Bill Gross warns: UK is a 'must avoid'

Bond king Bill Gross has highlighted the countries investors should be wary of in 2010, singling out the UK in particular as a 'must avoid,' with its gilts resting 'on a bed of nitroglycerine.'

In his latest investment outlook, Pimco founder Gross singles out the countries which he thinks are most vulnerable in 2010 as the 'ring of fire' to beware of (see the picture below). 'These red zone countries are ones with the potential for public debt to exceed 90% of GDP within a few years’ time, which would slow GDP by 1% or more,' he says. 'The yellow and green areas are considered to be the most conservative and potentially most solvent, with the potential for higher growth.'

Gross, who runs the $200 billion Pimco Total Return fund, thinks that of the developed countries, Canada and Germany stand out as the safest bets.

In contrast, he is unequivocal in his view of the UK's situation, even underlining his warning for added emphasis. 'The UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower.'

He says the UK 'with the highest debt levels and a finance-oriented economy – (is) exposed like London to the cold dark winter nights of deleveraging.'

For the best and safest returns, Gross recommends investors look toward Asia and developing countries for both equities and bonds.

'Risk/growth-oriented assets (as well as currencies) should be directed towards Asian/developing countries less levered and less easily prone to bubbling and therefore the negative deleveraging aspects of bubble popping. When the price is right, go where the growth is, where the consumer sector is still in its infancy, where national debt levels are low, where reserves are high, and where trade surpluses promise to generate additional reserves for years to come.

'Look, in other words, for a savings-oriented economy which should gradually evolve into a consumer-focused economy. China, India, Brazil and more miniature-sized examples of each would be excellent examples. The old established G-7 and their lookalikes as they delever have lost their position as drivers of the global economy.'

Gross' full investment outlook, published on Tuesday, can be found on the Pimco website here.