Global Strategic Outlook

Transcription

1 Allianz Global Investors Global Strategic Outlook Q Understand. Act.

2 ContentQui leno suspicor Amor quibus mido Consido noster luvabrum 8 Section one: Thematic piece 13 Section two: Equities outlook 23 Section three: Fixed income outlook 31 Section four: Multi asset outlook 33 Section five: Environmental Social Governance (ESG) outlook 36 Section six: Economic forecast and valuation review 40 Section seven: Global Policy Council biographies 2

3 Across all asset classes, we advise clients to take risks in order to meet their investment objectives. At Allianz Global Investors, we follow a two word philosophy. Understand. Act. Andreas Utermann Global Chief Investment Officer, Allianz Global Investors. Conclusions from the Allianz Global Investors Investment Forum in New York Executive summary At our most recent semi-annual Investment Forum, we reviewed the key hypotheses supporting our strategic investment advice for clients. Our primary conclusions were left unchanged. Across all asset classes, we advise clients to take evaluated risk in order to meet their investment objectives. Our financial repression thesis is even more valid now as investors face a low growth, low interest rate environment and rising political and market volatility. Allianz Global Investors believes passionately in investing actively in security selection and asset allocation to generate the returns that inexpensive beta is unlikely to deliver. Income from attractive equity and credit investments will offer less volatile returns to investors, as will income derived from less liquid, uncorrelated infrastructure and other long duration securities. As regulations continue to challenge investment returns, Allianz Global Investors remains committed to evolving our investment solutions to meet our clients future needs. Andreas Utermann, Global CIO 3

4 Understand. Financial repression remains in place Monetary policy will remain lower for longer globally Act. Protecting purchasing power is crucial The hunt for income is undiminished Economic growth will be low, and possibly fragile With China rebalancing, low growth will persist Global debt levels remain high and are likely to increase Given the lack of deleveraging, excess capacity is deflationary The political landscape around the world is changing Policies remain uncertain, and regulations are increasing Geopolitical risk has risen in Europe and the Middle East Prepare for uncertainty and volatility Cheap beta now offers very low returns in fixed income and equities Alpha is even more important in generating returns Income investing works in financial repression Dividend income has become a major driver of returns Some risk taking is needed to earn a return With volatility rising in all asset classes, investors must be active Analysing the global economy and the duration of financial repression Monetary policy remains very accommodative, with Europe and Japan in full quantitative easing mode and practically every other central bank, except the US Federal Reserve and Bank of England, reducing interest rates this year to protect their local economic growth prospects. As monetary policy has evolved, volatility has returned to currency markets, starting in January with the Swiss allowing the franc s peg to the euro to collapse; investors now fear voluntary and involuntary devaluations across developed and emerging economies. China s summer widening of the yuan trading bands, which have been widely and incorrectly reported as a devaluation, has greatly unsettled investors, creating even more volatility. Low and sustained financing costs have led to more leverage being assumed around the world, especially by emerging market sovereigns and corporations. Indeed, the world owes USD 50 trillion more than it did in 2008, during the height of the global financial crisis. Current levels of debt and the general lack of deleveraging lead us to conclude that trend growth will be considerably lower than in the past and also more fragile. Global imbalances have indeed narrowed, but they have not disappeared. Reading between the lines, however, we find that trading surpluses are being maintained by falling imports, rather than growth-friendly exports, and that Europe in particular is seeing a re-emergence of huge capital account surpluses as austerity policies take effect. Gross fixed capital formation is being generated in China and the emerging markets, leaving the older, more mature economies underinvesting at government and corporate levels. This is frustrating monetary and fiscal policies that aim to kick-start local growth and employment. With lower nominal trend growth despite the benefits from the collapse in commodity prices and lower investment levels, we also find that productivity is declining globally in the face of disruptive and increasingly mobile new technologies and services. While capital expenditure represents more than 60% of all investment globally, it is now in sharp decline in commodity-related industries. Rising currency volatility and devaluations display a lack of global co-ordination. This is leading to rising concerns that the world is facing growing trade and currency wars, as economies seek to borrow growth from others instead of stimulating growth from economies with high current account surpluses. However, at the global level, these policies are clearly not lifting growth rates substantially and certainly not to the levels seen in previous recoveries. Our hypothesis of sustained financial repression remains valid and, without new avenues and policies for economic growth, we expect it to remain in place for many years to come leaving a low growth, low interest rate and fragile economic environment. Stefan Hofrichter, Global Head of Economics & Strategies 4

5 Equity valuations during financial repression There are many ways in which one can value equities, ranging from dividend discount models to dividend and earnings yields to longer term Shiller PEs. Almost all valuation tools assume reversion to a mean over time, but these assumptions have been distorted greatly by the quantitative easing and zero interest rate policies (ZIRP) in effect around the world. In advising our clients to take risk, we are working to assess the discount rate that the market is using to value equities so we can ensure that we are taking the right level of risk. The current spectre of deflation is unsettling investors, but we remain confident that, provided the estimated peak of interest rates in this cycle is lower than previous peaks, then equities will continue to look attractive and can re-rate in valuation terms. Equities also offer earnings growth combined with attractive rising dividend-income streams. It is right to be concerned that a ZIRP world can promote mal-investment and create excessive valuations. However, using our fundamental research and strong investment philosophies and processes, Allianz Global Investors can add the alpha that investors need while controlling the volatility that they dislike. Steve Berexa, Global Head of Research & Global CIO Equity Solutions for liability-driven investors Insurance and pension investors continue to face the prospect of resolving their funding gaps using a wait-andhope strategy; other measures include large immunising cash injections, the strategic addition of more asset allocation or measured risk-taking on a dynamic basis. Insurance companies face the prospect of their potential returns being crushed by the twin challenges of Solvency II and the ZIRP environment. Accordingly, we are advising our clients to reduce exposures to capital-intensive business lines and seek more diversified, less capital-heavy investment returns. Interestingly, insurance companies have been early adopters in the hunt for yield, embracing illiquidity and more risk even as they are hindered by a low supply of infrastructure-type assets. Regulation has become pro-cyclical and has created a herding effect toward certain asset classes, further exacerbating the effects of financial repression. We advise our clients to shift their exposure towards growth-oriented insurance markets in Asia, as well as towards corporations with innovative new product lines. Regulation is driving investors toward certain types of asset class and risk orientations that may not always meet their longer objectives. Our consultative relationship process can help our clients become more flexible and dynamic in reassessing their investment opportunities. Arun Ratra, Head of Global Solutions Shale oil and its global ramifications Global demand growth changes have affected both the volume and value of oil over the last year or so; this was exacerbated by Saudi Arabia s geopolitical response to the growth of US shale oil and increased production by other regions. Industry investment is now collapsing globally. This has yet to be reflected in market oil prices given the forthcoming supply from Iran, Iraq and Saudi Arabia. However, new industry management teams are imposing strict investment criteria that will significantly affect the oil service and industrial sectors. In addition, tighter lending criteria, especially in the US after the fall in prices, will lessen both the enthusiasm and the ability to develop more shale prospects. As a result, although demand has flattened out, the world is not replacing the 2 million to 3 million barrels of oil a day that are being lost through the depletion of existing fields. Moreover, with geopolitical risks in the Middle East at very high levels, the risks remain of an incident which may affect regional production. 5

6 While industry dynamics remain fraught with uncertainty over demand, production and politics, it is becoming clear that the prognosis for oil is not as apocalyptic as the current oil price suggests. In a financially repressed world, many oil stocks offer an attractive combination of low valuations, extensive self-help abilities and high dividend yields. Scott Migliori, CIO Equity US Developments in asset management The asset management landscape is experiencing rapid change as regulation affects the industry, its distributors and banks and, most importantly, our clients. Much of this was anticipated in our theme of financial repression. The growing demand for transparency, the increasing need for better-aligned fee structures and shifting thoughts on achieving returns are all now coursing through the industry. Beta has now become essentially free, and, as markets have delivered positive returns, investors have tended to focus on costs not alpha. Yet we believe passionately that, from now on, beta will become not only more volatile, but it will not necessarily be positive. This means that investors will need to accept more risk and rely on alpha as a larger component of total return. Moreover, new regulations and ongoing financial repression may dissuade many investors, including insurance companies and Liability Driven Investment-constrained companies, from taking sufficient risk. We are increasingly confident that Allianz Global Investors focus on sharpening our active offering, and on driving strategic reviews of and changes to many of our investment processes and solutions, are in tune with our clients evolving needs. With beta practically free and increasingly volatile, the stage has been set for us to deliver high-quality and sustainable alpha to our clients in order to meet their challenging investment objectives. Andreas Utermann, Global CIO Monitoring risk with a focus on liquidity Our most recent Risk Monitor study Allianz Global Investors annual survey of institutional investors highlighted the top concerns of today s investors. Many of our clients are increasingly worried about the rising risks presented by geopolitics and asset bubbles, fuelled by perceptions that too much free money is now in the system. Investors in Asia are particularly sensitive to this. Concerns over liquidity or the threat of illiquidity which was last experienced in seem more muted, and there is a general lack of concern over generating acceptable future returns. Many risks have been found to be related to market returns risk rises when returns are positive and vice versa. This natural situation has been combined with increasingly pro-cyclical regulatory policies and fundamentally altered market structures, which changed after the painful events of With markets transformed and liquidity increasingly found in index and ETF products, it is not obvious where the buyer of last resort may be for many asset classes. Alpha remains scarce but expensive, and risk management relies on diversification, where cost management is vital. Investors see tail-risk events as more worrying than the dangers of illiquidity. As a result, we must help our clients navigate these waters to find return at acceptable levels of risk. Kristina Hooper, US Investment Strategist 6

7 Conclusions from our Global Policy Council Throughout the Investment Forum, the Global Policy Council (GPC) our team of CIOs and economists discussed a wide range of issues, paying special attention to the prospects for China and other emerging economies. GPC members focused on the outlook for oil and other commodities, which are so important to many emerging economies, and recognized that the global economy s prospects still seem moderately decent. At the same time, flows into most markets have become negative and uncertainty around US Federal Reserve policy may be limiting leverage and risk appetites. Equity valuations continue to make Europe look more attractive than the US and Japan, and, while emerging markets are cheap, they are not yet cheap enough. The GPC s preference for emerging market debt has been challenged and will be dynamically reviewed during the fourth quarter. We believe that most sovereign bonds are unattractive at this point. Next Investment Forum: Hong Kong, 13 January

8 1. Thematic piece: Is easy monetary policy fuelling new economic imbalances and credit bubbles? Stefan Hofrichter, CFA Head of Global Economics and Strategy Key points The current account gap between the developed and emerging economies has narrowed significantly: imports by developed economies from emerging markets have weakened in response to the global recession, while emerging-market exporters have gained market share due to weaker currencies. Despite record high investment levels, productivity growth has stalled: while the developed world is investing too little, emerging economies are investing too much in non-productive areas, such as housing. Credit growth is in evidence in economies that suffered the most as a result of the Global Financial Crisis: we should not be surprised if economic growth in the US, UK and the euro zone becomes increasingly robust and self-sustained as a result. In contrast, the picture looks different for emerging economies, as well as developed economies which have undergone a relatively light version of the GFC or no crisis at all: here, many economies have become overleveraged and the risks are that deleveraging will occur. Capital outflows are currently a major issue in emerging economies: they are actually akin to a tightening of financial conditions in the respective countries and may actually be the trigger which starts the deleveraging process in these markets. Global nominal GDP growth is likely to remain low going forward, with growth dynamics shifting back to the old world once more. Global monetary policy has become ultra-loose since the Global Financial Crisis (GFC) of We expect base money provided by the four major central banks in the world the US Federal Reserve (Fed), European Central Bank, Bank of England (BoE) and Bank of Japan to rise to around 14% of world Gross Domestic Product (GDP) by 2016, up from around 5% before the GFC. At the same time, central bank rates have basically fallen to zero in the developed world. We, therefore, need to consider whether this ultra easy monetary policy will contribute to the build up of global macro imbalances, notably in excessive credit, as was witnessed in the run-up to the GFC. In that context, we are analysing global developments of current accounts, investment activity, consumption and savings, as well leverage. Current account imbalances have narrowed Following the Asian crisis in the late 1990s, current accounts in the emerging world, most notably in Asia, started to improve: in actual fact, it was not until after , i.e. following the bursting of the dotcom bubble, that current account surpluses in fast-growing economies started to lift off. Within the group of major emerging economies (Brazil, Russia, India, China, South Africa, Mexico, Argentina, Turkey, Saudi Arabia, Indonesia and Korea), the combined current account as a share of GDP peaked in 2006 at around 5%. Conversely, in G7 countries and Australia, net exports of goods and services turned negative and current accounts were, on average, in deficit by around 2% of GDP (all numbers have been aggregated in US dollars, not purchasing power parity terms). Until eight years ago, the flipside of the emerging world s current account surpluses was overspending in the developed world, particularly in the housing sector. Easy monetary policy in the US and in Europe post the bursting of the dotcom bubble (based on our 8

9 estimates, monetary policy only turned neutral in ) was conducive to this development in two ways. Firstly, it directly stimulated the housing market in the US and Europe, and indirectly boosted consumption as a result of low debt financing costs. Secondly, parts of the liquidity generated flowed via multiple channels into emerging economies, where it helped finance export, and investment, driven growth. These trends started to reverse in 2007 with the onset of the GFC and the slowing of emergingmarket imports by developed economies. Since then, the current account gap between the developed and emerging economies has narrowed significantly: imports by developed economies from emerging markets have weakened in response to the global recession, while emerging-market exporters have gained market share due to weaker currencies. Global investment activity at a record high The world economy, however, looks significantly less balanced when analysing trends in investment activity: today global gross fixed capital formation (a broad concept of investment activity) is at its highest level in 25 years, with one quarter of world GDP spent on investment (Figure 1). Interestingly, in the developed world, ultra easy monetary conditions and the subsequent decline in corporate financing costs since 2009 have not led to a rise in the investment/ GDP ratio. To the contrary, developed market investment activity today only accounts for one fifth of GDP almost the lowest reading in a quarter of a century (and only a touch higher than in 2010). Instead, it is the emerging markets world, supported by strong capital inflows from the developed world, which has witnessed a sharp rise in investment activity. Gross fixed capital formation is now at around one third of GDP a record level up from below 30% before the GFC. Despite this sharp increase in investment activity in emerging economies, productivity growth has stalled globally. According to data provided by the Conference Board, annual total factor productivity growth has come down from around 1.25% globally to around zero, or even a slight contraction, in both developed and emerging economies alike (Figure 2). Put differently: while the developed world is investing too little, especially in research and development, emerging economies are investing too much, but in the wrong areas, i.e. those that are non-productive, such as housing. Deleveraging - what deleveraging? Not surprisingly, with higher investment activity comes higher leverage. The non-financial sector (private households, companies and governments) globally has a combined debt/gdp ratio of around 230%; this is based on our universe of eight developed and twelve emerging economies, which, in total, make up around three-quarters of world GDP. This debt/gdp ratio is the highest level in history and the trend continues to rise (Figure 3). This rising trend is not a reason to worry per se and may be explained by financial deepening, i.e. the well-established phenomenon where the financial sector tends to outgrow the broad economy. One can also take some comfort from the fact that the leverage ratio in the developed world has been quite stable, albeit high, since the beginning of this decade. However, in emerging economies, the leverage ratio has increased by around 50% compared to before the GFC. In particular, this trend gathered pace in , exactly at the time when trend growth in the emerging world started to slow. While the private non-financial debt/ GDP (households and companies) in the emerging market world is still lower compared to the developed world (150%), it is of similar order as in many Asian countries in 1997 (ranging from 114% in Singapore to 165% in Malaysia) and only slightly lower than in Finland and Sweden in 1990 (both around 140%), right before the bursting of their respective real estate bubbles. Key insights can also be derived from analysing the credit gap, i.e. the deviation of private non-financial leverage from trend, for country groups and individual countries (Figure 4). In many developed economies, most notably Spain, Ireland and Portugal in the eurozone periphery, the UK and to a lesser extent the Netherlands and the US, the credit gap has fallen significantly below trend. In the past, deviations from a trend of this magnitude have often been the low points and the starting level for a rebound in credit growth. This is also what we are observing currently: in the US, private sector credit growth has mirrored the increase in nominal GDP growth since We are also witnessing positive credit growth in the euro zone while, in the UK, lending surveys are pointing to an ongoing improvement in the credit cycle going forward. We should, therefore, not be surprised if economic growth in the US, UK and the euro zone becomes increasingly robust and self-sustained as a

10 result. In fact, a rate hike by the Fed or the BoE might be warranted in the not too distant future. However, a rate hike, even an end to the existing quantitative easing programme, is off the radar in the euro zone; while deleveraging has taken place in individual countries, it is not yet advanced for the region overall. Significant releveraging in emerging markets and selective developed economies Broadly speaking, the picture looks different for emerging economies, as well as developed economies which have undergone a relatively light version of the GFC or no crisis at all. The former group includes countries like China, Brazil and Russia, as well as Turkey, Malaysia, Thailand and the Czech Republic; the latter includes the two financial hubs in Asia, Hong Kong and Singapore, along with Australia, Canada, Sweden, Norway and Switzerland. All of these countries have increased leverage during the last few years, many of them significantly. As a consequence, in Brazil, Turkey, Hong Kong, Singapore, Thailand and China, the credit gap is above trend by 15% or more. According to the Bank for International Settlements (BIS), a deviation in excess of 6-8% significantly increases the risk of a sharp decline in trend growth once deleveraging starts to kick in, as well as the probability of stress in the financial system. It is also no coincidence that real estate markets have boomed during the past five years in many of the aforementioned countries, leaving housing markets in overvalued territory. This is not to say that we are expecting a new financial crisis in the emerging world, especially in Asia. Flexible exchange rates in many countries, as opposed to the fixed exchange rates of 20 years ago, will help cushion any future adjustment process. In addition, several, albeit not all, emerging economies are currently running current account surpluses: these countries enjoy huge foreign currency reserves, worth around USD 8 trillion combined, while non-domestic currency debt, primarily based in US dollars, only totals around USD 5 trillion. Capital outflows from emerging markets to trigger deleveraging? Nevertheless, capital outflows are currently a major issue in emerging markets. We estimate that in the year ending June 2015, around USD 400 billion has flowed out of China (Figure 5). The corresponding amount for total emerging economies (including Hong Kong and Singapore) is in the region of USD 300 billion. The outflows increased further over this summer: in August alone, the month when the People s Bank of China, devalued the renminbi, Chinese currency reserves declined by USD 94 billion, indicating a record monthly capital outflow. Outflows do matter. Just as the inflows in the first decade of the millennium spurred credit and economic growth, current outflows are deflationary for the emerging world (all else equal); they are actually akin to a tightening of financial conditions in the respective countries and may actually be the trigger which starts the deleveraging process in emerging economies. Indeed, we are already observing a slowdown in credit growth. We will continue to live in world of low nominal GDP growth What are the implications for global growth? Firstly, there are several reasons why nominal GDP growth globally is likely to remain low going forward. Productivity growth, at least so far, is low globally. Demographic trends not discussed in this article are weakening in the major economies. In addition, a large part of the world, i.e. many emerging and several developed economies which avoided a full-blown financial crisis at the end of the last decade, have become overleveraged and face the prospect of deleveraging: this is always a drag on growth, unless strong external demand can compensate for the slowdown in domestic activity. However, we are not too pessimistic on global growth as several European countries and the US are now quite advanced in their deleveraging efforts. Their respective credit cycles are already showing signs of improvement, even if only a moderate one. Second, as the US and Europe are in a totally different phase in the leverage cycle compared to emerging economies, as well as the developed economies which avoided the crisis in the first place, growth dynamics are likely to shift back to the old world again. What has become clear over the last decade is that an increase in leverage can stimulate growth only up to a point. The payback time can turn out to be quite painful. 10

11 Figure 1: Gross fixed capital formation as share of GDP (%) Developed Economies Emerging Markets World Source: World Bank, Allianz GI, annual data, data as at Past performance is not a reliable indicator of future results. Figure 2: Total factor productivity YOY in % World Developed Economies Emerging Economies Source: The Conference Board, annual data, data as at Past performance is not a reliable indicator of future results. Figure 3: Global non-financial debt/gdp G7+Australia Major EM + Asia x Japan Global Source: BIS, AllianzGI, quarterly data, as at Q Past performance is not a reliable indicator of future results. 11

12 Trend calculated based on data starting in 1980, except for Germany (1992); data as of Q4 2014, except for US and China (both Q1 2015). Figure 4: Credit gap (Deviation of private non-financial debt/gdp from trend in %) Spain UK Ireland Portugal Netherlands US Israel Germany Japan Eurozone South Africa Italy Greece Australia Canada Korea Malaysia Norway Poland Sweden France India Russia Denmark Switzerland Czech Republic China Thailand Singapore Hong Kong Turkey Brazil Developed Markets (DM) with full financial crisis in 2007/08 DM with moderate or no financial crisis in 2007/08 Emerging Markets (EM) Source: BIS, AllianzGI, quarterly data, as at Q Past performance is not a reliable indicator of future results. Figure 5: China one year rolling capital outflows (estimated) National statistics, AllianzGI, quarterly data, as of Q Past performance is not a reliable indicator of future results. 12

13 2. Equities outlook - US Key points Survey results indicate that the majority of investors believe the US dollar will continue to appreciate. With the Fed sidelined, this crowded trade could easily reverse, providing some relief for the international earnings of US-based companies. Pessimism over US corporate earnings appears relatively widespread. If earnings growth is to exceed expectations, the strength seen in US consumer spending needs to spread into capital spending and exports. In our view, there will be room for positive surprises in the quarters ahead especially if the US dollar s appreciation is coming to an end as the Fed remains on the sidelines much longer than investors originally anticipated. sector earnings a seismic shift that countries will lap in the fourth quarter, making it easier to achieve yearon-year earnings growth the US remains an economy where productivity gains are essential to any profit margin improvement. The arrival of slower payroll employment gains in the third quarter may herald renewed efforts by management to lower unit costs by paring the least efficient workers and by being more selective in their new hires. However, there is a limit to how far more disciplined hiring can yield unit cost improvements without introducing a drag on overall consumer spending. Fortunately, weakness in equity prices during the third quarter did knock investor sentiment measures down into overly pessimistic territory, even if valuation measures only became a little less rich. While equity volatility measures have begun to mean revert, which will tend to shrink institutional investor risk budgets, and credit spreads have widened, even outside the energy sector, share repurchase activity remained remarkably strong through the third quarter. Rob Parenteau, CFA Economist, External Advisor Doubt and confusion have reigned supreme amongst US equity investors as the Federal Reserve s (Fed) failure to hike its policy rate has raised questions about revenue growth and pricing power trajectories in the year ahead. In recent weeks, 10-year breakeven inflation rate expectations dropped below 1.5%, helping 10-year US Treasury yields to fall back below 2%, well below the % range anticipated by many brokerage house economists. 1 With commodity prices dipping once more, import price deflation has deepened, and wage pressures remain hard to find (despite an unemployment rate that is about to drop below 5%): the prospects for sufficient pricing power to drive profit margins higher have faded. Exemplifying the concern and consternation of equity investors, brokers were estimating a nearly 5% yearon-year decline in S&P 500 earnings at the end of the third quarter. While some of this weakness merely reflects the influence of falling oil prices on energy US dollar strength has made US equities even more expensive for international investors. But, with the Fed indefinitely sidelined, and a growing possibility that emerging market policy easing will promote some sort of reacceleration in emerging economies especially as China s fiscal spending surged above 25% on a year-on-year basis in August and the US dollar s appreciation may be drawing to a close. According to survey results from Absolute Strategy Research, twothirds of institutional investors surveyed expect further US dollar appreciation over the next year. 2 Crowded trades like this one have a way of dramatically reversing, which could both encourage more foreign equity buyers to wade into US stocks, and offer some relief to the international earnings of US-based companies. In the same survey, only onethird of institutional investors said that they believe corporate profit growth could exceed 10% over the next year. If investors are going to be blindsided in 2016, this result suggests it may be because earnings pessimism is already quite widespread. 13

14 As we enter the final quarter of the year, US consumer spending is running at a solid 3.2% year-on-year through August. However, this strength will need to spread into the capital spending and export sides of the US economy if earnings growth is to exceed expectations in the quarters ahead. As displayed in the Figure 1, the level of exports remains well below the highs of a year ago, although export sales have stabilized in recent months. Non-defence capital goods orders (excluding aircraft) are also below their peak levels, and have not advanced much from the levels first achieved in If US equities are going to deliver 5-10% returns in the year ahead, then it is crucial that these more cyclical sectors begin to show better momentum in the closing months of Capital spending improvements would also tend to boost productivity gains, and thereby add to both top-line revenue growth in the US, as well as possible profit margin improvements through related productivity gains. Once again, investor pessimism on both the capital spending and export fronts suggests to us there will be room for positive surprises in the quarters ahead especially if the US dollar s appreciation is coming to an end as the Fed remains on the sidelines much longer than investors originally anticipated. 1 Bloomberg, as at 30 September Absolute Strategy Research. Shaded areas indicate US recessions research. stlouisfed.org 1 Balance of payments basis (Left) 2 Non-defense capital goods excluding aircraft (Right) Figure 1: US exports and capital goods still lacklustre (USD Millions) 140, , , , ,000 90,000 80,000 70,000 60,000 50, Exports of Goods 1 Manufacturers' New Orders 2 80,000 76,000 72,000 68,000 64,000 60,000 56,000 52,000 48,000 44,000 (USD Millions) Source: Economic Research, Federal Reserve Bank of St. Louis, Data as at 1 August

15 Equities outlook - Europe Key points The European Central Bank has indicated it would be prepared to extend the size and duration of its quantitative easing programme if necessary. The recent emissions scandal has undermined confidence in the European auto sector. In mining access to funding, fears over credit ratings and collapsing commodity prices have all combined to force shares lower, in many cases by over 50%. We still expect earnings growth of at least 10% from European companies, ex the auto and mining sectors, as they benefit from the weaker euro and improving European economy. Valuations are also supportive, both relative to other equity markets and to fixed income assets and cash. European markets, like their brethren around the World, have given back all the gains of the first half of the year during a torrid third quarter. While we expect volatility in all asset classes to remain elevated, we remain constructive on the prospects for European equities during the first quarter of 2016 and into next year. Economic activity has so far remained much better than many had forecast, and even has been quite resilient over the summer period. The benefits of austerity have been paying off as many peripheral euro-zone economies are steadily restructuring: employment and consumption are, therefore, picking up pace, albeit in a very price sensitive manner. The European Central Bank (ECB) has remained proactively constructive on its monetary policies, and, when local inflation fell into negative territory recently, threatened to increase both the size and duration of its quantitative easing. We still expect inflation to pick up during 2016, even if this just reflects the base effect of the oil price decline falling out of the data. This should lessen the pressure on ECB policy. Politics have again quietened down from a Greek perspective only to be superseded by the upcoming elections in Spain by the general election in Portugal and upcoming election in Spain, as well as the migrant crisis caused by the chaos in Syria, Iraq and elsewhere. While clearly hindering some other important political agendas, the European Union is trying to find a united position on these issues and work collaboratively to resolve the crisis, even if not the underlying wars in the Middle East. With the ECB in full-on easing mode, fixed income and equity markets, and the euro seem well behaved. Indeed, they appear to be far more affected by the international actors in Washington, in Beijing and the US Federal Reserve. Corporate news has been quite dramatic in the last month, with both autos and miners in the spotlight. The recent emissions scandal in the European auto sector has dashed investor confidence in many manufacturers and suppliers, and thrown into doubt the current production renaissance which had been underway. Although the auto sector had been a beneficiary of cheap money, via vendor financing which made new cars more affordable, this deceit of consumers and regulators has damaged reputations for the foreseeable future. In mining, access to funding, fears over credit ratings and collapsing commodity prices have all combined to force shares lower, in many cases by over 50%. We believe the big oil companies to be in a very different position to the oversupplied miners. Yet, the difficulties in autos and mining have led to a sharp fall in earnings expectations across Europe which, in 2015, had been rising nicely for the first time for six years. Nevertheless, we still expect earnings growth of 10% plus from European companies, ex the auto and mining sectors, as they benefit from the weaker euro and improving European economy. Corporate merger-and-acquisition activity is still growing across many sectors. This is underpinning valuations, which also show Europe to be one of the cheaper equity regions. Lastly, European equities have fallen back towards offering a 4% dividend yield. This looks very attractive when European government bonds yield less than 1% and cash yields 0.25%! 1 With European investors still holding allocations to cash and bonds in excess of 80%, the great rotation into equities can emerge as a real theme now that valuations have improved. 1 Economic Strategy & Allianz Global Investors, as at 30 September Neil Dwane Chief Investment Officer, Equity Europe 15

16 Equities outlook - Asia-Pacific Raymond Chan, CFA Chief Investment Officer, Equity Asia-Pacific Key points While Asia now trades at a discount to global developed markets, for the region to deliver sustainable market performance, structural reforms are the only answer. In China, given our expectation of economic stabilization, the announcement of details related to the 13th Five-Year Plan and further reform progress, we expect order to be restored to the equity market within the next couple of quarters. Better margins, corporate restructurings, and more positive earnings revisions should see higher returns for Japanese companies and therefore justify a higher valuation for Japanese equities. In India, the election in Bihar may boost the BJP s seats in the upper house of parliament, helping Prime Minister Modi to implement reforms. Weak exports continue to weigh on Korea s economy, but tourist numbers have picked up following the end of the MERS outbreak. The housing market is also expected to provide support for Korea s economy. Disappointing macro news has continued to cause alarm within Asia Pacific markets during the past quarter. Very weak economic data from China, especially related to the industrial sector, has raised the question of whether Beijing is behind the curve. Commodity prices have also been extremely weak, particularly oil and copper, placing downward pressure on many emerging market and frontier market currencies. Concerns about the strength of the global economy and the risk of renewed deflationary pressures, given the weakness in commodity prices, remain high. In addition, a stronger US dollar and perceived competitive currency devaluations, led by China s sudden adjustment to the existing pricing mechanism for the renminbi, has caused further declines in many emerging market currencies, as well as capital outflows from Asia and emerging markets. Yet, in the current environment, currency devaluations are not effective as a tool for boosting exports: global trade growth has been almost flat over the last two years. For example, the Japanese yen has fallen more than 30% from its peak against the US dollar, and yet there has not been any meaningful pick up in Japan s export growth. Moreover, the more integrated that a country becomes into the global economy, the less the effect on its exports of any changes in its currency. This is a result of the development of global supply chains over the past two decades, as well as the fact that, today, most products are made from parts that can be manufactured in several different countries. Is another Asian crisis likely? The question has been raised whether we will see another Asian crisis, similar to the one in 1997/98. In our view, we do not foresee a liquidity crisis, but we do acknowledge that the economic growth outlook remains sub-par as a result of excessive leverage in the economies. Private sector debt in non-japanese countries within Asia is at an all-time high relative to GDP, reaching close to 160%. This compares to around 110% during the Asian crisis. In addition, credit-to-gdp ratios are many times higher than during the crisis. High levels of debt are drag on spending and limit the potential upside for credit expansions. A financial crisis is always a liquidity crisis: the inability to repay near-term obligations arises either because debt service burdens are too high, or because of a sudden withdrawal of liquidity from the system. True, current account balances and loan-to-deposit ratios of Asia s banking system have deteriorated compared to However, they are nowhere near 1997 levels, when many ASEAN countries were running current account deficits, and had banking system loan-todeposit ratios in excess of 100%. 16

17 The other difference is foreign reserves. Most central banks in Asia, with the exception of Malaysia, have spent the last two decades building up their foreign reserves. Therefore, Asian central banks now have a cushion of foreign reserves that they are able to use if there is a sudden withdrawal of external funding. Finally, compared to the crisis in 1997, most economies in Asia now have more flexible exchange rates. This means any exchange rate adjustment can be undertaken in a gradual manner, compared to the sudden, sharp depreciations we saw in Structural reforms are needed for Asia to deliver future returns Asia Pacific markets, with the exception of Japan, have corrected sharply in the third quarter. The region now trades at a discount to global developed markets, yet valuations are not very cheap by historical standards. For Asia to deliver sustainable market performance, structural reforms are the only answer: less state intervention, more market-oriented reforms, flexible labour markets, and better incentives that encourage innovation and entrepreneurialism. Structural reforms, however, are painful to execute economically and politically. Therefore, we may need to see more pain before policymakers will respond in a more constructive manner. China Investors have lost confidence in China, given the equity market volatility and the attempts at support by the Chinese authorities. In addition, on 11th August, the People s Bank of China allowed the market to play a greater role in determining the exchange rate of the renminbi: the weakened currency triggered speculations over further renminbi depreciation, as well as capital outflows. We expect this change would increase volatility of the renminbi going forward, but think it should also help to alleviate downward pressure on the economy in the near term. Despite the People s Bank of China s sustained effort of cutting interest rates and the required reserve ratio, concerns over macro deceleration continued to cloud the outlook for China. Key economic indicators showed further weakness on almost all fronts in August: industrial production growth remained at a low level of 6.1%, fixed asset investment (FAI) moderated to 10.9%, and exports and imports fell 5.5% and 13.8% respectively from a year earlier. 1 The only bright spot was retail sales, which held up well and grew by 10.8% over the last year. 1 This trend is also in line with the relatively encouraging services purchasing manager index (PMI) that stays comfortably in the expansionary zone. We maintain the view that both monetary and fiscal policies will continue to be accommodative in China to contain economic downside risk. Real interest rates remain at a high level and there is room for further cuts in nominal interest rates. Other policy instruments, such as Pledged Supplementary Lending, could also be deployed to inject liquidity into targeted economic segments if the situation requires. As for fiscal spending, we are seeing higher government investment in the railway and power grid segments to make up for the weak investment in property so far this year. Although we do not envisage a reacceleration in GDP growth, these counter-cyclical measures should prevent China from suffering a hard landing. Also, over the past few months, the quick progress of the Local Government Debt Swap Programme has reduced refinancing pressure for local governments and has helped to mitigate the balance sheet risk of banks. Another more subtle, but positive, economic evolution in China is the gradual shift towards a more serviceled model. In fact, the services sector has already overtaken the industrial sector as the largest contributor to China s GDP: according to data from the World Bank, the services sector accounted for 48.2% of the country s GDP in , while contribution from the industrial sector has dropped to 42.6%. 3 With the Chinese government s continued effort to relax administrative controls and restrictions related to the service industry, we argue that services and domestic consumption should become the main driver of the economy going forward will mark the start of China s next Five-Year Plan ( ) and a key focus in the fourth quarter should be the release of the relevant proposal. The draft of the 13th Five-Year Plan will be discussed by the Fifth Plenary Session of the 18th Communist Party of China Central Committee (CPCCC) scheduled for October, and then submitted for approval by the National People s Congress in March next year. According to an official statement made after the July meeting of the Politburo of the CPCCC, China will continue to focus on economic development and aim for a development pattern of higher quality, efficiency, equality and sustainability. Regarding the development of specific industries, it is expected that 17

18 Global Strategic Outlook - 3rd 4th Quarter 2015 initiatives would potentially be introduced to promote the growth of the services industry, industrial automation, and internet plus. As a consequence of regulatory uncertainty and direct government intervention in the domestic stock market, investment sentiment was dampened and investors sidelined, especially in the onshore A-share market. Although macro and corporate earnings growth deceleration were expected, the de-rating over the past few months has been drastic and the risk premium on Chinese equities has risen considerably. The MSCI China Index has fallen by one-third since April and its current P/E is already close to the low end of its historical range. Given our expectation of economic stabilization, the announcement of details related to the 13th Five-Year Plan and further reform progress, we expect order to be restored to the equity market within the next couple of quarters. Japan Economic growth in Japan continued to be disappointing: second-quarter real GDP contracted by 1.2% on an annualized basis, led by decline in private consumption and exports. More positive news came from an increase in inventories, though it remains to be seen how the weakness in emerging markets will affect shipments over the next couple of quarters. Japan s equity market is one of the better performers globally this year as investors have focused on how companies are spending the huge cash pile sitting on their balance sheets. We have seen signs that Japanese companies are starting to invest in capital expenditure for future growth, as well as to improve shareholder returns. Given the adoption of the corporate governance code in the corporate sector and the stewardship code by the institutional investors, companies have improved on their capital efficiencies by increasing dividends and increasing share buybacks. The equity market has seen a correction in the last month, reflecting concerns about whether the US Federal Reserve will increase interest rates, as well as the fear of a hard-landing for the Chinese economy. The price-to-earnings multiple of Japan s equity market has dropped to below 14 times, which is the lowest level over the past three years. Better margins, corporate restructurings, and more positive earnings revisions should see higher returns for Japanese companies and therefore justify a higher valuation for Japanese equities. India India s first-quarter fiscal-year 2016 GDP growth surprised on the downside, decelerating from 7.5% to 7% on a year-on-year basis. Both consumption and investment improved, but net export slowed. Domestically, it appears that a gradual recovery is under way. Industrial production growth accelerated in July, led by acceleration in capital goods. Medium and heavy commercial vehicles sales, which have been good indicators of economic activities in the past, improved for the fifth consecutive month. While industrial activity seems to have picked up, domestic consumption has yet to show a consistent trend of improvement. High-frequency indicators, such as two-wheelers sales growth, fell year-on-year in August. This could be due to a slowdown in rural income and government spending. However, urban discretionary consumption seems to be holding up better, as shown by four-wheelers sales numbers. Even as domestic recovery is gaining momentum, weak external demand continues to weigh on overall growth. Additionally, the currency has not depreciated as much as its regional peers, which could undermine India s export competitiveness. With those factors in mind, one can expect overall GDP growth to hover around current levels in near term. Progress on policy reforms has hit some snags over the past couple of months. The Goods and Service Tax (GST) and Land bill, originally planned for passage during the monsoon parliament session, have been delayed and have now been pushed back to the winter session: it seems increasingly unlikely that GST will be implemented by April Lastly, the results of the election in Bihar will have strong implications for Prime Minister Modi s party, the Bharatiya Janata Party (BJP). A win in the state will help the BJP to increase its seats in the Rajya Sabha (the upper house of parliament). Having a majority in Rajya Sabha would enable Modi to be more aggressive in pushing out reforms, as the BJP already has the majority in the Lok Sabha (the lower house of parliament). Korea Korea is facing a difficult export environment, the likes of which have not been seen since the 2008 financial crisis: the decline in its exports worsened from 3.0% in the first quarter of this year to 14.9% in August. A number of factors contributed to this poor performance. Firstly, export prices fell as lower energy prices drove down prices of petroleum and chemical products. Secondly, demand from Europe, China and other emerging economies deteriorated further. 18

19 Thirdly, Korean products became less competitive, given the strength of the Korean won against the euro and the Japanese yen during the first half of The renminbi s small devaluation in August heightened worries that Korean exports would suffer if the Chinese currency were to depreciate further. We are not too concerned about the potential currency movements per se. The Korean won has been quite weak against the renminbi throughout the past year, and would likely move in step with the renminbi should it depreciate further. However, a lower renminbi would likely signal serious weakness in the Chinese economy. This, together with the secondary impact on other emerging economies, would deal a significant blow to demand for Korean exports. 1 Bloomberg, as at 30 September Services: Data Worldbank. org/indicator/nv.srv.tetc.zs 3 Industry: Data Worldbank. org/indicator/nv.ind.totl.zs/countries Given the poor export outlook, corporate earnings are likely to see limited growth this year. Many of the large export companies have sizeable exposure to China and other emerging economies. This is most evident in the auto sector, where sales to China fell sharply, forcing automakers to implement more aggressive price discounting. In the technology sector, shipments of computers and mobile phones were lower than expected: competition has intensified due to the increased presence of Chinese players. On the other hand, there are selective areas where Chinese consumer demand seems to have remained quite resilient. After Korea s Middle East Respiratory Syndrome (MERS) outbreak ended in July, tourist numbers from China are recovering rapidly, from more than a 60% decline on a year-on-year basis in July to around a 5% increase in the first two weeks of September. We also understand that Korean cosmetics sales in China continue to grow strongly, unaffected by the broader slowdown in consumption. With the much more uncertain economic outlook, there is rising expectation of further interest rates cut by the Bank of Korea. It will be a difficult call, in our view, as the US is poised to raise rates, while capital continues to flow out of emerging markets including Korea. Nevertheless, even without further rates cut, the current low rates environment should continue to encourage Koreans to purchase homes. Housing prices have continued their upward trend in recent months, supported by high transactions. Barring an emerging market crisis, the housing market recovery is expected to continue and provide some support to the domestic economy. 19

20 Equities outlook - style Klaus Teloeken Chief Investment Officer, Systematic Equity Key points In the US, we expect trend-following strategies to struggle a bit ahead of the first interest rates hike. Instead, we will put more emphasis on quality styles, like high return on invested capital or earnings visibility. In Asia, given the concerns over China, we maintain a bias towards quality and stable growth names. We expect the premium for these names to persist until investors are confident to position for an upturn in inexpensive cyclicals. In Japan, we expect that trend-following strategies will continue to do better than in the pre-abe era, and that value strategies will continue to do worse. In Europe, we continue to favour a more cyclical investment style profile that emphasizes attractive valuations with some support from positive price momentum and earnings revisions. The third quarter of 2015 has been a solid quarter for style investors. Most investment styles, like price momentum, earnings revisions, stable growth and high quality posted solid gains. Among the major investment styles, only value and small caps lagged (Figure 1a and Figure 1b). The investment style performance was largely driven by macro-economic factors, such as the oil price or worries over China. In particular, trend-following strategies, like momentum or revision strategies, closely followed the trend in oil prices. Such strategies saw a solid performance as oil prices resumed their downward trend in the third quarter, after a short pause during the previous quarter. Further worries over Chinese growth, and its impact on the global economy, pushed cyclical investment styles, such as value and small caps, lower. On the other hand, noncyclical investment styles, like stable growth and high quality, benefitted, as did to a lower extent trendfollowing strategies, such as price momentum and earnings revisions, due to a bias towards non-cyclical, defensive names. Regional investment style performance was rather differentiated in the third quarter. The backdrop for investment styles was most supportive in Europe where most major investment styles saw strong returns; the investment style value was the only exception. The backdrop for investment styles was most challenging in Japan where none of the major investment styles added to returns, except for small caps. In emerging markets, the performance of investment styles was reminiscent of the early stages of a recession since it was characterized by a flight to quality and a sell-off in cyclical names. Which investment styles do we favour going forward? In the US, leading indicators are continuing to signal an economic expansion, but they are also close to past peak levels. Historically in this mid-cycle environment, all major investment styles have done well, with the investment style value taking a narrow lead, followed by price momentum and earnings revisions strategies. Hence, we have favoured a more cyclical investment style profile that emphasizes attractive valuations with some support from positive price momentum and earnings revisions. However, as markets approach the first interest rate hike, we expect trend-following strategies to struggle a bit as the increased market volatility in the tightening phase threatens the credibility of past trends. Of course, the US Federal Reserve has carefully prepared markets for the rate hike. Hence trendfollowing strategies will have had time to adapt to the new monetary environment and so might do better in this cycle than in past hiking cycles: this is particularly true when comparing with the situation in 1994, when the strong rise in interest rates surprised markets, and trend-following strategies suffered a lot. But still, we think it is time to de-emphasize trend-following strategies somewhat, as the market has yet to fully come to terms with the normalization of monetary policy: in fact, we think we have just have entered the digestion phase. Instead, we will put more emphasis 20

21 on quality styles, like high return on invested capital or earnings visibility, that usually do well ahead of, and around, the first interest rate hike. In Asia, we expect the fears of a hard landing in China to dominate investment style performance for a while. This should help non-cyclical and defensive investment styles, like stable growth as well as high quality, at the expense of cyclical and higher beta investment styles, such as value and small caps. However, the valuations of cyclical, higher beta names are approaching an all-time low in Asia, while valuations of lower beta, quality names are approaching an all-time high. Nevertheless, we maintain a bias towards quality and stable growth names as we expect the premium for these to persist until investors are confident to position for an upturn in inexpensive cyclicals which we think is far off. In Japan, since Shinzō Abe took over three years ago, the performance of investment styles has been very different from the patterns of the past. In most of the past 25 years before Abe took over, value was the dominant investment style in Japan, while trendfollowing investment styles like medium-term price momentum or earnings revisions while doing well in the rest of the world did not work in Japan. However, things have changed, and the performance of investment styles in Japan has been quite the opposite of the performance patterns of the past. In fact, it has been quite similar to the performance of global investment styles over the past years, with trendfollowing investment styles, such as price momentum and earnings revisions, taking the lead, and value styles being weaker than is typically the case at this stage of the cycle. Going forward, we expect that trend-following strategies will continue to do better than in the pre- Abe era, and that value strategies will continue to do worse. Trend-following strategies generally do well as long as the prevailing environment market, economic or interest rate remains stable. In that case, trends persist as long as the environment persists. We expect that the current backdrop, characterized by a weaker currency and ultra-low rates, will persist. The addition of further quantitative easing would also bode well for trend-following strategies. The weaker performance of value strategies over the last few years in Japan reflects concerns over the longterm success of Abenomics: investors are not yet willing to price in a persistent improvement in the growth perspective of Japanese stocks. Hence, growth is perceived to be a scarcity, and investors tend to prefer scarce growth stocks over abundant value stocks. However, once investors start to put more faith in the longer term success of Abenomics, value stocks are likely to stage a comeback. But, for now, the recent concerns over China, and their negative impact on the Japanese economy, will probably continue the lead of growth over value. In Europe, the weaker euro, lower oil prices and supportive earnings revisions all point to a stronger economic recovery in A stronger economic outlook should help cyclical investment styles, like value or small caps, more than non-cyclical investment styles, such as high quality or stable growth, as should additional quantitative easing. Trend-following strategies, like momentum or revision strategies, are also expected to do well in this environment, albeit less so than value, as long as the prevailing economic and monetary environment persists. Hence, we continue to favour a more cyclical investment style profile that emphasizes attractive valuations with some support from positive price momentum and earnings revisions. The high valuation of non-cyclical investment styles, like high quality or stable growth that have only been more expensive at the peak of the euro zone debt crisis, also supports our cyclical bias. Euro zone quantitative easing means that bond yields will be lower for longer. This means the hunt for yield will continue, and investors will continue to reward stable, bond-like equities. This should bode well for high dividend strategies based on low risk stocks with sustainable earnings. What are the implications of a potential rise in interest rates in the US for high dividend names? Empirically, irrespective of the economic outlook, whenever interest rates rise, high dividend names struggle. This is unsurprising given that investors increasingly look at high yielding names as bond substitutes in times of low rates. Therefore, when rates rise, these bond substitutes lose some of their appeal. Most at risk are the more defensive high dividend names, as these stocks have been sought as the true bond substitutes. Therefore, a high dividend strategy focusing more on cyclical high yielding stocks faces much less of a headwind when interest rates are on the rise. And, as rising rates mostly go hand-inhand with an improved cyclical outlook, a more cyclical high dividend strategy should actually face a tailwind. 21

22 Summary The third quarter has been a solid quarter for style investors, with most investment styles, like stable growth and high quality, posting solid gains. Among the major investment styles, value and small caps lagged amid renewed worries over a hard landing in China. Going forward, with most regions still being in the mid-stage of an economic recovery, all major investment styles are expected to do well, with the investment style value taking a narrow lead, followed by price momentum and earnings revisions strategies. In the US, though, as markets approach the first interest rate hike, we expect trend-following strategies to struggle modestly as the increased market volatility in the tightening phase threatens the credibility of past trends. Hence, ahead of the first interest rate hike, we will increase our emphasis on quality styles since these should benefit from a higher level of volatility. Figure 1a: Relative performance of investment styles vs. MSCI world (measured in %) Q Value Growth Revisions Momentum Quality Small Cap Figure 1b Jan 15 Feb 15 Mar 15 Apr 15 May 15 Relative performance in % Jun 15 Jul 15 Aug 15 Sept 15 Q1 Q2 Q Value Growth Revisions Momentum Quality Small Cap Relative performance in % Source: Allianz Global Investors, as at 24 September Past performance is not a reliable indicator of future results. Historical simulation: Performance after transaction costs. Assumptions of the historical simulation: The above figures represents hypothetical portfolios with the investment styles noted. Performance results for hypothetical portfolios have certain inherent limitations. The results do not reflect the results of trading in actual accounts or the material economic and market factors that could impact an investment manager s decision-making process. The performance figures are before taxes and before transactions costs, dividends are reinvested. All weights in the portfolios are initially of equal size. The resulting portfolio is re-weighted to ensure sector and region neutrality. Portfolios in the above figures are rebalanced monthly and investment styles are built by choosing the top 20% of stocks in an investment style within the MSCI World Index. 22

23 3. Fixed Income outlook - Global Key points Although the Fed has refrained from liftoff in September, we still expect rates to start to rise this year. While we think the tightening cycle will be gradual, we expect more tightening than implied by current market pricing. In the euro zone, front-end yields should remain well anchored by monetary policy. However, euro-area yields in the medium and longer term parts of the curve have the potential to move higher over the medium term. We see few obstacles to prevent additional policy easing in Japan. We continue to hold a constructive longterm view on the US dollar and British pound versus the euro and the Japanese yen. The global recovery continues, albeit with an increasing divergence in growth momentum between developed markets and emerging markets. While overall trend growth is lower than before, the upswing in developed markets is intact, driven by the strength of the consumer sector. In contrast, in aggregate, emerging markets are having to contend with a structural transition phase and are in a difficult phase of the economic cycle. Uncertainty regarding the strength of the Chinese economy is unlikely to disappear in the near term. However, the overall effect for developed markets should remain contained, providing a hard landing in China can be avoided. US: recovering from the weak first quarter The pace of growth in the US economy improved following a weak first quarter in which unusually severe weather conditions appeared to have played a major role. While the stronger US dollar continues to have a moderating impact on the manufacturing sector, business surveys show that the sentiment in the service sector continues to run at strong levels. During this recovery, labour productivity growth has remained at low levels, allowing the unemployment rate to decline much faster than even the US Federal Reserve (Fed) had expected. At the same time, low productivity growth has held back a decisive pick-up in wage growth. We expect the labour market to improve further over the months ahead, and anticipate further signs of a pick-up in wage growth. The core rate of consumer price inflation has showed resilience so far, despite downward pressure from second-round effects stemming from lower energy prices and lower import prices due to the appreciation of the US dollar. Over the months ahead, we expect the core rate of consumer inflation to shift higher gradually. In contrast, headline inflation remains around the zero level, due to the significant decline in the oil price. The Fed continues to prepare market participants for the start of monetary policy normalization. Should tensions in the global economy emerge, it appears willing to delay normalizing monetary policy. However, we see a good chance for conditions to favour the majority of Federal Open Market Committee members becoming reasonably confident with respect to agreeing on a first rate hike this year. Thereafter, the tightening cycle is likely to be gradual, and we would not be surprised to see a downward adjustment in the expected terminal rate. While we expect the Fed to remain cautious with regards to the timing and magnitude of any rate rises, we expect more tightening than implied by current market pricing. As a result, we see potential for the front-end of the US yield curve to rise above forward implied levels. Euro zone: the ECB stands ready to extend QE if required In the euro zone, the moderate recovery continues, and it looks as though an agreement with Greece could finally be found. Improved financial conditions, cyclical factors, an increasingly expansionary fiscal stance, the positive impact of lower energy prices and Ingo Mainert Chief Investment Officer, Balanced Europe 23

24 the lower exchange rate, all contribute positively to the recovery. Nevertheless, the growth potential within the single currency zone remains subdued, and labour market slack remains large. As a result, we expect core inflation to remain around current levels for the next couple of months before gradually moving upwards. Again, headline inflation will be dominated by the influence of energy prices (oil). The European Central Bank (ECB) has indicated it would extend, or increase, its asset purchase programme if needed, especially if there were an unwarranted tightening of financial conditions or a lowering in the outlook for inflation. As the euro remains the main transmission channel, we believe that ECB policy over the next couple of months will be very much influenced by the monetary stance of the Fed. The longer the Fed refrains from raising rates, the more the ECB is inclined to act. We think that an extension of quantitative easing beyond September 2016 is likely, but that a change of the deposit and refinancing rate is unlikely to occur. As a result, front-end yields should remain well anchored by monetary policy. However, euro-area yields in the medium and longer term parts of the curve have the potential to move higher over the medium term, driven by technical factors, a potential stabilization in inflation expectations, and monetary policy tightening in the US. Japan: exports and household income are rising While the Japanese economy is currently undergoing a soft patch, we believe the overall modest recovery should continue. As a result of yen depreciation, the export sector is strengthening. Real disposable household income has risen too, but consumers willingness to spend is still subdued. The Abe government is expected to continue with its political and structural reforms. While inflation dynamics have been disappointing, the Bank of Japan continues to expect (core) inflation to move towards the target, going forward. In our view, however, there are few obstacles to prevent additional policy easing. Overall, a moderate normalization of US monetary policy should neither derail the cycle in developed markets, nor trigger a crisis in emerging countries. However, monetary policy normalization in some developed markets remains a fine balancing act given the current fragile conditions in several emerging countries. US dollar: picture complicated by uncertainty about Fed timing and China The euro/us dollar exchange rate was volatile in August, and overall, the euro strengthened as concerns over China s growth and the related equity market volatility caused investors to discount a rise in US interest rates in September, weighing on the US dollar. The euro also benefited from higher risk aversion, as it is regarded as the funding currency of choice due to its negative short-term interest rates. Although we do not rule out further volatility in the euro/us dollar exchange rate, we regard the current up-move as a correction: monetary policy divergence still holds sway, and could stabilise the exchange rate. 5-year inflation expectations, the ECB s preferred measure, have fallen since early July, effectively unwinding most of the rise associated with the ECB s asset purchase programme. This might help the ECB to sound dovish and possibly talk down the euro. Looking at the bigger picture, our constructive view of the US dollar remains intact, and is underpinned by monetary policy divergence. However, falling equities and higher risk aversion could lead to a delay in any rise in US interest rates, which will weigh on the US dollar. Therefore, higher levels of risk aversion are a risk to our bearish fundamental view on the euro. That said, if the Fed hikes rates and there is no lasting increase in risk aversion, 2-year US bond yields will move higher and we expect the US dollar to react accordingly. Japanese yen: benefiting from risk aversion The Japanese yen was a beneficiary of the rising risk aversion and uncertainty surrounding the Fed s expected rate rise last month. Looking ahead, better US economic data and an eventual US rate hike should support the US dollar. In addition, the Government Pension Investment Fund s new portfolio allocation targets overweights foreign assets by more than expected. This should also weigh on the value of the yen. In our view, as soon as US 24

25 short-term bond yields move higher, the US dollar/ Japanese yen exchange rate should rise considerably. British pound: corrected lower last month The euro/british pound exchange rate has strengthened recently. We regard this as a correction. In our view, further strength in the British pound is a function of the UK s relative growth advantage, especially compared to the euro zone. This economic strength will likely support capital inflows, which would offset the UK s large current account deficit. Sterling will benefit from monetary policy divergence, just like the US dollar. 25

26 Fixed Income outlook - Europe Franck Dixmier Global Head of Fixed Income and Chief Investment Officer of Fixed Income Europe Key points We believe the Federal Reserve has erred in not starting to raise rates at its September meeting, and expect US interest rates to rise in In contrast, the European Central Bank has made clear its intention to increase its quantitative easing programme, if needed. This will likely cap any rise in long-term euro-zone bond yields caused by a rise in US interest rates. Spreads in credit markets have continued to widen to levels last seen in late We remain bullish on credit, believing it to be supported by solid fundamentals and attractive valuations, although we acknowledge that technical factors are more challenging. In September, the US Federal Reserve (Fed) was once again able to test the strength of its influence over financial markets. Rarely has a forthcoming Federal Open Market Committee (FOMC) decision been so widely anticipated and attracted so much commentary, nor has the ensuing inaction been so devastating! In our view, the Fed has erred by leaving the fed funds rate unchanged, since there are several good reasons for why it should have started to normalize monetary policy: among these, the US economy is close to full employment, consumer confidence is driving domestic growth, and the property market is healthy. We acknowledge that inflation remains at a low level, impacted by the fall in commodities prices. However, given almost full employment, why should the principles underpinning the Phillips curve be discarded? As several members of the FOMC have highlighted, it is highly likely that inflationary tensions will ultimately influence wages: supply is increasingly limited in the US employment market, while demand remains strong. The reasons given for leaving rates unchanged were also surprising, as it is unusual for the Fed to base its decisions on external considerations, such as the risk of a slowdown in China and other emerging economies. Traditionally, domestic issues have always been the main factors taken into account in determining monetary policy. Muddled communication from certain members of the FOMC also added to the confusion: too much freedom of speech, combined with the clamour for transparency, can ultimately totally eclipse the so-called forward guidance which is meant to channel investor expectations. The recent events have confirmed our expectation that the Fed will start to raise rates in However, we believe that the rate-hike cycle will adopt an atypical profile in terms of its duration, as well its amplitude. Given that the US economy is highly leveraged, it would not be surprising to see the Fed cap its rate hikes at a level below that of medium-term target inflation. The Fed will also want to avoid an inversion of the yield curve since, in the past, this has always heralded an imminent recession. The recent lack of movement from the Fed has, therefore, not caused us to change our opinion. We continue to expect future monetary policy divergence between the Fed, which we believe will soon start to normalize its monetary policy, and the European Central Bank (ECB), which is sending out a very clear message regarding its plan to step-up its quantitative easing programme (QE) if circumstances require. However, the ECB s credibility may potentially be undermined: the credit cycle has taken off in the euro zone, which is good news and to the central bank s credit, but the recent downgrade in inflation forecasts raises doubts over the efficiency of its policy. The message from the ECB s September press conference was unambiguous, reaffirming that the central bank has the will and the capacity to intervene, and is ready to do so. QE2 is thus an increasingly credible scenario in the euro zone. 26

27 What will be the impact on fixed-income markets? It is interesting to note that the markets have been mainly sceptical regarding the Fed s capacity to raise its rates over the past few years. At the end of September, the probability of a rate hike in 2015 was only 41% 1. This is a worrying observation given the implications of such a move for the pricing of all asset classes. Consequently, we anticipate volatility to spike following the announcement of an initial rate hike, and to be accompanied by a repricing among the shortterm and intermediary segments of the US yield curve. In this context, long-term euro-zone yields are likely to rise. However, any such steepening is expected to be rapidly capped by the structural support provided by the ECB s omnipresence in the markets through its current QE programme, which also further increases the likelihood of a QE2. The credit market rallied during the first quarter, but spreads widened during the second quarter, with high volatility in September. Fears over slowing emerging market growth, as well as the recent decision by China to devalue its currency, have created instability in the market. Although anticipation of the first increase in US interest rates since 2006 was not the fundamental cause of the acceleration in the market trend, the Fed s inaction was clearly the trigger. Consequently, credit markets have returned to levels last seen at the end of 2012, with a spread of 150 basis points in the investment grade market and 550 basis points in high yield. Despite the fragile environment, as well as reduced liquidity and negative momentum, we remain bullish on credit market for the following reasons: Solid microeconomic fundamentals Financial and non-financial issuers are in robust health due to their cash-rich balance sheets and satisfactory financial debt levels. Debt levels are far below their historic peak (net financial leverage among investment grade companies is close to 1.7x, and 3.3x in the high yield segment, with banks T1 capital ratios at above 10%), helped by particularly attractive refinancing costs, which are enabling companies to progressively reduce the cost of their debt. With capital expenditure remaining low, a re-leveraging cycle is not anticipated in the medium term. However, the resurgence of idiosyncratic risk (Glencore and Volkswagen are good examples) further reinforces the need for a selective security picking approach. Unstable technical factors Current weakness in the investment grade market is mainly due to less favourable technical factors. The high level and pace of new issues (EUR 197 billion gross non-financial bond issuance to date) has continually tested the market s absorption capacity, whereas capital inflows into the asset class have been disappointing. Issuance is expected to remain abundant 2 and is likely to continue to weigh on the market. Furthermore, the divergence in central bank monetary policy has encouraged a wave of non- European issuers to launch opportunistic deals in the euro market. This has radically changed the regional composition of the indices, with the US now representing the second heaviest component in the euro investment grade market 3. The high yield market has been unbalanced chiefly by an outflow of cash from funds, with the flow of primary issues declining sharply. Liquidity in the secondary market has also reduced significantly, which has amplified volatility. Banks are now closing out their open market positions at the end of each quarter in order to optimize their regulatory ratios. Attractive valuation levels Credit spreads, which have returned to the levels seen at the end of 2012, have now become attractive once again. In the low interest rate environment in Europe, the search for yield will remain a dominant theme and credit bonds, therefore, offer an alluring risk-return profile. 1 Bloomberg, as at 30 September EUR 250 billion of non-financial bond issues expected in US issuers now represent 27% of the European investment grade index. 27

28 Fixed Income outlook - Asia-Pacific David Tan Chief Investment Officer, Fixed Income Asia Key points Weak commodity prices are dampening inflation, which is positive for Asia. Most Asian economies still have some policy flexibility (monetary and fiscal) to support growth ahead. The key risks for Asia continue to be the prospect of US Federal Reserve (Fed) rate hikes and a larger, more prolonged China slowdown. We expect Asian local rates to trade sideways or yields to decline slightly in the near term. We continue to like Indian local bonds which are supported by stabilizing inflation, a credible central bank and favourable technicals due to restrictive foreign investor quotas. More selectively, we also like Philippines government bonds. We expect Asian currency divergence to continue, driven by fundamentals. The Indian rupee continues to be our favoured Asian currency, providing low volatility carry. We continue to favour the Asian credit markets, particularly Chinese property names where our focus is on names that have good access to funding and are more defensive in land acquisition and financial management. The third quarter of 2015 was driven by events in China which negatively impacted sentiment across the rest of Asia. In July, we saw the sharp decline in the China A-share equity market, resulting in the suspension in trading of more than half of China s 2,808 listed companies. In August, the Chinese authorities devalued the Chinese renminbi in efforts to move the currency towards a more market-driven mechanism as China aims for the renminbi s inclusion in the International Monetary Fund s (IMF) Special Drawing Rights (SDR) basket. China then simultaneously cut the benchmark interest rate and the bank s reserve requirement ratio in an effort to shore up still weak economic growth. Elsewhere in Asia, the Malaysian Prime Minister was caught up in a financial and political scandal, while, in Indonesia, leader Joko Widodo is fighting his own battles amid weaker commodity prices (commodities make up over 50% of Indonesia s exports) and a continually depreciating rupiah. Amid the weaker macro backdrop, most Asian local bond markets gained in local currency terms, supported by benign inflationary conditions and the prospect of further policy rate cuts in some markets (Figure 1). The key exceptions were Indonesia, the offshore renminbi market, and Malaysia: negative returns were seen in these markets. In Indonesia, local yields rose sharply over the quarter as the currency continued to slide and inflation spiked due to higher food prices (and the impact of the weaker rupiah). Offshore renminbi bonds were also weaker as a result of negative sentiment following the renminbi devaluation. The decline in the renminbi precipitated further weakness in Asian currencies, with the Malaysian ringgit and the Indonesian rupiah suffering the sharpest declines (-14% and -9% respectively over the quarter). Overall, the Asian local currency bond market declined by -5% (HSBC Asian Local Bond Index) in US dollar terms over the quarter (Figure 2). Asian credits were relatively more resilient (the return on the J.P. Morgan Asia Credit Index was -0.5% for the third quarter) supported by lower US Treasury yields and decent yield carry. This was offset by sharply wider credit spreads over the quarter (wiping out yearto-date tightening gains), with the high yield sector underperforming due to increased risk aversion. Despite the negative news flow from China, Chinese credits held up relatively well, with property credits underpinned by further stabilization of the Chinese property sector. In terms of supply, new issuance activity was quiet over the summer given the backdrop of the market volatility. 28

29 Market outlook Despite the weaker macroeconomic backdrop, the weakness in commodity prices has kept inflation at bay. This is positive for Asia. Most Asian economies still have some policy flexibility (monetary and fiscal) to support growth ahead. Asia s macro fundamentals are much improved compared to the 1990s (better current account balances, stronger foreign currency reserves, more flexible currencies, multilateral/ bilateral swap arrangements), so our view is that another Asian financial crisis is unlikely. The key risks for Asia continue to be the prospect of US Fed rate hikes and a larger, more prolonged China slowdown. While there has been a lot of talk about the negative impact of a Fed rate hike on emerging markets (including Asia), our view continues to be that Asia can manage a gradually normalizing Fed, which is our base case scenario. For China, we expect to see further monetary easing and other policy measures ahead to support growth. With this backdrop, we expect Asian local rates to trade sideways or to decline slightly in the near term. We believe further easing is possible in selective markets such as China and Korea. India conducted a 50 basis points front-loaded cut at the end of September which means further cuts for the rest of 2015 are less likely. Indonesia has high policy rates (7.5%), but we are unlikely to see a rate cut until the rupiah stabilizes and inflation moderates. Malaysia s situation is complicated by the need to consider potential outflows and its deteriorating external balance position. For the rest of the major Asian economies, while further rate cuts are possible, policy rates are already relatively low, so policy makers will need to also look to fiscal policy to support growth. We continue to like Indian local bonds which are supported by stabilizing inflation, a credible central bank and favourable technicals due to restrictive foreign investor quotas. More selectively, we also like Philippines government bonds. The Philippine domestic economy remains resilient, supported by overseas worker remittances and government spending, and it is a key beneficiary of weak commodity prices. expect Asian currency divergence to continue, driven by fundamentals. The Indian rupee continues to be our favoured Asian currency, providing low volatility carry. Asian credit valuations are attractive following the recent market sell-off. We continue to favour selective high yield credits given their greater yield and spread buffer, along with lower sensitivity to rising US Treasury yields (due to the shorter duration of the sector). With markets expected to remain volatile and developed market yields continuing at low levels, Asian investment grade credits provide good yield pick-up and are characterized by still stable fundamentals (see Figure 1, 2 and 3). We have been positive on the Chinese property sector for most of the year and it has outperformed due to improving sales data (focused on the higher tier cities) amid China s policy relaxation measures over the year. Recently, the Chinese authorities lowered the mortgage down-payment ratio for first time homebuyers to 25% from 30% for cities without home purchase restrictions. This measure was implemented strategically just before the start of the Golden Week in China (commencing 1 October). The Golden Week is typically a period when many developers launch new projects or increase the number of units for sale, in anticipation of increased demand during this holiday period. We believe this will help to prop up sales meaningfully in the China property sector. Looking ahead, we continue to be highly selective in our investments in China property credits, given the potential for headline and idiosyncratic risks. We focus on names that have good access to funding, and that are more defensive in land acquisition and financial management. Asian currencies could see a tactical rebound given the large sell-off we have seen recently. While we remain cautious overall, we look to take advantage of tactical opportunities during periods of volatility. We 29

30 Figure 1: Asian local currency bonds: Q performance Q3 return Returns are based on the HSBC Asian Local Bond Index. % Overall Index India Hong Kong China Onshore Korea China Offshore Philippines Taiwan Singapore Thailand Indonesia Malaysia Local currency return US dollar return Source: Bloomberg, Allianz Global Investors, as at 30 September Past performance is not indicative of future returns. Figure 2: Asian USD bonds: Q performance Q3 return Returns based on the J.P. Morgan Asia Credit Index. Overall Market Corporate - Investment Grade Corporate Overall Quasi-Sovereign Sovereign - Investment Grade Sovereign - High Yield Corporate - High Yield % in USD Source: Bloomberg, Allianz Global Investors, as at 30 September Past performance is not a reliable indicator of future results. Figure 3: Asian investment grade 1 More upgrades than downgrades this year 1 Asia Investment Grade only includes China, Korea, Indonesia and India. No. of upgrades and downgrades Upgrade Downgrade Source: S&P, Morgan Stanley Research, as at 30 September Past performance is not a reliable indicator of future results. 30

31 4. Multi asset outlook - A more neutral bias to risky assets Key points The risk that rates remain too low for too long has increased the risks of policy error later in the cycle. With emerging market weakness remaining a concern, the market cycle signal for equities is much weakened, resulting in a more neutral stance in asset allocation. Our fundamental signal indicates a preference for European over other equity markets, but this is not confirmed by our market cycle analysis which indicates further weakness of a similar magnitude to other regions. The recent spike in volatility means the market cycle signal is less supportive of an underweight position in bonds. However, we remain underweight the US and UK core government bond markets. We retain a structural underweight position in REITs and overweight positions in the US dollar and commodities. Some market commentators have been espousing the overvaluation of asset markets for the last few years. Having been great beneficiaries of the extraordinary measures implemented by central banks, both equities and bonds continued to appreciate on a seemingly endless uptrend that is, until last quarter. During the third quarter, volatility in emerging markets spread to the developed world as China s inability to deflate its equity bubble in a controlled manner, coupled with a surprise devaluation of its currency, led investors to question the strength of Chinese and, by extension, global growth. Many emerging markets were already suffering from deteriorating economic fundamentals, and the talk of a lift-off in the US interest rate cycle in September provided a further catalyst for weakness in the region. Whilst the US Federal Reserve (Fed) surprised some by not raising rates 50% of economists surveyed on Bloomberg expected a hike most commentators agreed that the rate decision and post-meeting press conference provided even less clarity on the path of rates in the coming quarters. The surprise seems to have come from the reference to international factors impacting the Fed s decision, even though the domestic economy was judged to be strengthening. Downward revisions to inflation expectations were justified by US dollar strength and energy price weakness, with the Federal Open Market Committee (FOMC) unclear of exactly how transitory this disinflationary impact will be. Global macroeconomic data continues to retreat; although US indicators have recently stabilized, the recovery in the euro zone and UK has lost further momentum. Despite the pursuit of extraordinary measures by the European Central Bank (ECB), financial and monetary conditions in the euro zone tightened somewhat in September. Together with the decrease in market measures of inflation expectations, this has increased the likelihood that the ECB will expand, or extend, its quantitative easing (QE) programme, although this is not currently our base case expectation. The mechanism for higher inflation was always seen as euro depreciation, and with the Fed delaying its first hike, higher imported inflation into the euro zone is no longer assured. A monetary policy stance that is too low for too long increases the probability of a policy error later in the cycle. Furthermore, the risk of asset price bubbles forming increases: although China, with its closed capital account, is more able than most to limit the downside in its equity market, even it couldn t stop significant capital outflows from the region during the first half of this year. Emerging markets in aggregate have all experienced capital outflows, driven by a combination of weakening economic fundamentals, currency depreciation and an approaching US rate hike. Herold Rohweder Global Chief Investment Officer, Multi Asset 31

32 Whilst the US domestic economy still shows promise, with labour markets continuing to tighten, service sector business sentiment improving and real estate activity robust, the global backdrop over the last quarter has weakened. Some further contagion from emerging to developed markets can be expected. China has responded to weaker growth by cutting rates, reducing its reserve requirement ratio and increasing fiscal expenditure since May. This should have a positive impact on growth later this year. However, the transition from an investment, to a consumer-led economy is proving more difficult than some initially thought, and the drive against corruption has severely damaged the transmission mechanism from fiscal expansion to investments in state-owned enterprises. Asset allocation outlook The risk that rates remain too low for too long, and the accompanying mispricing of assets has increased. Although the US economy continues to recover we expect growth at or slightly above trend there is likely to be some negative spill-over from emerging market weakness. This cautious view on risky assets is reflected in a much weakened market cycle signal for equities, and an overall more neutral stance in asset allocation. run up to a Fed hike, their currencies will remain under pressure. To reinvest we need to see improved cyclical data, at which point a tactical rebound is possible. We expect the excess supply in commodity markets to take time to resolve, and with trend global growth lower than history, we are likely to retain an underweight in the coming quarters. Having benefited from a delay in the Fed hiking cycle, exposure to real estate investment trusts (REITs) is at neutral. However, we recognize that further upside is limited due to expensive valuations and a rate hiking cycle approaching. Our structural position, therefore, is underweight. We retain an overweight position in the US dollar; despite the Fed not hiking rates in September, the FOMC is still pricing in one rise before the turn of the year. In our opinion, relative economic strength and rate cycles favour further US dollar upside from here. At the time of writing, our fundamental signal indicates a preference for European over other equity markets, due to support from the ECB s QE programme and superior relative valuations. This is not, however, confirmed by our market cycle analysis which indicates further weakness of a similar magnitude to other regions. We remain underweight the US and UK core government bond markets, anticipating that the US will eventually respond to stronger domestic fundamentals by tightening monetary policy, and the UK will not be far behind. Valuations continue to be expensive in bonds, although we concede that the market cycle signal is not as supportive to an underweight position as previously, given the recent spike in volatility. Structurally we expect further deterioration in emerging markets, as productivity growth is slowing, the region s population is ageing and China s restructuring proves problematic. Cyclically we recognize the headwinds facing the region and, in the 32

33 5. Environmental Social Governance (ESG) outlook Key points The seemingly inescapable shift by the industry towards quarterly reporting is now being challenged, but only a handful of public firms have so far begun to review the frequency of their reporting. To achieve real change, the roles and approaches of all stakeholders in the investment chain need to be considered. Asset managers need to proactively show support for the FCA s initiative to promote longer reporting periods, and for those companies brave enough to implement such changes. Incentive schemes across the industry should better align rewards with the longterm goals of clients. With the financial services industry one of the less trusted industries in the UK, asset managers must play their part in rebuilding confidence in markets, pushing for better governance standards and improved longer term outcomes The same is sometimes said of asset managers and the investors they serve. A longer term approach in investment practices can offer benefits for many market participants, including improved longer term decision making by companies and consequentially better long-term performance and sustainable development. It could also promote better alignment between asset owners liabilities and the assets in which they are invested. The problem of short termism However, in a world of ever faster information flow and interactions, it should not come as a surprise that businesses timeframes are shortening. Innovation and the ability to utilize technology in a data-led marketplace have also inevitably enabled short-term participants to exercise greater sway. Trading patterns are a good example of this: the increasing trading volumes of high frequency traders, the incentive structures and strategies of activist investors, restrictions on portfolio allocations driven by regulatory change, and increasing pressures on shortterm performance by asset managers have led to an increasing myopia, evidenced by steadily decreasing holding periods (Figure 1). Elizabeth Corley, CBE Chief Executive Officer A better perspective: Beyond the short term The world would be a better place if businesses stopped thinking so much about short-term results and focused more on the long term. Adi Ignatius, Editor of Harvard Business Review. In a world where the ever faster flow of information can encourage short-term thinking, Elizabeth Corley opines on the benefits of businesses taking a longer term strategic perspective. She also looks at the role of asset management companies in providing effective stewardship to achieve this goal. The world would be a better place if businesses stopped thinking so much about short-term results and focused more on the long term was the view of Harvard Business Review editor Adi Ignatius in January Whilst a short-term horizon is the essence of some activity, it can also lead to negative consequences. These include the distortion of prices and asset correlations, reducing wealth through churning, and undermining potential long-term value creation for clients. Moreover, business models and investment strategies inevitably influence an asset manager s ability to exercise corporate governance functions and, therefore, should be created with long-term perspective. Stewards of capital the role of asset managers Whilst asset managers play a key role in the allocation of capital to those that need it, they should also fulfil a crucial function in promoting and encouraging the markets to take a longer term view, as well as encouraging investee companies to have more sustainable business models. In 2010, the UK s 33

34 Financial Reporting Council published the first UK Stewardship Code directed at institutional investors. The Code set out key principles for effective stewardship, and aimed to promote long-term success of investee companies in such a way that investors, the ultimate providers of capital, would also benefit. Now over four years old, almost 300 organizations have publicly registered as signatories, including more than 200 asset managers, representing 32% of the UK equity market. 1 The uptake of the Code is an encouraging step forward in building a mass of investors willing and able to engage in active stewardship. However, asset managers must engage further in their role as stewards of capital. The quality of engagement is still perceived to be too low and some signatories appear not to be following through on their commitment to the Code, perhaps seeing it as a box ticking exercise. 2 Over the past decades, there has been a seemingly inescapable shift by the industry towards quarterly reporting. To its credit, the FCA abandoned the rule in a move to encourage longer term thinking in the stock markets, however only a handful of public firms have so far begun to review the frequency of their reporting. Although welcomed by many investors, asset managers must proactively show support for the initiative, and for those companies brave enough to implement such changes. As one of Diageo s top shareholders commented when the company announced its plans to drop quarterly reports This is a very good thing. We do not want companies obsessing over the short term ups and downs of profit and sales. (with) a clear long term strategy in place profits and sales will follow. 3 However, to achieve real change, the roles and approaches of all stakeholders in the investment chain need to be considered. Consultants, for instance, should be encouraged to also take a longer term view, and to question fund turnover and agency effects to a greater extent: some do, but it is not yet common practice. Incentive schemes across the industry must better align rewards with the long-term goals of clients. In addition, while not all asset managers will have sufficient resources to do so, more should be done to engage with investee firms on their governance: long-term, responsible and sustainable mandates will only be truly achieved if asset managers invest in teams with the right skills. At a time where the financial services industry remains one of the less trusted industries in the UK (Figure 2), asset managers must play their part in rebuilding confidence in markets, thus encouraging investing for future growth and, in turn, jobs. This would lead to better governance standards and improved longer-term outcomes. 1 Developments in Corporate Governance and Stewardship 2014, Financial Reporting Council, January Who Can Really Take on Short-Termism, Adi Ignatius, Harvard Business Review, UK asset manager calls for end to quarterly reporting, Financial Times, 8th June Promoting long-term, responsible and sustainable investment mandates Policy makers and regulatory bodies must also address regulatory barriers and other obstacles that hinder a longer-term perspective, such as accounting treatment of assets. They also need to propose guidelines to promote long-term horizons in governance and portfolio management. Here, the private sector can contribute ideas on new models. A recent example is the work instigated by the Cambridge Institute for Sustainable Leadership which focuses on long-term responsible investment in the context of mandates. The purpose is to develop a template for the optimal design and characteristics of an equity investment mandate that encourages longterm investment decisions and allows for improved monitoring. 34

35 Automotive Food and Beverage Financial Services Banks Global Strategic Outlook - 4th Quarter 2015 Figure 1: US equities holdings periods form 1975 to 2015 Number of Years Source: Thomson Reuters Datastream Figure 2: Level of trust in industries in the UK More trust Less trust Technology Consumer Electronics Entertainment Media Chemicals Source: Edelman Trust Barometer

36 6. Economic forecast summary AllianzGI Consensus AllianzGI Consensus US Real GDP % chg SAAR* CPI** Short-Term (official) Rates Year Rates US Dollar Index UK Real GDP % chg SAAR* HCPI*** Short-Term (official) Rates Year Rates GBP/USD Euroland Real GDP % chg SAAR* CPI** Short-Term (official) Rates Year Rates (Germany) EUR/USD Japan Real GDP % chg SAAR* CPI** Short-Term (official) Rates Year Rates JPY/USD China Real GDP % chg SAAR* CPI** Y Lending Rate Year Rates USD/CNY India Real GDP % chg SAAR* CPI** Short-Term (official) Rates Year Rates INR/USD Commodities Gold Oil *Seasonally Adjusted Annual Rate. **Consumer Price Index. ***Harmonized Consumer Price Index. Source: Allianz Global Investors, as at 30 September Forecasts are not a reliable indicator of future results. 36

37 Financial markets review 30-Jun-15 Qtr-to-date 30-Jun Sept-15 Yr-to-date 31-Dec Sept-15 % Change From Calendar Calendar Year High Calendar Year Low Year 2014 Equities US S&P % -6.74% -9.89% 2.81% 11.39% NASDAQ % -2.45% % 2.52% 13.40% MS Value % % % 3.19% 9.16% MS Growth % -3.13% % 2.14% 12.98% S&P 500 VIX % 27.60% % % 39.94% NASDAQ VIX % 36.56% % % 27.20% Equities Japan Nikkei % -0.36% % 3.53% 7.12% Equities Europe DJ Euro Stoxx % -0.91% % 2.75% 2.90% FTSE % -7.68% % 2.76% -2.71% Dax % -1.51% % 2.09% 2.65% Cac % 4.27% % 9.10% -0.54% Equities Asia-Pacific MSCI Asia Pacific ex-japan (USD) % % % 1.82% -4.32% Currencies EUR/USD % -7.73% -7.73% 6.17% % USD/YEN % 0.14% -4.59% 3.19% 13.73% GBP/USD % -2.85% -4.64% 3.46% -5.86% Commodities Oil brent % % % 11.68% % Gold (USD) % -6.07% % 2.81% -1.78% S&P Goldman Sachs Commodity Index % % % 6.33% % Short-Term Rates Fed Funds Target 0.25% 0 bps 0 bps 0 bps 0 bps 0 bps 3-Month T-Bill -0.01% -2 bps -5 bps -13 bps 0 bps -3 bps 3-Month Euro -0.04% -3 bps -12 bps -12 bps 0 bps -21 bps 3-Month Yen 0.17% 0 bps -1 bps -1 bps 0 bps -4 bps Long-Term Government Bonds 2-Year Treasuries 0.60% 1 bps -3 bps -19 bps 16 bps 25 bps 5-Year Treasuries 1.35% -27 bps -29 bps -44 bps 16 bps -10 bps 10-Year Treasuries 2.06% -27 bps -12 bps -42 bps 39 bps -83 bps 10-Year Bund 0.59% -18 bps 5 bps -41 bps 51 bps -140 bps 10-Year JGB 0.35% -9 bps 2 bps -16 bps 14 bps -41 bps US Corporate Bonds Barclays US Aggregate AAA 10+ years 4.25% 44 bps 63 bps -7 bps 87 bps -58 bps Barclays US Aggregate BAA 10+ years 5.49% 18 bps 71 bps -6 bps 104 bps -77 bps spread BAA/AAA 1.24% -26 bps 8 bps 1 bps 17 bps -19 bps Barclays High Yield 12.76% 254 bps 279 bps -2 bps 358 bps 239 bps EMU Corporate Bonds Barclays Euro Aggregate AAA 0.33% -13 bps -3 bps -22 bps 30 bps -93 bps Barclays Euro Aggregate BAA 0.58% -14 bps 2 bps -20 bps 36 bps -102 bps spread BAA/AAA 0.25% -1 bps 5 bps 2 bps 6 bps -9 bps *The periodic changes for equity indices are percentage changes, whilst for bond indices the change is given in basis points. A 1% point change is equivalent to 100 basis points. The calendar high and low columns represent the deviation of the index in percentage or basis points terms accordingly, compared to the index level at the end of the period of review. Source: Datastream, as at 30 September Past performance is not a reliable indicator of future results. 37

38 Relative sector valuations Z-Score average Delta to 3 months ago Z-Score relative P/E Z-Score relative P/B Z-Score relative P/CF Z-Score relative DY Oil & Gas Oil Production Oil Services Basic Materials Chemicals Basic Resources Industrials Construction & Materials Industrial Goods & Services Consumer Goods Auto Food & Beverages Persoanl Household Goods Healthcare Consumer ServIces Retail Media Travel & Leisure Telecoms Utilities Financials Banks Insurance Technology Software Hardware Note: The table summarizes AllianzGI s constant monitoring of relative sector valuations: we compare the current relative valuation with the average historic relative valuation by using z-scores for four widely used valuation measures, namely Price/ Earnings (P/E), Price/Book (P/B), Price/Cash flow (P/CF), and dividend yield (DY). The z-score average column describes the average of all four valuation measures. The dividend yield enters the average with inverse sign, as a high dividend yield indicates a low valuation. Source: Thomson Financial Datastream, Allianz Global Investors E&S, as at 1 October Legend: Numbers in green indicate z-scores of below -1 (attractive relative valuation) Numbers in red indicate z-scores of above +1 (expensive relative valuation) 38

39 Implied earnings per share growth (5-year) Global sectors Payout ratio derived growth estimate (p.a. over 5y horizon) Market Implied growth over 5y period (p.a.) Delta (>0: cheap, <0: expensive) Rank Repression quality Oil & Gas 2.1% 1.7% 0.4% 6 low Basic Materials 2.7% 1.2% 1.5% 5 good Industrials 1.9% 3.4% -1.5% 7 good Consumer Goods 1.9% 3.6% -1.7% 8 good Consumer Services 1.6% 7.9% -6.3% 11 low Healthcare 1.9% 9.8% -7.9% 12 low Telecom 0.6% 4.7% -4.2% 10 low Utilities 0.8% -1.4% 2.2% 4 low Financials 2.0% -3.6% 5.6% 2 good Banks 2.2% -5.6% 7.8% 1 good Insurance 1.8% -3.8% 5.6% 3 good Technology 1.8% 5.3% -3.5% 9 low Source: Thomson Financial Datastream, Allianz Global Investors E&S, as at 1 October Past performance is not a reliable indicator of future results. 39

40 Biographies 7. Global Policy Council The Global Policy Council (GPC) is a monthly meeting of the regional CIOs, Economics and Strategy team and senior investment professionals, chaired by our Global CIO, Andreas Utermann. The council focuses on the direction of the global economy, regional economic outlooks, prospects for the global bond and equity markets, and periodic thematic pieces of proprietary research. Andreas E F Utermann Global Chief Investment Officer, Allianz Global Investors Andreas is Global Chief Investment Officer (CIO) and co-head of Allianz Global Investors. Andreas joined Allianz Global Investors and its Global Executive Committee in 2002 as Global CIO Equities. Between his joining and the end of 2011, Andreas was also Global CIO and Co-Head of RCM. Andreas holds a number of non-executive positions in the industry, including Board Memberships of the CFA Society of the UK, the AMIC Council of the ICMA as well as being a member of the Advisory Council of the DVFA. Prior to joining, Andreas worked for 12 years at Merrill Lynch Investment Managers (formerly Mercury Asset Management), where he was the Global Head and CIO, Equities. Before joining MLIM, Andreas worked for two years at Deutsche Bank AG. He holds a BSc in Economics from the London School of Economics and an MA in Economics from Katholieke Universiteit Leuven. Andreas is an Associate of the Institute of Investment Management and Research and is fluent in English, German, French and Dutch. Raymond Chan, CFA Chief Investment Officer, Equity Asia-Pacific Raymond is responsible for all investment professionals in Asia ex-japan, reporting to the Global CIO in London, and is the Chairman of the Global Balanced Investment Committee and the Regional Portfolio Management Group (RPMG) in Hong Kong. Raymond has overall responsibility for the investment process and performance. He has 22 years of portfolio management experience in the region and is the lead manager for the Core Regional (Asia Pacific ex-japan equity) products. Prior to joining the Group, Raymond was Associate Director and Head of Greater China team with Barclays Global Investors in Hong Kong, where he specialised in Hong Kong, China and Taiwan stock markets and managed single country and regional portfolios. Raymond s Hong Kong Fund at Barclays was ranked no. 1 offshore fund in He is a CFA charterholder and holds an M.A. in Finance and Investment from the University of Exeter and a B.A. (Hons.) in Economics from the University of Durham, UK. 40

41 Neil Dwane Chief Investment Officer, Equity Europe Neil is CIO Equity Europe, based in Frankfurt and responsible for all portfolio management, research and trading activities in Frankfurt, Paris and London. Neil is a member of the AllianzGI European Executive Committee as well as the Global Investment Management Group and is Chairperson of the European Equity Management Group, which consists of the most senior equity investment team leaders in Europe. Neil joined the company in 2001 as Head of UK and European Equity Management from J.P. Morgan Investment Management where he had been a UK and European specialist portfolio manager since He began his investment career in 1988 with Kleinwort Benson Investment Management as an analyst, later as a fund manager, before moving to Fleming Investment Management in Neil holds a BA in Classics from Durham University and is a member of the Institute of Chartered Accountants. Stefan Hofrichter, CFA Head of Global Economics and Strategy As Head of Allianz Global Investors Economics and Strategy team since 2011, Stefan s research covers global economics as well as global and European asset allocation. Stefan joined the firm in 1996 as an equity portfolio manager and assumed his current role as an economist and strategist in Between 2004 and 2010, he also had responsibility for various retail and institutional mandates, including global and European traditional balanced funds, global multi-asset absolute return and multi-manager alpha-porting funds. Stefan became a member of the firm s Global Policy Council in 2004 and is a member of the Pan-European Tactical Multi Asset Investment Committee, established in Stefan also chaired the German Asset Allocation Committee between 2010 and Stefan holds a Diplom degree in Economics from the University of Konstanz (1995) and in Business Administration from the University of Applied Sciences of the Deutsche Bundesbank, Hachenburg (1991). Stefan became a CFA Charterholder in Ingo Mainert Chief Investment Officer, Balanced Europe Ingo joined from cominvest in February 2009, following Commerzbank s purchase of Dresdner Bank. Ingo is a Managing Director and CIO Balanced Europe. Ingo takes this role having headed Asset Management at cominvest since June Ingo started his professional career with Commerzbank in 1988 and first held analyst and currency specialist functions following his traineeship, before taking management responsibility in Commerzbank as Team Head Equity Strategy Germany in 1994 and Head of Fixed Income Research in 1998 before moving to the Asset Management side of the business as Head of Global Markets Research Division in 2001 at Commerz Asset Managers. Since 2002 he held a position as Head of Balanced Portfolio Management Division at cominvest, was then named Head of Asset Management Private Banking at Commerzbank in August 2004 and was finally appointed Managing Director and CIO of cominvest. Ingo is a Certified Investment Analyst and a board member of the DVFA Society of Investment Professionals in Germany; he graduated from the Johann Wolfgang Goethe- University with a Diploma in Business Administration. Franck Dixmier Global Head of Fixed Income and Chief Investment Officer of Fixed Income Europe Franck, CIO Fixed Income Europe, joined the Allianz Group in 1995 as Fixed Income Portfolio Manager. In 1998 he became the Head of Fixed Income for AGF Asset Management (the former name of AllianzGI in France). In this role he was also responsible for the AGF insurance portfolios. In 2008, Franck became a Member of the Executive Committee, and Chief Investment Officer of Allianz Global Investors France. He was appointed Deputy CEO of AllianzGI France and CIO of AllianzGI Investments Europe in Franck Dixmier graduated with a Master s Degree in Economics and Finance from the Paris Dauphine University (Master s degree - DEA conjoncture économique et prospective). 41

42 David Tan Chief Investment Officer, Fixed Income Asia David joined Allianz Global Investors in He is the Chief Investment Officer, Fixed Income Asia Pacific. David has extensive experience in the management of Asian bonds as well as platform and business development. His experience in managing Asian bonds dates back to He joined Allianz Global Investors from AXA Investment Managers UK, where his last position was Executive Director Fixed Income Asia Pacific and Middle East with responsibility for business development. From end of 2008 to early 2011, David was Chief Investment Officer of Kyobo AXA Investment Managers in Korea. Prior to that, David was based in Singapore as Head of Fixed Income Asia, with responsibility for all the bond portfolio management activities in the region. David has a Bachelor of Business Administration (Finance) with joint majors in Economics from Simon Fraser University, Canada. Dr. Klaus Teloeken Chief Investment Officer, Systematic Equity Klaus is the Co-CIO of the Systematic Equity team. He joined Allianz Global Investors in 1996 as a quantitative analyst, and in 2001 he assumed the role as Head of Systematic Equity. He oversees more than EUR 30 billion of assets under management, and is responsible for the development and the management of systematic investment strategies for equities. In this role, Klaus has developed the team s Best Styles and High Dividend product line. He is also responsible for the management of the Best Styles Global and High Dividend Global product. Klaus studied mathematics and computer science in Dortmund, Germany. Contributors non GPC members Elizabeth Corley Chief Executive Officer and Co-head of Allianz Global Investors Elizabeth is Chief Executive Officer (CEO) and Co-head of Allianz Global Investors. Prior to joining Allianz Global Investors in 2005, Elizabeth spent eleven years working at Merrill Lynch Investment Managers (formerly Mercury Asset Management). Before this, Elizabeth was consultant and then partner with Coopers & Lybrand, and prior to that worked for a number of years in the life and pensions industry. Having served for two terms as Chairwoman of the Forum for European Asset Managers (an industry grouping of CEOs), she now is a member of the Management Committee. In 2014, she was appointed to the European Securities and Markets Authority s stakeholder group. Elizabeth is also an Advisory Council member of TheCityUK Ltd and a member of TheCityUK International Regulatory Strategy Group. Since April 2011, she has served as non-executive director on the Financial Reporting Council, the UK s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment. In June 2014, Elizabeth was asked to chair a panel of market practitioners to contribute to the Fair and Effective Markets Review in the UK. Subsequently, she was asked to chair the FICC Markets Standards Board on an interim basis, which was set up as a recommendation of the Review. Elizabeth was named CEO of the Year in 2011, Most Influential Person in Asset Management in 2012 by Financial News, and in 2015 received the 100 Women in Hedge Funds European Industry Leadership Award. As well as being a fellow of the Royal Society of Arts, Elizabeth is a writer and has had five thriller novels published. 42

43 Dr. Herold Rohweder Global Chief Investment Officer Multi Asset Herold is a Managing Director and Global Chief Investment Officer Multi Asset at Allianz Global Investors. He is also a member of the US Executive Committee of Allianz Global Investors and member of the Global Investment Management Group. Herold joined Allianz in 1989 as a portfolio manager for global balanced, European equities and European fixed income. In 1998, Herold initiated the Systematic Asset Management effort for equity and multi asset investments at Allianz Asset Management. Since 2011 Herold has been Global CIO Multi Asset at Allianz Global Investors. Herold graduated from Wayne State University, Detroit with a Master-of-Arts degree in Economics and has received a Ph.D. from the Economics department of the University of Kiel, Germany. Robert Parenteau, CFA Economist and Investment Strategist, External Advisor As the sole proprietor of Macro Strategy Edge, Robert employs macroeconomic insights to contribute to asset allocation and equity sector selection decisions. Robert received his BA (Hons.) in Political Economy from Williams College in January 1983 and earned his CFA in Robert also serves as a research associate of the Levy Economics Institute. 43

44 Key to currency abbreviations (abb) 44 Currency Abb Currency Abb Currency Abb Afghanistan afghani AFN Gambian dalasi GMD Norwegian kroner NOK Albanian lek ALL Georgian lari GEL Omani rial OMR Algerian dinar DZD Ghanaian new cedi GHS Pakistan rupee PKR Angolan kwanza AOA Gibraltar pound GIP Panamanian balboa PAB Argentine peso ARS Gold (oz) XAU Papua New Guinea kina PGK Armenian dram AMD Guatemalan quetzal GTQ Paraguay guarani PYG Aruban florin AWG Guinea franc GNF Peruvian nuevo sol PEN Australian Dollar AUD Guyanese dollar GYD Philippine peso PHP Azerbaijan new manat AZN Haitian gourde HTG Polish zloty PLN Bahamian dollar BSD Honduran lempira HNL Qatari rial QAR Bahraini dinar BHD Hong Kong dollar HKD Romanian new lei RON Bangladeshi taka BDT Hungarian forint HUF Russian rouble RUB Barbados dollar BBD Iceland krona ISK Rwandan franc RWF Belarusian ruble BYR Indian rupee INR Samoan tala WST Belize dollar BZD Indonesian rupiah IDR Sao tome/principe dobra STD Bermudian dollar BMD Iranian rial IRR Saudi riyal SAR Bhutan ngultrum BTN Iraqi dinar IQD Serbian dinar RSD Bolivian boliviano BOB Israeli new shekel ILS Seychelles rupee SCR Bosnian mark BAM Jamaican dollar JMD Sierra Leone leone SLL Botswana pula BWP Japanese yen JPY Silver (oz) XAG Brazilian real BRL Jordanian dinar JOD Singapore dollar SGD British pound GBP Kazakhstan tenge KZT Slovak koruna SKK Brunei dollar BND Kenyan shilling KES Slovenian tolar SIT Bulgarian lev BGN Kuwaiti dinar KWD Solomon Islands dollar SBD Burundi franc BIF Kyrgyzstanian som KGS Somali shilling SOS CFA franc BCEAO XOF Lao kip LAK South African rand ZAR CFA franc BEAC XAF Latvian lats LVL South-Korean won KRW CFP franc XPF Lebanese pound LBP Sri Lanka rupee LKR Cambodian riel KHR Lesotho loti LSL St Helena pound SHP Canadian dollar CAD Liberian dollar LRD Sudanese pound SDG Cape verde escudo CVE Libyan dinar LYD Suriname dollar SRD Cayman islands dollar KYD Lithuanian litas LTL Swaziland lilangeni SZL Chilean peso CLP Macau pataca MOP Swedish krona SEK Chinese yuan/renminbi CNY/CNH Macedonian denar MKD Swiss franc CHF Colombian peso COP Malagasy ariary MGA Syrian pound SYP Comoros franc KMF Malawi kwacha MWK Taiwan dollar TWD Congolese franc CDF Malaysian ringgit MYR Tanzanian shilling TZS Costa rican colon CRC Maldive rufiyaa MVR Thai baht THB Croatian kuna HRK Maltese lira MTL Tonga pa'anga TOP Cuban convertible peso CUC Mauritanian ouguiya MRO Trinidad/Tobago dollar TTD Cuban peso CUP Mauritius rupee MUR Tunisian dinar TND Cyprus pound CYP Mexican peso MXN Turkish New lira TRY Czech koruna CZK Moldovan leu MDL Turkmenistan manat TMM Danish krone DKK Mongolian tugrik MNT US dollar USD Djibouti franc DJF Moroccan dirham MAD Uganda shilling UGX Dominican r peso DOP Mozambique new metical MZN Ukraine hryvnia UAH East caribbean dollar XCD Myanmar kyat MMK Uruguayan peso UYU Egyptian pound EGP NL Antillian guilder ANG United Arab Emir dirham AED El Salvador colon SVC Namibia dollar NAD Vanuatu vatu VUV Estonian kroon EEK Nepalese rupee NPR Venezuelan bolivar VEB Ethiopian birr ETB New Zealand dollar NZD Vietnamese dong VND Euro EUR Nicaraguan cordoba oro NIO Yemeni rial YER Falkland islands pound FKP Nigerian naira NGN Zambian kwacha ZMK Fiji dollar FJD North Korean Won KPW Zimbabwe dollar ZWD

45 Disclaimer Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. High-yield or junk bonds have lower credit ratings and involve a greater risk to principal. Convertible securities involve the added risk that securities must be converted before it is optimal. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. Forecasts are inherently limited and should not be relied upon as an indicator of future results. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission (SEC); Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan. Unless stated otherwise, all data is as of 30 September Copyright 2015 Allianz Global Investors 45

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