Having broadened and deepened its fixed income capabilities significantly over many years, AllianzGI is now taking the natural next step in the evolution of its fixed income offering by bringing its capabilities into an integrated, global structure.
Fed moves can't erase economic uncertainty of coronavirus
The US Federal Reserve cut rates to near zero over the weekend in a bid to ease pressure on the global financial system. Yet stockmarkets are unlikely to be reassured. With the course of the coronavirus outbreak uncertain and governments acting increasingly aggressively to contain or delay its spread, a global recession looks all but certain. Investors should recognise that we are in bear-market territory and adjust accordingly. US Treasuries and gold could do well, but investors may also want to add risk in undervalued sectors such as energy.
The financial markets are uncertain about the course of the virus and unlikely to find reassurance as the global economy edges towards recession
China has met with some success at containing the coronavirus, and its economy seems poised to recover — though demand for some goods will likely be muted as the virus inflicts economic damage elsewhere
Central banks globally are pulling out all the stops to provide the liquidity their economies desperately need, but many don’t have much ammunition left
"Safe" assets such as US Treasuries and gold could see more upside, while investors may want to add risk in areas such as energy that have already priced in a likely recession
The US equity markets ended last week in better spirits, with the S&P 500 notching up its biggest one-day gain since 2008, as President Donald Trump announced a package of measures to combat the growing threat of the new coronavirus. But sharp bear-market rallies are a common feature after steep falls and markets tend to slip further in the months ahead — as witnessed after the 1929 and 1987 crashes.
As if to prove this point, European and US stocks tumbled in morning trading on Monday — despite a move by the US Federal Reserve on Sunday to cut rates to effectively 0%. The Fed also announced a package of quantitative easing worth at least USD 700 billion and stated that it would open central bank US dollar lines as it did during the financial crisis of 2008.
These moves suggest there is still huge pressure inside the global financial system — and indeed, non-US parties have incurred USD 12-18 trillion in debts borrowed in dollars. The Fed has again become, in effect, the central bank of the world.
Economies around the world are in serous situations
The financial markets are uncertain about the course of the virus and unlikely to find reassurance anytime soon. Economies around the world are in serious situations, and many could suffer a dead stop similar to the one China experienced in the first quarter.
In Asia, efforts at containment seem to have had their desired effect, with China getting back to work — which will be good for domestic China and China A-shares. Less certain will be China exports in the coming months, as other parts of the world contend with the virus and its impact.
The virus is now taking a terrible toll in Europe. Germany, Spain and France are starting to introduce lockdown measures of the kind already seen in Italy — and the outbreak isn't even expected to peak until late April through May. We don't expect Europe's outlook to improve in the near term, regardless of how much fiscal support governments provide.
In the US, the number of confirmed coronavirus cases is rising as quickly as confidence is falling — which could slow spending by consumers and businesses. Given our house view that the US already looked quite recessionary, it seems certain that the US will fall into recession soon. The question is, how long will it last and how deep will it be?
Central banks are pulling out all the stops, but will it work?
The move by the Fed reflects efforts by central banks globally to provide the liquidity their economies desperately need, even though this will place huge strains on government finances and enormous pressure on banks. Investors should look to local monetary policy for guidance:
China — The People's Bank of China is providing liquidity, and additional monetary and fiscal stimulus is expected. This has led to hopes that China's economy will recover. Market valuations are attractive, having not reached new highs for the last five years.
Japan — The Bank of Japan is buying bonds, ETFs and equities, which is supporting risk assets. The market is now near five-year lows and relatively cheap on valuation measures.
Europe — The European Central Bank did not reassure investors last week, and it does not have much ammunition left in its arsenal. Valuations are cheap and markets are near five-year lows.
UK — The Bank of England seems to be setting a strong coordinated response now. The market has also underperformed for the last three years of Brexit uncertainty, and it is near five-year lows.
US — Its markets have done tremendously well over last few years, powered by Big Tech firms. But despite steep selloffs, the S&P 500 Index is still trading above its five-year lows.
We expect US Treasuries to do well as the Fed starts another round of quantitative easing, despite the worrying signs of illiquidity in those markets. Many weaker securities are falling to "yield to worst" levels, suggesting there is little appetite to add risk here now. Active managers who focus on the fundamentals may be well-positioned to find opportunities here.
With the Fed at zero, we may see the US dollar weaken, though no economy will want a strong currency now. This may be good for gold and other commodities.
As we consider the next six months of uncertainty, investors may want to add risk where assets are already pricing in a recession. The energy sector is a prime example. But other sectors will likely face extended trouble — particularly tourism, travel, restaurants, manufacturing, autos and aerospace — as workers are "furloughed" and knock-on effects spread.
At times like these, it is difficult to ascertain much information from the markets, but investors need to accept that we are now in bear-market territory. As the global economy freezes, we expect to see recessionary — and perhaps depressionary — conditions spread.
While the world battles the coronavirus pandemic, China has already made strides towards mitigating the virus’s effect on its people and economy. Although the country is not yet out of danger, we expect China’s economy to recover in the second half of this year – which could be another positive signal for China’s domestically driven A-share market.
After China’s economy ground to a virtual halt earlier this year, most companies have resumed work – which should ease pressure in the global supply chain and help Chinese manufacturers
Even with the coronavirus outbreak, “onshore” China A-shares have outperformed “offshore” China H-shares this year, and significantly outperformed equities in the US, Europe, Japan and emerging markets
Given that China A-share companies get almost all their revenues domestically, they are likely to have an advantage over exporters amid a slowing global economy
With coronavirus causing widespread volatility, it’s worth noting that A-shares have had a very low correlation with other major asset classes – including them in a global portfolio helps diversify away some portfolio risk and helps generate a much better risk-return profile
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 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 his 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. 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 (Australian Registered Body Number 160 464 200) 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 U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorised by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; 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. 199907169Z]; 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 and Investment Trust Association, Japan]; and Allianz Global Investors Taiwan Ltd, licensed by Financial Supervisory Commission in Taiwan.