A year "full of challenges", to be faced in a "prudent" way in terms of savings, and with only one real objective: that austerity leave room for growth, above all in Italy and in the Eurozone. This is the outlook for 2013 outlined by Allianz Global Investors, which believes that global growth may remain slightly below the trend level next year, in a context of persistent economic weakness in the industrialized countries which will particularly affect the Eurozone and the United Kingdom.
According to forecasts from the asset management division of the insurance group, Asia in particular will offer support to growth that is moderate and lower than the levels of previous years. Japan, probably once again on the verge of recession, is seen as an exception, while the consequences of the US fiscal cliff will also play a significant role.
In light of the most recent disappointing economic data and the new monetary stimulus plans launched by the US Federal Reserve and the Bank of Japan, Andreas Utermann, Global Chief Investment Officer of Allianz Global Investors, therefore presents a cautious outlook for 2013: “The quantitative easing measures could be interpreted as a clear signal that difficult times await us. And undoubtedly the United States faces significant fiscal challenges. If President Obama does not reach a new agreement with Congress, tax increases and spending cuts totaling 4 percent of US gross domestic product will be triggered at the beginning of the year. We are convinced that eventually policy makers will 'walk off the cliff', though avoid the negative consequences of the 'fiscal cliff' on US growth next year”.
In a longer-term perspective, however, Utermann expresses less concern about the US economy: "Thanks to the dynamism of the economy and more favorable demographic fundamentals, the United States has a stronger foundation than Europe to overcome the debt problem”.
Positive signs in the European Union, but still no indication of stability
Allianz Global Investors then identifies some positive signs in the situation in the Eurozone. In mid-2012, when peripheral government bond spreads reached record highs and peripheral countries' yield curves flattened or even inverted, market consensus seemed to indicate that the Economic and Monetary Union (EMU) would not survive in its current form. According to Utermann the resolute actions concerted between politicians and the European Central Bank (ECB) have faced the risky situation immediately, however failing to completely resolve the problem. “At least, Mario Draghi's explicit declaration that the ECB would have done 'whatever was necessary' to save the euro prevented the outbreak of a fire that would have spread from Greece to all of Europe. In the Eurozone, therefore, the dynamics of the crisis changed, as politicians now have the opportunity to take the initiative again”.
Utermann considers the European Stability Mechanism introduced in September is an important step forward, which is already having positive effects on the capital markets. Overall, the evolution of the general picture confirmed the assessment expressed by the Global CIO of AllianzGI: the crisis has promoted more intense common action within the Eurozone, rather than provoking its dismemberment.
Nonetheless, Utermann argues that it is premature to give the all-clear: “For the European Union to return to resting on stable and credible foundations, it will be necessary to implement three fundamental measures: extend the ECB's function of lender of last resort to all countries, take further steps towards fiscal union and reach an agreement on the banking union in order to eliminate the interdependence between the public budget and the banking system”.
According to Utermann, progress has already been made, in particular, towards the banking union: the promising initiatives currently under consideration, which see the ECB as a potential supervisory authority, could be implemented as early as 2013. On the other hand, the populations of the countries peripheral Europeans in this difficult phase will probably continue to oppose the reform projects, while the "core" countries will paint the EU as a bottomless financial pit. With spirits so heated, the parliamentary elections next spring in Italy and the German elections in the autumn of 2013 represent risk factors that should not be underestimated.
In 2013 volatility will remain at high levels
Despite the low or negative real interest rate environment, Utermann advises against focusing solely on continued gains in equity markets: “It certainly is tempting, given some rallies in the markets over the past year, but just a distribution of assets at long term can allow to mitigate the risks. Given the current economic conditions, I believe it is risky to speculate on prices in the short term.
Volatility will remain at high levels in 2013 as political events will continue to determine the direction of the markets. “Three years ago we first argued that the road to the new global equilibrium would be long due to the massive public debt of industrialized countries and rising savings rates in other parts of the world. A change of mentality on the part of investors will also be necessary: for the moment there will be no going back to the old benchmarks”, says Utermann.
Although in a context of overall rather limited growth, the upside potential of equities is limited, Utermann believes that there are good opportunities within the equity segment for the coming yearbut reiterates that careful stock selection is even more important in a globally challenging environment. For companies with a strong international business model and a strong competitive position, there should be opportunities for growth even in difficult market conditions. As over the past two years, Utermann continues to reiterate his belief that investors should focus on stocks that pay a dividend.
Over the past twelve months, the average dividend yield of healthy companies has significantly exceeded the level of many bonds and, according to Utermann, this trend is destined to continue. Utermann also believes that next year, defensive alternative investments with attractive return potential will include government bonds of selected emerging economies and their currencies, corporate bonds, including high-yield securities, and infrastructural".
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Attachments: Presentation N.Dwane 12.12.2012 Financial Repression.pdf
