For Italy, low interest rates represent a great opportunity to reduce the debt/GDP ratio. Provided we are able to "deliver" positive growth in the coming years. This was underlined by the experts of Allianz Global Investors in a meeting with the press for the presentation of the outlook for 2015, indicating that a reduction of 0,2% per year in the cost of debt would translate, if the Government's growth estimates are confirmed, in a reduction of 2018% in the debt/GDP ratio in 2,5. Low rates for a prolonged period of time, and in further reduction, in fact lead to a further lowering of the spreads in the Eurozone capable of creating a positive lever for a reduction of the debt on the GDP in the presence of structural reforms.
OPPORTUNITIES LOW RATES FOR ITALIAN DEBT. WATCH OUT FOR THE DECEMBER TLTRO
"More than the numbers - explained Mauro Vittorangeli, head of the Conviction Fixed Income strategy of Allianz Global Investors - when doing exercises on the future, which are very theoretical, the concept is important: Italy has a great opportunity with low rates . If we seize the opportunity for growth when rates remain low for systemic reasons, we can exploit this as a system to put ourselves back a bit and therefore it is a qualitative message”.
The Italian government has in fact been quite cautious in its estimates of debt interest expenses. "They kept a little space - said Vittorangeli - at this point they must deliver the nominal growth". At the same time, Allianz Gi rules out a deflationary scenario for Italy in 2015 "thanks to the implementation of the reforms".
The scenario of financial repression, i.e. low interest rates and yields, will still continue. The market now expects the baton of quantitative easing to pass from the Fed to the ECB. In the face of recent disappointing economic data, pressure could increase on the European Central Bank, in the presence of negative interest rates, for further monetary easing measures to prevent the euro area from slipping into recession. The test case is immediately here : the second auction of Tltro loans is expected in December.
The first, carried out in the autumn, disappointed expectations. If even the second were to register disappointing requests, for Allianz Gi the Eurotower could decide to take immediate action. "Quantitative easing - explained Vittorangeli - is not our baseline scenario but the probability that it occurs has increased: we are not interested in whether the ECB will implement QE but in the degree of expansion of the budget". In other words, it doesn't matter whether or not it is Qe through purchases of government bonds. What he notes is Draghi's promise to expand the central bank's balance sheet back to 2012 levels.
PREPARE FOR GREATER VOLATILITY. RATE RISE IN JUNE 2017 FOR THE ECB
At the same time, however, the great liquidity in the markets can be a source of concern: "Unfortunately - said Andreas Utermann, global chief investment officer and co-head of Allianz Global Investor - the amount of money injected into the global economy by Central Banks as of 2009 it does not evaporate on its own. To date, the global financial system has been little affected by high levels of liquidity, but for 2015 investors should prepare for increased market volatility.
Especially since the moves of the Central Banks remain a key factor. In the coming months, the divergence in monetary policy between the US and the UK compared to Europe and Japan should further intensify. "Global interest rates will remain very low for the foreseeable future," Utermann said, "but over the course of 2015, if economic data strengthens and the US unemployment rate continues to decline, the Federal Reserve will most likely and the Bank of England will raise rates”. If the global growth forecast remains moderate (Allianz estimates +3,7% in 2015 compared to +3,25% in 2014), the potential elements of uncertainty increase and it is the US economy that confirms itself as the main engine, compared weaker in Europe, Japan and emerging markets.
For Allianz Gi, whose view is in line with market expectations, the Fed will act to raise rates in June-July 2015 while the ECB will act in June 2017. “The risk is that the Fed could act much sooner and this could generate volatility on the markets, but in a context of increases very different from the past” said Vittorangeli adding that for the ECB “the problem is that it works a lot on market expectations. The ECB has been very good at managing expectations”. The role of central banks with the creation of expectations and the use of forward guidance is in fact what made forecasting models jump, or at least work less well. If until 2013, some slides presented by Allianz highlight, the models indicated the real trend of yields with a certain precision, this is no longer the case. For both US Treasuries and German bunds, yields are today lower than what the models would have indicated (which are based on a mix of indicators such as, to cite two examples from the German case, the three-month T-bills and the German unemployment rate). Or today Bund yields are lower than model because markets are pricing in the start of Draghi's Qe.
THE INVESTMENT STRATEGY
In this scenario, care must be taken to expect gains in line with the past. Between 2009 and 2013 investors benefited from particularly high yields with average returns of around 15%, supported by the Federal Reserve's ultra-expansive monetary policy. Situation that cannot last forever. “While remaining convinced that over a long-term time horizon, the equity sector offers some of the best returns – says Utermann – investors should be aware that, in the short term, the relatively high returns recorded in recent years by the equity and bond markets are not sustainable, and are therefore likely to stabilize at a lower level in the future”. As far as government bonds in the Eurozone are concerned, although a large part of the widening of the spread has already been reabsorbed, we are still at levels above the pre-crisis levels and, with the implementation of monetary union (banking union + fiscal integration + lender of last resort), there may be room for profit.
“Probably the bull market is over – said Vittorangeli – but it doesn't mean we will enter a bear market, rather in a period in which yields will remain in a narrow range. The carry strategy remains the basic strategy”. Thus, for Allianz, which was the buyer of the Btp Italia, even if "for fundamental reasons" in relative terms they like the Bonos more than the Btp, the investment strategy bets on the narrowing of the spread and on the flattening of the Italian yield curve: " on the 3-10 year segment the differential can go down further, we like indexed ones and the very steep 10-30 year segment which cannot be said to be a forthcoming trade but where there is value”.
