Volatility May Wilt as Election Expectations Take Root

Greg A. Meier | 03/04/2017
Flags of the World

Summary

Favourable European election results coupled with progress for the Republican growth agenda in the US could soften market uncertainty, says our Capital Markets and Thematic Research team. But for the next few weeks, the road still looks bumpy.

The geopolitical scene is about to get smoky and hot. Within the next few weeks, investors will have fresh information on a variety of risks that have dominated news headlines. The outcome will drive markets and set the course for the remainder of 2017.

In Europe, an election super-cycle kicks into high gear, as French voters go to the polls to select a new president. While the anti-euro, far-right candidate, Marine Le Pen, is positioned to win first-stage voting on 23 April, she probably won't take an outright majority. This would mean a final, second-stage vote on 7 May, with one of the more establishment, market-friendly candidates – perhaps Emanuel Macron – winning. But as any President Trump supporter or Brexiteer will happily tell you, the polls can be wrong. And while France should take the main stage in Europe, nitty-gritty details on the UK-EU divorce should come to light, and Italian elections – where euro-sceptic parties are polling above 50 per cent – could be called at any time.

On the other side of the pond, the clock is ticking on President Trump's first 100 days in office, which rumbles to a close on 29 April. Optimism about Mr. Trump's pro-growth agenda has been a key factor supporting US corporate earnings, inflation expectations, share prices and the spike in "soft", survey-based economic data like consumer and business confidence. But, despite running the presidency and both houses of Congress, things haven't gone smoothly. President Trump has struggled with both self-inflicted injuries (like wiretapping tweets and Russia connections) and external obstacles (like high federal debt levels and fiscal hawks within his party).

The 24 March failure of the Republican initiative to dismantle President Obama's Affordable Care Act may be an indication of future challenges to buoyant animal spirits. Governing is complicated. Gaining consensus around debt-financed initiatives like major tax cuts and USD 1 trillion in infrastructure spending might not be a slam dunk. Congress is scheduled to go on a two-week recess starting 10 April. On 28 April, the US government is scheduled to run out of the cash. Aside from side-lining the risk of a government shut-down, an agreement to extend financing – at least until later in the year when the debt ceiling again becomes an issue – would be an easy way to demonstrate that Trumponomics is alive and kicking.

Against this uncertain geopolitical backdrop, central banks around the world are struggling to balance massive monetary accommodation against a spurt in inflation pressures. Headline prices in the US, UK and Europe are already at or above 2 per cent. At the same time, seven central banks globally are still running negative interest rate policies, while aggregate global quantitative easing continues to expand at breakneck speed. Looking ahead, we think central bank liquidity – one of the factors that helped support risky assets during the post-crisis era – might peak by early 2018.

Today's risk-takers should benefit if uncertainties fade amid favourable European election results and forward progress in the Republican economic growth agenda. But if risks veer into reality, earnings expectations – and thereby share prices – might start to look a little bit extended. As usual, we'll know for sure when the rubber hits the road.

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.

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Greg A. Meier

Strategist, US Capital Markets Research and Strategy
Mr. Meier is a strategist and a vice president with Allianz Global Investors, which he joined in 1999. He is responsible for developing research and analysis for the firm’s investment professionals and Sales and Client Service teams, and for conveying the firm’s views to clients. Mr. Meier’s work focuses on global capital markets, macroeconomics, monetary policy, fiscal policy and retirement issues. He was previously a performance analyst and a financial writer with the firm. Mr. Meier has 15 years of investment-industry experience. He has a B.S. in business administration from the University of Montana and an M.B.A. from the University of Washington.

China's Banks Are Looking Less Shadowy

Joey Wong | 05/04/2017
China

Summary

Our Grassroots℠ Research survey of bank managers in China sheds light onto a sector not known for transparency. A new breed of lower-risk wealth-management products and signs of a healthy mortgage market may support a more positive view of the country’s banking industry.

Key takeaways
  • Demand is strong for WMPs, with NAV-type products gaining traction
  • Mortgages are considered a healthy and lucrative business for the banking sector
  • Most of our sources believe the overall loan default rate will stay low

For years, some market-watchers have voiced concerns about the health of China's banks and questionable sales of wealth-management products (WMPs). These investment vehicles offer attractive yields and imply backing by the issuing banks, yet their portfolios are not always transparent and banks frequently do not record them on their balance sheets – giving rise to fears of systemic risk.

When our Grassroots℠ Research team recently talked to bank branch managers in China about these issues, we found that demand for WMPs remains strong. But there is growing consumer interest in a new, more transparent product. We also found ample evidence of a healthy mortgage market that supports our generally constructive perspective on these banks.

Among our key findings:

  • Most of our sources said WMP sales trended up between December 2016 and February 2017 – by an average of 11 per cent – as other investment options, such as stocks and housing, remained unattractive.
  • Loan quotas are expected to stay unchanged this year due to government efforts to curb the overheated housing market and general concerns about China's business environment.
  • Our sources expect mortgage loans in 2017 to remain the main source of loan business, while property-backed consumer loans should see significant growth.
  • Two-fifths of our sources expect the loan default rate to remain flat in 2017, but half expect it to trend higher.
  • Still, most believe the overall loan default rate will stay low, and we did not find any sign of default risk increasing in recent months.

Our GrassrootsSM study also found that net-asset-value–type WMPs have gained traction among banks and customers, which Research Analyst Helen Ye found interesting: "NAV-type products remove the implicit-guarantee obligation from banks and require them to educate customers about their own risk exposure."

The findings about muted loan growth and continued reliance on mortgages as the primary source of new loans are similarly encouraging. "Mortgages are considered a healthy and lucrative business for the banking sector," said Ms Ye. "These results run counter to the market's concerns about continued excessive credit growth in China's economy and are supportive of our investment perspective on China's banks."

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.

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Joey Wong

Vice President, Research Analyst
Ms. Wong is a research analyst and a vice president with Allianz Global Investors, which she joined in 2010. She is a member of the Asia Pacific research team and a member of the Grassroots℠ Research team. Ms. Wong has six years of investment-industry experience and 10 years of experience in market research. She was previously a research manager at the Nielsen Company in Hong Kong. Ms. Wong has a B.S. in commerce, with a double major in finance and marketing, from the University of Auckland, New Zealand.
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