Pimco favors U.S. credit over Europe on weak euro zone growth

NEW YORK (Reuters) - Pimco, the investment firm that operates the world's largest mutual fund, generally prefers U.S. credit over European credit because of expected weak growth in the euro zone over the next 12 months, a Pimco executive who oversees investments in Europe said.

"At current valuations, we favor being underweight euro zone credit in our generalist portfolios, emphasizing the U.S. and other global credit alternatives," Andrew Balls, managing director and head of European portfolio management for Pimco, wrote in a report posted Thursday on the firm's website.

A Pimco spokeswoman said the comments apply to all portfolios managed by Pacific Investment Management Co. that have exposure to Europe.

Pimco, a unit of financial services company Allianz SE, manages $1.97 trillion in assets and is one of the world's largest bond managers. Its flagship Pimco Total Return Fund, with $251 billion in assets, is the world's largest mutual fund.

Balls reiterated Pimco's view that annual growth in the 17 nations that make up the euro zone will not exceed 0.5 percent on average over the next year. Pimco expects inflation in the region to be about 1 percent over that period.

Pimco's outlook for the United States is far more robust. Last week, Pimco managing director Saumil Parikh said in a note that Pimco sees U.S. growth between 2 percent and 2.5 percent within the next year.

Pimco's weak growth outlook for the euro zone comes despite data in August showing that the region emerged from its longest recession to date in the second quarter on stronger growth in Germany and France, the region's two largest economies.

Balls said in the latest note that Pimco favors shorter-dated debt of core euro zone countries and the UK given its weak European growth outlook and expectations that the European Central Bank and Bank of England will keep policy rates "on hold for the next few years."

ECB President Mario Draghi said Monday that the central bank remains committed to keeping interest rates low for as long as necessary. He also mentioned another long-term refinancing operation as an option to push down money-market interest rates if needed.

Pimco expects the economies of Greece and Portugal to continue to contract, and sees a worsening of credit conditions in peripheral countries as the biggest downside risk.

Balls said most European countries are not well-equipped to deal with sudden market shocks.

"There is little scope for euro zone governments, and seemingly the ECB on its current stated trajectory, to respond to large unforeseen market shocks," Balls wrote.

(Reporting by Sam Forgione; Editing by Leslie Adler)