
Summary
In a late-cycle economy, asset-class returns tend to be modest, suggesting a difficult environment for passive portfolios that merely track an index. Moreover, as central-bank stimulus is withdrawn, passive investors could be further hurt by rising volatility and falling correlations. It all adds up to an environment that could provide attractive opportunities for active investors.
Key takeaways
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As challenging as investors may find today’s
economic climate, it could be set to get even
trickier. We are approaching major turning
points in economic and corporate earnings
growth, central-bank liquidity and fiscal
stimulus – as well as heightened political
headwinds. While we do not think the global
business cycle is finished yet, it is maturing:
the US and Chinese economies are cooling
and medium-term recession concerns have
risen sharply.
Mounting evidence suggests global growth
is past its peak – though still hovering at
around potential – and we are now heading
into the last phase of what has been a long
period of expansion. We do not think the
global business cycle is finished yet, but as it
matures, the world economy faces slower
near-term growth. Following the favourable
“Goldilocks“ setting of the past couple of
years – where conditions were consistently
“just right” – financial markets are now
facing a more challenging backdrop.
This environment demands a considered
investment approach, because portfolios
that may have served investors well during the
steady ascent of risk assets over recent years
could be exposed now. But while there are risks
for everyone, the end of a cycle also brings
opportunities, particularly for active investors.
Portfolios that may have served
investors well during the steady ascent
of risk assets over recent years could
be exposed now
No reward for just taking beta risks
If there’s one lesson from previous late-cycle
environments, it’s that navigating financial
markets will require more thought and selectivity
from here on.
Looking at historical patterns of investment
performance over a full economic expansion, the
typical pattern would be that stock returns surge
perhaps a year or two out from recession (see
chart below). We could have already seen that
“final hurrah” this time round. As the end of a cycle
nears, investors have rarely been rewarded for just
taking beta risk – that is, for passively holding a
portfolio with broad market exposure.
The biggest risk could be to take no risk
Faced with uncertainty, it may be tempting to take
risk off the table altogether. But doing so could
harm purchasing power over time and, with
interest rates expected to remain low for a while
longer, the hunt for yield remains pressing.
Economies may be cyclical, but time is linear –
people still need to plan for the future. The biggest
risk could be to take no risk.
That said, from a tactical investment standpoint,
as the business cycle draws to an end, investors
may want to adopt a slow-motion derisking
strategy, selectively reducing market risk and
increasing alpha exposure instead.
With an active approach, it is possible to remain
invested and continue benefiting from the longterm
power of compounding. Global growth is
patchy and recession fears have intensified, but
we believe attractive opportunities still exist. To
build a resilient portfolio, investors should aim to
look past the headlines to focus on strong balance
sheets and other qualities that underpin the
sustainability of investments.
Investors may want to adopt a slowmotion
derisking strategy, selectively
reducing market risk
Use volatility and dispersion to your advantage
In a late-cycle period, active investing is not just a
defence against an anticipated deterioration in
the global economy; it also provides the chance to
be proactive during periods of higher volatility
and lower correlations.
This is the kind of environment we’re seeing now,
thanks to ongoing geopolitical uncertainty and
central banks that are returning their monetary
policy to normal. As central banks remove liquidity
from the economy, we’ve already seen volatility
(ie, price fluctuations) move up, and we expect it
to stay that way for some time to come.
Asset returns through economic expansions in the United States
Negative excess returns in the final year of business cycles, on average

The chart shows asset-class returns over cash during US expansions since 1975 (high-yield return data is from 1982),
with overall excess returns shown in the top row. Global and US equities have on average recorded low double-digit
returns toward the latter phase of a cycle (1-2 years pre-recession; middle row). As the end of a cycle draws near
(1 year pre-recession; bottom row), excess returns vs. cash on all asset classes shown here have been negative, on average.
Another effect of the policy shift is that single
stocks should exhibit lower correlations – in other
words, they should show less of a tendency to
move in tandem (see chart below). Generally
speaking, the excess global liquidity created by
central banks’ quantitative easing programmes
has been a rising tide that has lifted risky asset
classes. As this broad blanket stimulus is gradually
removed, single stocks will likely move less in
tandem and we expect greater dispersion
between the best and worst performers – or more
clear winners and losers – as fundamentals and
specific factors become stronger influences on
asset prices.
In times like this, we expect the prices of risk assets
to deviate more around fair value, creating
potential opportunities for active investors to pick
up mispriced securities – tomorrow’s winners
whose growth potential is not yet adequately
reflected in prices. Active managers usually have
the flexibility required to move between what they
believe are attractive asset classes, regions,
sectors and companies.
We expect the prices of risk assets to
deviate more around fair value,
creating potential opportunities for
active investors
On the topic of dispersion, it’s important to
remember that global indicators aggregate a
broad range of metrics, not all of which point in
the same direction. For example, while many
equity markets, including the US, are still richly
priced, emerging markets stocks appear
attractively valued, while European prices look
moderate. Given the range of valuations,
selectivity is key, and an active approach may
offer the best opportunity to build a portfolio with
long-term return potential.
Keep an active eye on which risks you’re taking
As this economic cycle winds down, we see several threats with the potential to impact markets globally. Investors should watch them carefully and position their portfolios appropriately.
- Trade conflicts are unlikely to cause a global recession by themselves, but they can sour sentiment and disrupt supply chains. This can exacerbate economic weaknesses.
- As select countries lurch toward protectionism, those nations that are heavily export-oriented and dependent on international supply could find themselves vulnerable.
- Heightened geopolitical uncertainty has the potential to further roil markets. But while US President Donald Trump and Brexit attract the most attention, they are not the only political question marks.
- Leverage may be the biggest problem facing
the global economy. Much of the world solved
the last debt crisis essentially by borrowing
more. China is one of the most indebted
nations, but many other countries have taken
on more debt too and US dollar-denominated
debt outside the US now stands at record
levels.
Stay alert, be active
A late-cycle environment like this one is
undoubtedly more challenging, and investors
should position for lower market returns, more
volatility and tail risks. But in our view, this is not a
time to step back. The current cycle may be
entering its twilight, but there are still potential
rewards for active investors.
Single stocks will likely move less in tandem

Source: Datastream, FactSet, AllianzGI Global Economics & Strategy. This chart shows correlations between individual shares
in the S&P 500 Index (ie, the extent to which stocks tend to move in tandem). Quantitative easing (QE) caused average
correlations to rise (the dotted-yellow line on the right);. Data as at 31 January 2019.
Investing involves risk. There is no guarantee that actively managed investments will outperform the broader market. 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. Foreign markets may be more volatile, less liquid, less transparent, and subject to less
oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets. 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 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,
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750915

Summary
Thematic investing is gaining popularity as investors look to invest in a way that aligns with their interests and values. Without typically being restricted to a certain sector, region, market cap size or any benchmark, these strategies offer an attractive opportunity for active asset managers to show what they can deliver.
Key takeaways
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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 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 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, authorized 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.