How To Invest During Financial Repression

Transcription

1 Conclusions from the Allianz Global Investors Investment Forum Investment Forum New York, September 2015 At our most recent semi-annual Investment Forum, we reviewed the key hypotheses of our strategic investment advice for our clients and left our primary conclusions unchanged. Andreas E. F. Utermann Global CIO of Allianz Global Investors Analysing the global economy and how long financial repression will last Monetary policy remains very accommodative, with Europe and Japan in full quantitative easing mode and many other central banks, except the US Federal Reserve and Bank of England, reducing interest rates through the year to protect their local economic growth prospects. Volatility has returned to currency markets as monetary policy has evolved, starting in January with the Swiss allowing the peg to the euro to collapse; investors now fear voluntary and involuntary devaluations across developed and emerging economies. China s decision to devalue the Renminbi (RMB) via its new currency regime, 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 by corporations. Indeed, the world owes USD 50 trillion more than it did in 2008, at the height of the global financial crisis. Current levels of debt and the general lack of deleveraging allow 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 growthfriendly exports, and that in Europe in particular is seeing a re-emergence of huge capital account surpluses as austerity takes 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 of 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. Capital expenditures, now in sharp decline in the commodity industries, represent more than 60 per cent of all investments globally. Rising currency volatility and devaluations display a lack of global co-ordination. This results in growing

2 Executive Summary Understand Financial repression remains in place Monetary policy globally will remain lower for longer Low and possibly fragile economic growth Global debt levels remain high and will increase The political landscape around the world is changing Geopolitical risk has risen in Europe and the Middle East Cheap beta now offers no returns in fixed income and equities Income investing works in financial repression Some risk-taking is needed to earn a return Act Protecting purchasing power is crucial The hunt for income is undiminished With China rebalancing, low growth will persist With no deleveraging, excess capacity is deflationary Policies remain uncertain, regulations are increasing Prepare for uncertainty and volatility Alpha is even more important for generating returns Dividend income has become a major driver of returns With volatility rising in all asset classes, investors must be active Across all asset classes, we must advise our clients to take risk in order to meet their investment objectives. With our financial repression thesis even more valid now as investors face a lowgrowth, low-interest-rate environment with rising political and market volatility, Allianz Global Investors believes passionately in investing actively in security selection and asset allocation to generate the returns that cheap beta will be unable 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. Regulations will continue to challenge investment returns, and AllianzGI remains committed to evolving our investment solutions to meet our clients future needs. Andreas Utermann, Global CIO 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, these policies are clearly, at the global level, 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 lowgrowth, low-interest-rate and fragile economic environment. Stefan Hofrichter, Global Head of Economics & Strategies 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 and longer-term Shiller PEs. Almost all valuation tools assume reversion to a mean over time, which has 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. While the current spectre of deflation is unsettling investors, we remain confident that if 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 as well as offer earnings growth combined with attractive growing 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, AllianzGI can add the alpha that investors need while controlling the volatility that they dislike. Steve Berexa, Global Head of Research & Global CIO Equity 2

3 Solutions for liability-driven investors Insurance and pension investors continue to face the prospect of resolving their funding gaps using a wait-and-hope strategy, large immunising cash injections, the strategic addition of more asset allocation or measured risk-taking on a dynamic basis. AllianzGI offers two solutions to both definedbenefit and defined-contribution markets that allow clients to optimise their balance of returns against funding risks. Insurance companies themselves face the prospect of their potential returns being crushed by the twin challenges of Solvency II and the ZIRP environment. Accordingly, AllianzGI is 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 created a herding effect toward certain asset classes which represents another arrow in the financial repression quiver. We advise our clients to shift their exposure toward growth-oriented insurance markets in Asia as well as toward 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 then 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, which has not yet been reflected in market oil prices in light of the oncoming 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 enthusiasm and the ability to develop more shale prospects there. 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 geo-political risks in the Middle East at very high levels, we remain concerned that an accident could occur there any day, which would affect regional production. 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 meme of financial repression. However, 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 investors have been focusing on costs not alpha as the markets have delivered positive returns. 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 look for alpha as a larger component of total return. Moreover, 3

4 new regulations and ongoing financial repression may dissuade many investors, including insurance companies and LDI-constrained companies, from taking sufficient risk. That is why AllianzGI has developed a range of new investment solutions to meet our clients evolving needs, including unconstrained strategies, absolute-return ideas that access strong alpha signals, factor-investing strategies and skilled risk management. We are increasingly confident that AllianzGI s 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 both 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 AllianzGI s 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 geo-politics 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 cyclical with the markets 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 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 recognised 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. All sovereign bonds are unattractive. Next Investment Forum: Hong Kong, 13 January 2016 Imprint Allianz Global Investors GmbH Bockenheimer Landstr Frankfurt am Main Global Capital Markets & Thematic Research Hans-Jörg Naumer (hjn), Ann-Katrin Petersen (akp), Stefan Scheurer (st) Allianz Global Investors / AllianzGI_VIEW Data origin if not otherwise noted: Thomson Financial Datastream. Calendar date of data if not otherwise noted: September

5 Further Publications of Global Capital Markets & Thematic Research Active Management It s the economy, stupid! The Changing Nature of Equity Markets and the Need for More Active Management Harvesting risk premium in equity investing Active Management Alternatives Volatility as an Asset Class Financial Repression Shrinking mountains of debt QE Monitor Between a flood of liquidity and a drought on the government bond markets Liquidity The Underestimated Risk Macroprudential policy necessary, but not a panacea Capital Accumulation Riskmanagement Multi Asset Smart risk with multi-asset solutions Sustainably accumulating wealth and capital income Strategic Asset Allocation in Times of Financial Repression Behavioral Finance Behavioral Risk Outsmart yourself! Reining in Lack of Investor Discipline: The Ulysses Strategy Behavioral Finance Two Minds at work Behavioral Finance and the Post-Retirement Crisis Strategy and Investment Equities the new safe option for portfolios? Dividends instead of low interest rates QE A starting signal for euro area investments? 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. 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. 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.