds and long-term U.S. Treasuries, which can become volatile at a time when central bankers in Europe and Japan are pushing interest rates into negative territory.