Bond giant Pimco sees weak economic growth in the eurozone over the next three to five years and, as a result, plans to add more global emerging market assets to its European portfolios, according to a report posted on the firm's website.

Andrew Balls, head of Pimco's European portfolio management, said that annual economic growth in the 17-nation currency bloc will not likely exceed 0.5 percent on average, and that Pimco will seek "alternatives" such as emerging market securities to compensate for the high risk and insufficient reward of investing in European countries.

Pimco, which runs the world's largest mutual fund, said this month that a break-up of the euro currency zone is still possible, though not very probable, over the next three to five years.

The firm also said in its earlier outlook that U.S. economic growth will not be "much greater" than 2 percent over that time frame, that global inflation will likely pick up, and that social issues will play a more critical role in Western economies while politics may not improve much.

In the latest report, entitled "Europe's Crossroads: The End of the Muddle Through?" Balls said the firm expects the eurozone "to depreciate, particularly versus stronger-growing emerging market countries," and that smaller European countries run the risk of exiting the eurozone or falling to "second-tier" status. Meanwhile, Germany, France, Italy and Spain will attain a stronger fiscal and banking union, Balls said.

The eurozone has been in recession since the end of 2011 and the region's economy shrank an additional 0.2 percent in the first quarter of this year. The latest contraction, which was worse than the 0.1 percent forecast by a Reuters poll, was the region's sixth straight quarterly contraction.

Balls said that the European Central Bank will waver between "'whatever it takes' activism and periods of refusal to act" in the next three to five years. The ECB cut its main interest rate to a record low of 0.5 percent this month and ECB Executive Board member Peter Praet said Tuesday that the ECB can cut rates further if needed to stimulate the economy.

The Newport Beach, California-based Pacific Investment Management Co., a unit of European financial services company Allianz SE, had $2.04 trillion in assets at the end of March. The firm's flagship Pimco Total Return Fund has about $292.9 billion in assets. The firm is run by chief executive and co-chief investment officer Mohamed El-Erian and co-founder and co-chief investment officer Bill Gross.

Balls said Pimco will continue to avoid investing in smaller eurozone countries given inadequate reward for the risk while targeting Italy and Spain, which he said may avoid "haircuts" or lower returns on their government debt. Balls added that even yields on those bonds, however, are not very attractive.

"The level of yields does not provide very attractive compensation for the risk and volatility in what we expect to be a bumpy journey," Balls said in the report. Balls added that most bank debt in the eurozone is "expensive" while industrial credit offers "skimpy" reward for the risk.

Yields on 10-year Italian government bonds fell to 4.03 percent on Tuesday while yields on 10-year Spanish government bonds fell to 4.26 percent on signals that the ECB will maintain its easy monetary policy.

Germany, which generates almost a third of the eurozone's economic output, has been reluctant to push forward with "big developments" toward the eurozone debt crisis given the nation's elections in September, Balls said.

Even following the vote, Pimco sees Germany continuing "piecemeal measures" toward the region's problems while failing to make efforts to increase its own economic growth, he added.