Career
Menu

House View Q3 2024: Act on volatility

Our view of global markets

Take the positives of a soft landing
  • Markets are on divergent paths. A spike in political risk – with elections in France and the UK in Q3 and the US poll looming in November – adds to a theme of regional differentiation.
  • Data increasingly points to a regional shift in growth expectations. We think this desynchronisation may generate opportunities across economies and asset classes.
  • Our conviction strengthens around a soft landing in the US and global economies, where growth slows – and inflation comes down – without risking a recession. This scenario will likely be positive for equities, which are set to benefit from positive earnings growth. But watch for volatility around market and political news.
  • Markets expect only 40bps of aggregate global rate cuts this year – down from three times that figure in early January. Different growth and inflation backdrops mean central banks have varying leeway to adjust their policy stance.
  • A rate cut in the US is now likely in September, in our view. We think markets are too cautious on further cuts, and investors should use this disconnect to strengthen positions in yield curve steepening and duration.
Icon

Chart of the quarter: That desynching feeling…

The European Central Bank (ECB) cut rates in June and markets anticipate the US Federal Reserve (Fed) and Bank of England (BoE) will follow – at varying speeds. The Bank of Japan (BoJ) is expected to move the other way.

Stay agile while being wary of political risks
  • The overall economic and market environment remains supportive of equities and bonds. A soft landing with lower inflation risk allows central banks to cut rates. In addition, company margins remain solid.
  • Political risks are acute. France’s elections may spark caution from European investors, at least in the near term. November’s US elections could mean the re-election of Donald Trump whose policies may have far-reaching consequences, including on tariffs where fault lines within Europe are already evident.
  • Progress has been made on inflation, but the last mile is often the hardest. While not our core scenario, we recognise the risks of a “no landing” – where the economy continues to run hot – which could be negative for bonds (and ultimately possibly for equities too).
  • But this is not a time to sit on the sidelines. US inflation is approaching target for the first time in two and a half years and improved Fed guidance allows the market focus to switch to politics and growth.
  • Even against the backdrop of overall slower global growth, an orderly rotation of growth expectations from region to region may be a healthy and stabilising development that supports the extension of the current expansion.

Consider the following:
  • Equities: We are positive about the enablers of AI adoption (eg, data centres, cloud providers) and green transition. Select European small caps stand out for their high-quality balance sheets. We think the UK looks cheap and politically benign.
  • Asia: Japan benefits from improving corporate governance. Investors might use volatility to target the more innovative and higher-yielding parts of China markets. We also like China government bonds.
  • Fixed income: Picking up the divergence theme, we prefer yield curve and cross-market relative value including curve steepeners in the US and euro area (eg, Germany). We are positive on UK rates given underlying fundamentals and political outlook.

See below for more details of our asset class convictions.

Different growth and inflation backdrops globally will give central banks varying leeway to adjust their policy stance. This environment could make for fertile hunting ground for active investors – but watch for political risk.

Asset class convictions

Asset class convictions: equities

Political vs economic cycles: volatility makes quality essential

Going into 2024, it was clear that this would be a major year for elections, with around 50% of the world population going to the polls. But the year continues to throw up political curveballs such as the snap election in France. Geopolitics have become omnipresent for markets.

This is against the backdrop of a more benign macroeconomic environment. The recent meeting of the Fed increased visibility on monetary policy. The takeaway for investors: while the economic cycle is crucial, greater clarity on the unfolding environment means the focus can shift to the political cycle. This message is coming loudest from the US, where the election looms in November and the re-election of Donald Trump could have global implications.

The interplay of the political cycle vs. the economic cycle is set to create more volatility for investors. While this volatility will likely offer entry points, it reinforces the need for quality in portfolios and careful portfolio construction. Focus on quality indicators, such as strong balance sheets and company leadership, when evaluating companies across growth, value and income styles.

Against this backdrop, here are several investment ideas we currently favour.
Tech: focus on the enablers and second wave of AI impact

Technology remains an interesting sector. Some stocks are richly priced – not least the Magnificent Seven companies that have been a major stock market driver in the US, particularly thanks to the boom in artificial intelligence (AI). So, we would look further afield within the sector, particularly at those companies that specialise in the enabling technologies of the AI boom such as cloud computing, data centres and application programming interfaces (APIs) – crucial parts of the AI “plumbing”.

In addition, while the development of the AI ecosystem is still in its early phases, the impact of applied AI on companies via productivity increases will be the next phase to be recognised by capital markets – AI’s second wave.

European small caps: small is beautiful

Europe’s approximately 5,000 listed small-cap companies include global leaders in attractive growth segments. Highly weighted in sectors such as capital goods and transport, small caps tend to be more cyclical and domestic than larger firms. This means they typically outperform when euro area growth accelerates. Hence the time to be positive on small caps could be when growth momentum is troughing and Purchasing Managers’ Indexes begin to rebound.

Perceived to be disproportionately reliant on credit, they have not participated in the cyclical recovery of recent months amid tighter credit conditions. But the environment could be turning in their favour as the ECB starts cutting rates. Furthermore, we think relatively low coverage by sell-side analysts could open up alpha opportunities for active investors looking for quality names.

Current relative value of large vs. small caps in Europe
Next 12m P/E premium European small over large caps

Current relative value of large vs. small caps in Europe

Source: Allianz Global Investors, 9% valuation discount based on 12m forward PE vs. historic premium (+12%).

Asia: cheer for China equities – and is Japan the land of the rising markets?

We think there are reasons to be cheerful about Chinese equities over the longer term. The China A equity market is showing year to date gains after three years of bear market performance. Valuations are at historically low levels and forecasts for earnings growth are accelerating. The market is “under owned”. Plus, the government is sounding encouragingly proactive on boosting the economy and employment. Still, questions hang over the sustainability of growth, as well as the future of the beleaguered property market.

It is prudent to take a selective approach to Chinese equities, particularly as volatility may increase in the run-up to November’s US election and beyond. This means a focus on higher-yielding parts of the market: companies with higher dividends and share buybacks. Businesses boosting free cash flow by reducing capex requirements are attractive. We’re also looking to key growth areas supported by self-sufficiency, AI penetration and innovation. These may include firms operating within power grid infrastructure, semiconductor supply chains, AI-related fields and nuclear power.

We are also positive about Japan. The market experienced a major structural overhaul with “prime” companies required to meet new listing rules on liquidity, business performance and corporate governance. We think Japanese equities combine a reasonable valuation and strong recent earnings with a supportive growth environment amid the central bank’s continued efforts to stimulate growth.

Asset class convictions: fixed income

Watch for the yield curve to steepen

The economic landscape has changed considerably in recent years as inflation and interest rates have moved up. Yet, the US Treasury yield curve (among others) has not reflected the shift, staying remarkably flat relative to history. We think that is about to change.

We expect the US and German yield curves to steepen over the remainder of 2024. The catalyst? Central banks are embarking on rate cuts, prompting a re-pricing of front-end yields. Consequently, we expect the “term premium”– the extra yield investors demand for holding longer maturity bonds over shorter ones – to rise, weighing on ultra-long maturity bonds.

US and German yield curve steepening trades should benefit. In contrast, in Japan, we expect policy interest rates to be normalised over the coming years in the face of rising inflation expectations – a move that should drive a flattening in the government bond curve.

Flat vs steep curves: US 5s30s and Japan 7s30s, bps

Flat vs steep curves: US 5s30s and Japan 7s30s, bps

Source: Allianz Global Investors, Bloomberg, 31 May 2024.

Opportunities of divergence

Market participants might be forgiven the occasional yawn in recent years as major developed government bond markets have moved virtually in lockstep. But this is no longer the case.

Opportunities now abound as countries and regions move in a less synchronised way. We see differences emerging in monetary and fiscal policy, exacerbated by political tremors. And government debt burdens may diverge. The shifts could present attractive returns from relative value positions in the months ahead.

As an example, the strength of the US economy has led to a dramatic scaling back in the market’s expectations for 2024 interest rate cuts. Dynamics in the UK economy are different. Below-trend growth, fiscal restraint and an attractive valuation backdrop, given restrictive real rates, favour an allocation to UK gilts on a cross-market basis.

We see other similar opportunities emerging – giving market participants plenty to think about.

Asset class convictions: multi asset

UK: back to being boring?

After Brexit, the short-lived Liz Truss premiership, and multiple changes of prime minister, the UK may – finally – be regaining its reputation for being boring. Its relative stability now compares favourably with the upheavals seen elsewhere.

This new-found predictability, combined with its status as one of the cheapest markets in the world – even on a sector-adjusted basis – could make the UK worth a serious re-evaluation, particularly as earning revisions start to improve. Other factors in its favour include:

  • Macro data is improving, showing more positive upside surprise than other regions.
  • Better business and consumer confidence data is starting to translate into improving retail sales.
  • Many investors are currently underweighting the UK and so as growth continues to improve, and the political noise of July’s election is out of the way, there’s potential for investors to reallocate.

Surge of interest in European banks

The re-emergence of significant positive interest rates has been a game changer for European banks. After a decade of trending down and reaching effectively zero just two years ago, interest rate margins of historically “normal” levels are now attainable again.

This regime shift has resulted in very strong earnings growth, and profits in 2023 reached three times the average of the preceding decade. Banks are likely to maintain similar profit levels for as long as interest rates stay above roughly 2%, where they can defend their margins – which builds the structural investment case.

Naturally, there are also risk factors that require close monitoring including higher-than-expected loan losses, the political situation in France, and the possibility of taxes on “windfall profits”.

Nonetheless, we believe this could be an overall attractive opportunity as, despite the strong momentum (+23% year to date), European banks still look far from expensive: at less than 7x earnings (US banks: 12x) they have substantial room to re-rate, especially given the current improvement in European economic data.

  • 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. 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 statements contained herein may include statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. We assume no obligation to update any forward-looking statement.

    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 for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of this document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

    This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors UK Limited, authorized and regulated by the Financial Conduct Authority; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).

    AdMaster: 3726069

Recent insights

Layers of contemporary financial skyscrapers in Central Business District, Hong Kong

Navigating Rates

Fixed Income Forward: October 2024

With the potential for more frontloading of interest rate cuts by the European Central Bank, we see the possibility of further yield curve steepening, primarily from the more policy-anchored front end. In outright duration risk, we prefer to stay more tactical on US Treasuries.

Discover more
by Michael Krautzberger , Georgios Georgiou | 7 days ago
An American flag hangs outside a tall gray stone building with large windows.

Navigating Rates

Donald Trump poised for White House return

With all signs pointing to a Donald Trump win, we expect many of his populist policies to cause ripples, even though markets were largely priced for this outcome. How might investors navigate the election result?

DISCOVER MORE
by Gregor Hirt , Michael Krautzberger , Virginie Maisonneuve | 06/11/2024
US elections monitor: policy impact

Navigating Rates

US elections monitor: policy impact

All eyes will be on the US elections in November – but the implications for markets could be quite different depending on who wins.

Discover more

by Greg Meier | 21/10/2024

Allianz Global Investors

You are leaving this website and being re-directed to the below website. This does not imply any approval or endorsement of the information by Allianz Global Investors Asia Pacific Limited contained in the redirected website nor does Allianz Global Investors Asia Pacific Limited accept any responsibility or liability in connection with this hyperlink and the information contained herein. Please keep in mind that the redirected website may contain funds and strategies not authorized for offering to the public in your jurisdiction. Besides, please also take note on the redirected website’s terms and conditions, privacy and security policies, or other legal information. By clicking “Continue”, you confirm you acknowledge the details mentioned above and would like to continue accessing the redirected website. Please click “Stay here” if you have any concerns.

Welcome to Allianz Global Investors

Select your language
  • 中文(繁體)
  • English
Select your role
  • Individual Investor
  • Intermediaries
  • Other Investors
  • Pension Investors

  • Allianz Global Investors Fund (“AGIF”)

    • Allianz Global Investors Fund (“AGIF”) as an umbrella fund under the UCITS regulations has within it different sub-funds investing in fixed income securities, equities, and derivative instruments, each with a different investment objective and/or risk profile.

    • All sub-funds (“Sub-Funds”) may invest in financial derivative instruments (“FDI”) which may expose to higher leverage, counterparty, liquidity, valuation, volatility, market and over the counter transaction risks. A Sub-Fund’s net derivative exposure may be up to 50% of its NAV. 

    • Some Sub-Funds as part of their investments may invest in any one or a combination of the instruments such as fixed income securities, emerging market securities, and/or mortgage-backed securities, asset-backed securities, property-backed securities (especially REITs) and/or structured products and/or FDI, exposing to various potential risks (including leverage, counterparty, liquidity, valuation, volatility, market, fluctuations in the value of and the rental income received in respect of the underlying property, and over the counter transaction risks). 

    • Some Sub-Funds may invest in single countries or industry sectors (in particular small/mid cap companies) which may reduce risk diversification. Some Sub-Funds are exposed to significant risks which include investment/general market, country and region, emerging market (such as Mainland China), creditworthiness/credit rating/downgrading, default, asset allocation, interest rate, volatility and liquidity, counterparty, sovereign debt, valuation, credit rating agency, company-specific, currency  (in particular RMB), RMB debt securities and Mainland China tax risks. 

    • Some Sub-Funds may invest in convertible bonds, high-yield, non-investment grade investments and unrated securities that may subject to higher risks (include volatility, loss of principal and interest, creditworthiness and downgrading, default, interest rate, general market and liquidity risks) and therefore may adversely impact the net asset value of the Sub-Funds. Convertibles will be exposed prepayment risk, equity movement and greater volatility than straight bond investments.

    • Some Sub-Funds may invest a significant portion of the assets in interest-bearing securities issued or guaranteed by a non-investment grade sovereign issuer (e.g. Philippines) and is subject to higher risks of liquidity, credit, concentration and default of the sovereign issuer as well as greater volatility and higher risk profile that may result in significant losses to the investors. 

    • Some Sub-Funds may invest in European countries. The economic and financial difficulties in Europe may get worse and adversely affect the Sub-Funds (such as increased volatility, liquidity and currency risks associated with investments in Europe).

    • Some Sub-Funds may invest in the China A-Shares market, China B-Shares market and/or debt securities directly  via the Stock Connect or the China Interbank Bond Market or Bond Connect and or other foreign access regimes and/or other permitted means and/or indirectly through all eligible instruments the qualified foreign institutional investor program regime and thus is subject to the associated risks (including quota limitations, change in rule and regulations, repatriation of the Fund’s monies, trade restrictions, clearing and settlement, China market volatility and uncertainty, China market volatility and uncertainty, potential clearing and/or settlement difficulties and, change in economic, social and political policy in the PRC and taxation Mainland China tax risks).  Investing in RMB share classes is also exposed to RMB currency risks and adverse impact on the share classes due to currency depreciation.

    • Some Sub-Funds may adopt the following strategies, Sustainable and Responsible Investment Strategy, SDG-Aligned Strategy, Sustainability Key Performance Indicator Strategy (Relative), Green Bond Strategy, Multi Asset Sustainable Strategy, Sustainability Key Performance Indicator Strategy (Absolute Threshold), Environment, Social and Governance (“ESG”) Score Strategy, and Sustainability Key Performance Indicator Strategy (Absolute). The Sub-Funds may be exposed to sustainable investment risks relating to the strategies (such as foregoing opportunities to buy certain securities when it might otherwise be advantageous to do so, selling securities when it might be disadvantageous to do so, and/or relying on information and data from third party ESG research data providers and internal analyses which may be subjective, incomplete, inaccurate or unavailable and/or reducing risk diversifications compared to broadly based funds) which may result in the Sub-Fund being more volatile and have adverse impact on the performance of the Sub-Fund and consequently adversely affect an investor’s investment in the Sub-Fund. Also, some Sub-Funds may be particularly focusing on the GHG efficiency of the investee companies rather than their financial performance which may have an adverse impact on the Fund’s performance.

    • Some Sub-Funds may invest in share class with fixed distribution percentage (Class AMf). Investors should note that fixed distribution percentage is not guaranteed. The share class is not an alternative to fixed interest paying investment. The percentage of distributions paid by these share classes is unrelated to expected or past income or returns of these share classes or the Sub-Funds. Distribution will continue even the Sub-Fund has negative returns and may adversely impact the net asset value of the Sub-Fund.  Positive distribution yield does not imply positive return.

    • Investment involves risks that could result in loss of part or entire amount of investors’ investment.

    • In making investment decisions, investors should not rely solely on this [website/material].

    Note: Dividend payments may, at the sole discretion of the Investment Manager, be made out of the Sub-Fund’s capital or effectively out of the Sub-Fund’s capital which represents a return or withdrawal of part of the amount investors originally invested and/or capital gains attributable to the original investment. This may result in an immediate decrease in the NAV per share and the capital of the Sub-Fund available for investment in the future and capital growth may be reduced, in particular for hedged share classes for which the distribution amount and NAV of any hedged share classes (HSC) may be adversely affected by differences in the interests rates of the reference currency of the HSC and the base currency of the respective Sub-Fund. Dividend payments are applicable for Class A/AM/AMg/AMi/AMgi/AQ Dis (Annually/Monthly/Quarterly distribution) and for reference only but not guaranteed.  Positive distribution yield does not imply positive return. For details, please refer to the Sub-Fund’s distribution policy disclosed in the offering documents.

     


    Allianz Global Investors Asia Fund

    • Allianz Global Investors Asia Fund (the “Trust”) is an umbrella unit trust constituted under the laws of Hong Kong pursuant to the Trust Deed. Allianz Thematic Income and Allianz Selection Income and Growth and Allianz Yield Plus Fund are the sub-funds of the Trust (each a “Sub-Fund”) investing in fixed income securities, equities and derivative instrument, each with a different investment objective and/or risk profile.

    • Some Sub-Funds are exposed to significant risks which include investment/general market, company-specific, emerging market, creditworthiness/credit rating/downgrading, default, volatility and liquidity, valuation, sovereign debt, thematic concentration, thematic-based investment strategy, counterparty, interest rate changes, country and region, asset allocation risks and currency (such as exchange controls, in particular RMB), and the adverse impact on RMB share classes due to currency depreciation.  

    • Some Sub-Funds may invest in other underlying collective schemes and exchange traded funds. Investing in exchange traded funds may expose to additional risks such as passive investment, tracking error, underlying index, trading and termination. While investing in other underlying collective schemes (“CIS”) may subject to the risks associated to such CIS. 

    • Some Sub-Funds may invest in high-yield (non-investment grade and unrated) investments and/or convertible bonds which may subject to higher risks, such as volatility, creditworthiness, default, interest rate changes, general market and liquidity risks and therefore may  adversely impact the net asset value of the Fund. Convertibles may also expose to risks such as prepayment, equity movement, and greater volatility than straight bond investments.

    • All Sub-Funds may invest in financial derivative instruments (“FDI”) which may expose to higher leverage, counterparty, liquidity, valuation, volatility, market and over the counter transaction risks.  The use of derivatives may result in losses to the Sub-Funds which are greater than the amount originally invested. A Sub-Fund’s net derivative exposure may be up to 50% of its NAV.

    • These investments may involve risks that could result in loss of part or entire amount of investors’ investment.

    • In making investment decisions, investors should not rely solely on this website.

    Note: Dividend payments may, at the sole discretion of the Investment Manager, be made out of the Sub-Fund’s income and/or capital which in the latter case represents a return or withdrawal of part of the amount investors originally invested and/or capital gains attributable to the original investment. This may result in an immediate decrease in the NAV per distribution unit and the capital of the Sub-Fund available for investment in the future and capital growth may be reduced, in particular for hedged share classes for which the distribution amount and NAV of any hedged share classes (HSC) may be adversely affected by differences in the interests rates of the reference currency of the HSC and the base currency of the Sub-Fund. Dividend payments are applicable for Class A/AM/AMg/AMi/AMgi Dis (Annually/Monthly distribution) and for reference only but not guaranteed.  Positive distribution yield does not imply positive return. For details, please refer to the Sub-Fund’s distribution policy disclosed in the offering documents.

     

Please indicate you have read and understood the Important Notice.