Bill Gross: Buy TIPS, Demographics Key

Bond legend says emerging markets will offer more opportunity because of demographics.

Reviewed by: Sam Forgione
Edited by: Sam Forgione

New York (Reuters) – Bill Gross, the closely watched bond investor, said on Thursday that investors should consider increasing their exposure to developing markets over the long term while buying 10-year inflation-protected Treasurys, given demographic factors.

Gross, who oversees the $1.3 billion Janus Global Unconstrained Bond Fund, said in his January Investment Outlook that demographics would dominate financial markets over the next few decades, and developed nations like the United States should invest more in emerging markets to compensate for a growing number of retirees.

He said the United States faces the demographic problem of too few millennial workers to care for too many aging baby boomers, while developing nations are younger demographically.

Demographics & Returns

"Demographics may not rule absolutely, but they likely will dominate investment markets and returns for the next few decades until the boomer phenomena fades away," Gross said.

Baby boomers are the generation born in the two decades after World War Two, while millennials are those who reached young adulthood around the year 2000.

"It is true that if much of the developing world is younger demographically (think India), then developed nations could and should transfer an increasing percentage of their financial assets to emerging markets to help foot the demographic bills back home," Gross said.

"Long term then, as opposed to currently, think about increasing your asset allocation to the developing world."

Bill’s TIP

Gross also said that investors should bet on higher inflation since a shortage of health care workers relative to aging baby boomers' needs would likely result in higher wages for millennials.

He said investors should buy 10-year inflation-protected Treasurys—iShares TIPS Bond (TIP | A-99), and SPDR Barclays 1-10 Year TIPS (TIPX | B-98)while betting against, or "shorting," fixed coupons, adding that health care stocks should thrive.

In contrast, Gross said that financial corporations with high liabilities such as insurance companies and bonds of underfunded cities such as Chicago and states such as Illinois would not fare as well.

Gross also said baby boomers would need to sell assets in order to pay their bills, which would lead to lower returns on assets than in past years, especially given near-zero interest rates in the developed world.

"Asset returns will therefore be lower than historical norms, especially because interest rates are close to 0 percent in developed countries," Gross said.

Gross has warned in recent years that investors should expect lower returns on both stocks and bonds.