A brief trip around the world gives us a very differentiated scenario: the recovery is not proceeding homogeneously everywhere but is moving at different speeds. That is why further divergence between central bank policies is increasingly likely. The latest US data on unemployment confirmed the idea that the Fed is continuing on a constant tapering path and there is already talk of a possible increase in the cost of money in the first part of 2015. On the contrary, at this week's meeting, the ECB president Mario Draghi confirmed that rates in the Eurozone will still remain low for a long time and that, if necessary to combat low inflation, the board is unanimous in adopting unconventional measures, including quantitative easing, i.e. the purchase of obligations. The ECB is the first major central bank to introduce negative interest rates, as well as a new LTRO program aimed at improving the supply of credit and reducing funding costs, especially for small and medium-sized enterprises in southern Europe. Finally, the Bank of England, in open divergence from the ECB, was recently the first major central bank to signal the possibility of imminent interest rate hikes in 2014, in response to the rapid strengthening of the British economy. Japan, on the other hand, confirms its reflationary monetary policy, while avoiding further aggressive stimulus for the moment after the weakening of economic activity linked to the sales tax increase.
“As the economic recovery proceeds at varying speeds in regions such as the US, UK, Eurozone and Japan, central bank inflation expectations and policies have clearly started to diverge, a process that could accelerate in the coming quarters,” he said. said Andreas Utermann, Global CIO of Allianz Global Investors, during the Milanese presentation on the macroeconomic scenario of the investment group.
SHOOTING AT MORE SPEED
NEUTRAL POSITIONING ON STOCKS AND BONDS
For 2014, Allianz Global Investors expects global economic growth of around 3,25%: global growth dynamics have not undergone significant changes, although Allianz Gi experts currently see greater downside risks for the second half. As mentioned, in different parts of the globe the recovery is multi-speed. The United States is in the lead, recovering after a first quarter penalized by severe weather conditions; China continues to counter the slowdown in growth with supply-side policies, while Japan faces the shock suffered by the economy in the second quarter due to the sales tax increase with a reflationary economic policy. Lastly, in Europe we are witnessing the consolidation of the recovery in the United Kingdom, with a gap with respect to the Eurozone which in 2014 will continue to follow a path of more moderate growth. In this scenario, Allianz Gi believes that the earnings targets have already been achieved on the bond markets of developed countries, and on some equity markets, making it therefore more difficult from now on to make further profits. Valuations in stocks and bonds appear somewhat stretched, with momentum pointing in the wrong direction. Equity yields hovered around 5-7%, in line with Allianz Gi's forecast for the full year, while bond yields and, in particular, emerging market local currency bond yields reached similar levels or even higher, disregarding the investment company's expectations for a gradual normalization of the yield curve.
“In the first half of 2014 – commented Utermann – returns at the asset class level were surprisingly positive, given the continuation of a stagnant macroeconomic context and the emergence of significant geopolitical risks. For the remainder of 2014, we expect markets to experience little change at best. In general, in fact, growth expectations have disappointed on the downside and the growth of profits has been penalized by practically no expansion at the level of revenues”.
Volatility is still at very low levels, while IPO activity has intensified significantly, a factor that often heralds downward volatility for equities. “We therefore believe – continues Utermann – that the time has come to take profits on both major asset classes, and for the first time in the last four years we recommend adopting a neutral position. While it is still possible to gain through dividend investing, growth market segments and exposure to select emerging market and local currency bonds, as well as through select cross-currency deals, there are likely to be challenges in the coming months , unless there is a significant improvement in the macroeconomic and geopolitical situation with a clear recovery in profits”.
Indeed, significant geopolitical tensions emerged in 2014, with the first quarter marked by Russia's actions towards Ukraine, and the second quarter the scene of new episodes of violence and renewed unrest in Iraq. “At the moment – Allianz Gi points out in its outlook on the second half of 2014 – these two crisis situations have not yet had a substantial impact on the markets, but it is clear that there could be repercussions in the event of a further escalation. The worsening crisis in Ukraine could negatively affect the growth of developed markets in three key aspects: the price of energy (currently subject to further pressure following the outbreak of violence in Iraq), the increase in tensions in the financial system and a deterioration in economic sentiment”.
Then there are the tensions in Iraq even if for now the markets don't seem to be affected by them."Although at the moment the impact of these tensions on the world economy appears limited - note the experts of Allianz Gi - the worsening of the situation or a surge of oil prices could depress investor sentiment and penalize large oil importers, including the United States”. However, we can remain optimistic overall: according to Allianz Gi, the markets will be "definitely more attentive to the initiatives of the central banks rather than to the geopolitical tensions in Ukraine and the Middle East". Indeed, the highest risk is represented by a change in central bank policy, in the face of a faster-than-expected rise in inflation.
