Active Investors Thrive on Creative Destruction

Hans-Jörg Naumer | 02/02/2017
Choosing a direction

Summary

As geopolitics and disruption factor into just about every investment decision in this post-election period, it’s important to bear in mind the “creative power of destruction”. This is precisely the environment where active investors can apply their skills and sort out the winners.

The highlights from our recent Investment Forum in Hong Kong included not just our outlook on geopolitics, but also the impact of technological disruption. Both will continue to occupy the capital markets for quite some time to come, and we were reminded of both by the disruptive first political steps taken by the new US president.

Donald Trump has raised doubts not just about the entire Western alliance policy, but about globalization in general – and with it, the mechanism providing competition and comparative locational advantages that constitutes a win-win situation for all stakeholders. This is about much more than China, by the way, which also featured into our Investment Forum agenda. Our discussion on how China’s capital markets are increasingly opening up was fascinating.

Following a phase of almost exuberant optimism while waiting for Trump’s fiscal-policy measures, reality is now reasserting itself. Meanwhile, geopolitics remain on the agenda as we wait for further details on Brexit, parliamentary elections in the Netherlands (in March) and presidential elections in France (in April).

The only constant among all these variables seems to be global monetary policy, although just how immutable it ultimately proves to be remains to be seen. Trump’s criticism of US Federal Reserve Chair Janet Yellen’s policy makes one wonder whether the interest-rate curve might not turn out to be steeper than expected. There is, however, no denying that anyone wanting a weaker US dollar is not going to want a more restrictive monetary policy.

By contrast, European Central Bank President Mario Draghi is facing rising inflation rates in the euro zone, which makes it increasingly unlikely there will be an extension beyond December 2017 of his bond purchase programme in its current form. Nevertheless, the major central banks are persisting with their expansionary monetary policies, and the phase of low/negative interest rates cannot be expected to end anytime soon.

On the upside, economic indicators in virtually all the key regions have been painting an increasingly friendly picture in recent weeks.

Active management is the order of the day if disruption is to evolve into Joseph Schumpeter’s idea of the creative power of destruction: Active stockpicking is needed to filter out the winners of technological change, and active selection of investment segments will enable investors to take advantage of market volatility. Above and beyond any disruption, monetary policy, economic development and corporate earnings should favour riskier asset classes.

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. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. 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 GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); 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]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

102859

Expert-Image

Hans-Jörg Naumer

Global Head of Capital Markets & Thematic Research
Hans-Jörg Naumer is Global Head of Capital Markets & Thematic Research with Allianz Global Investors which he joined in 2000. The focus of his work is on analysis relating to strategic and tactical allocations, specific investment opportunities and the identification of long-term investment trends. Before joining the firm, he worked for Société Générale, where he became the Head of Research Germany and was part of the French investment bank’s international research team. From his vantage point as an analyst and economist, he observed the establishment of the Economic and Monetary Union and thus ranked among the prime “ECB Watchers”. He started his professional career in the corporate banking division of Deutsche Bank in 1994. Hans-Jörg studied economics at the University of Mannheim, one of the leading universities for economics and business studies in Germany. During his studies, he worked at the Chair for Macroeconomics.

Battles Brewing Over US Budget and Taxes

Steven Malin | 03/04/2017
White House

Summary

President Trump's ambitious plans are expected to encounter stiff resistance, but meaningful spending and taxation changes should happen well before year-end. The markets will respond well if Mr Trump's pro-growth, pro-business policies become reality.

Key takeaways
  • Before addressing the budget, Congress and Mr Trump must pass short-term spending bills and raise the debt ceiling to avoid a shutdown
  • Democrats dislike Mr Trump’s budget, as do many Republicans in both houses of Congress
  • Tax reform seems inevitable this year, but it will likely fall short of the Trump administration’s original goals

The new priorities of the US Congress and the Trump administration are designed to make US fiscal policy more pro-growth and pro-business. What these legislators will actually accomplish, however, is anyone's guess – particularly once political posturing and special-interest lobbying kicks in. On top of that, the federal budget process has many twists and turns that will ultimately dictate the timing, scale and scope of changes.

Complicating matters further, the Republican-controlled Congress and President Donald Trump have work to do before they can even get to next year's budget: They must approve new short-term spending bills that fund the government through September, the end of the fiscal year, and they will need to raise the debt ceiling to avoid a government shutdown. At every step along the way, they will be met by resistance from Democrats and many within their own party.

Significant changes to government spending

Mr Trump's fiscal-year 2018 budget proposal, sent to Capitol Hill on 16 March, sets in motion formal Congressional processes that will determine the funding levels for federal agencies, programs and operations – and most of them have little chance of being approved. The proposal calls for unprecedented cuts in civilian non-defense discretionary spending and the elimination of 19 federal agencies to fund increased spending on national defense, veterans' affairs and homeland security. As proposed, the budget would confine civilian non-defense spending to slightly more than 3 per cent of gross domestic product in fiscal-year 2018, a 56-year low.

Initial indications suggest that not only do congressional Democrats dislike the proposal, but much of the Republican base in both houses of Congress disagrees with the president's plan as well – with one prominent senator calling it "dead on arrival". Republicans on the political right already contend that the proposal, if enacted, would magnify the federal budget deficit; more moderate Republicans complain that severe cuts to programs important to their respective states or districts cannot be supported.

Major tax reform in Republicans' sights

Even as they prepare for a fierce budget fight, Congress and Mr Trump have begun serious consideration of tax reform for businesses and individuals. These proposals could turn into the most comprehensive new tax legislation since 1986 and are expected to spark a new round of political battles.

By most accounts, Republican leaders in Congress will seek to enact reform legislation by no later than late summer, so the pressure will build quickly. Tax reform will focus not only on businesses: Plans call for reduced burdens on middle- and lower-middle-income households, and a broader tax base for higher-income tax filers, designed to eliminate net reductions in their effective rates. Legislation along these lines will put many moderate Democrats in a tricky situation: Positioning against the tax bill could look like a rejection of benefits for low- and moderate-income taxpayers, while voting for the bill could seem like capitulation to the Republican leadership in Congress.

Regardless of the timetable, passage of business and personal tax-reform packages seems inevitable this year, even if they fall short of the original goals of the administration and House Speaker Paul Ryan. Compromise will be needed because several components of the comprehensive package – such as the border adjustability tax – are highly controversial. Nevertheless, proponents of radical reform will push hard for changes to taxes, spending, health insurance and regulation, considering them overlapping parts of a comprehensive program that works only if all of the key provisions remain intact. Think of it as a stack of Jenga blocks.

Change is coming

In the end, the overall tax-reform package as proposed by the administration and congressional leaders will likely raise the federal budget deficit over the next decade. Yet the increase can be offset partially if the package stimulates economic growth sufficiently to boost tax revenue and shrink government spending. Either way, meaningful changes in spending priorities and major tax reforms can be expected well before the end of 2017. The markets should respond well if Mr Trump's pro-growth and pro-business policies become reality and the economy strengthens.

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. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. 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 GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); 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]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

133381

Expert-Image

Steven Malin

Investment Strategist, US Capital Markets Research & Strategy
Steven Malin is an investment strategist and a director with Allianz Global Investors, which he joined in 2013. As a member of the US Capital Markets Research & Strategy team, he is responsible for making weekly US and global asset-allocation recommendations. Steven’s responsibilities also include analyzing global economic, financial, political and regulatory developments; and briefing institutional, retail and retirement clients. Before joining the firm, he was the director of research at Wealthstream Advisors, a private wealth management firm; and an advisor to Aronson Johnson & Ortiz, a quant-based institutional equity manager. Earlier, Steven was a senior portfolio manager at AllianceBernstein, serving institutional, sub-advisory, Taft-Hartley and private clients throughout North America. He also worked at the Federal Reserve Bank of New York for more than 16 years, and during this time he was an officer who held several senior position. Before that, he was the senior economist, founder and director of the regional economics center at The Conference Board. Steven has a B.A. in economics from Queens College and a Ph.D. in economics from the Graduate Center of the City University of New York.
Connect With Us
Stay up-to-date with social media
Contact Allianz Global Investors
For more information on our products and services
Contact Us