1. No category

March 2015
Capital Markets Monthly
The negative interest rate club
As of 27/2/15
Despite a few question marks raised by global economic data,
residual geopolitical risks and a comparatively lacklustre corporate
reporting season, here and there leading stock exchanges have
risen to record highs. While equity market records actually lead
to expectations of weaker bond prices – but of course, that is a
long outmoded way of thinking that dates from the time when
returns were solidly positive – the opposite was the case: The
“negative interest rate club” continued to grow, with Sweden
joining its ranks. Of course, not all industrial countries have
negative interest rates (yet?). In the US, government bonds
recently even experienced a decoupling, but according to the
law of communicating vessels, no market is safe from the
liquidity pressure coming from the central banks. And it speaks
for itself when about 60% of outstanding German government
bonds have a negative yield, as do 45% of French government
bonds, 80%(!) of Swiss government bonds, and 30% of Japanese
government bonds.
At the same time, the liquidity pressure searching for returns
is sloshing over into the Asian markets, which are increasingly
gaining the favour, particularly among European investors.
Accordingly, the issue of Euro-denominated bonds originating
in Asia increased by a factor of five over the prior year to
USD 2.3 billion.
It is interesting to note in this respect: Monetary policy easing, as
we have already seen a great deal of in the industrial countries,
has recently shifted to the global emerging markets. While
The “return seekers”
club keeps growing
and growing and
growing.
Hans-Jörg Naumer
Global Head of
Capital Markets &
Thematic Research
Allianz Global Investors
Equity Indices
Status
FTSE 100
6,940
DAX11,402
Euro Stoxx 50
3,586
S&P 500
2,105
Nasdaq4,964
Nikkei 225
18,827
Hang Seng
24,887
KOSPI1,997
Bovespa51,583
FXStatus
USD/EUR1.124
New Publications
Interest Rates %
USA
3 Months
2 Years
10 Years
Euroland 3 Months
2 Years
10 Years
Japan 3 Months
2 Years
10 Years
Raw Materials
Oil (Brent, USD/Barrel)
0.26
0.59
2.02
0.04
-0.22
0.30
0.17
0.01
0.34
61.1
CapitalMarketIndicator
Bond Funds
Equity Funds
Dividends instead of low interest rates
www.allianzglobalinvestors.de
there have already been about 20 rate cuts globally since the
beginning of the year, more than half of them have taken place
in the emerging countries.1 The club of countries with negative
or continually falling interest rates or yields is growing, while the
“disinflation” (falling inflation) and “deflation” (negative inflation
rates in conjunction with recessionary economic performance)
debate is not yet over. A solid 60% of the industrial countries are
currently reporting an inflation rate of less than 1%.
We still maintain that the economic outlook and the price
of oil make deflation unlikely. The search for returns beyond
government bonds remains the order of the day.
Welcome to the return seekers club,
Hans-Jörg Naumer
1
Source Bloomberg & own calculations as of February, 28th 2015
Allianz Global Investors: Capital Markets Monthly – March 2015
Markets in Detail
Tactical Allocation, Equities & Bonds
• The global economic situation continues to be fragile and unbalanced. The decline in the price of oil should, however, boost growth
overall. Global monetary stimulus also plays a role here.
• The expansionary central bank policy remains a structural plus for equity investments, especially against the backdrop of low future
returns in the bond market.
• Overall, this speaks in favour of maintaining an overweight in riskier forms of investment such as equities, although investors should
be prepared for increasing volatility.
German Equities Japan Equities • While the German equity market is fairly valued by global
standards, in the European context it is among the more
expensive markets.
• The German economy continues to show its robust side.
Record exports are accompanied by record employment.
• Owing to the oil price and the weak Euro, the economic
outlooks remain positive.
• To date, neither the Ukrainian nor the Greek crisis have dented
the economic cycle.
• The economic situation continues to be disappointing. The
inflation target has again receded into the distance.
• However, the upward trend in earnings revisions continues
unabated for Japanese equities. It has reached a 15-year high.
• The weak Yen may also have a noticeably favourable impact on
corporate profits.
• However, international investors should include the exchange
rate in their investment decision.
Equities Europe
• The Eurozone is gradually developing into a closer monetary
union. The entry into force of the banking union has noticeably
improved the financial architecture of the monetary union.
• Events in Greece should not have any long-term negative
impact on other countries in the Eurozone. The ECB indicator
for systemic risk in the Eurozone has shown little tension in
recent weeks.
• Valuations in both the Eurozone and in the UK can be
considered particularly attractive in terms of the cyclicallyadjusted price-earnings ratio, with valuations in the UK at a
significant discount compared to their historical average.
US Equities • In the US, the production gap has closed further, with rising
labour costs now expected, which should support consumption.
• Economic indicators point to slowing momentum, but this
should not yet be seen as a move away from the previously solid
economy. The labour market, in contrast, continues to develop
positively.
• Equity market valuations are high, even in terms of the
cyclically-adjusted price-earnings ratio, but are supported by
low interest rates.
• Earnings revisions have been negative in the last few weeks. The
strong US Dollar is probably one reason for this.
Emerging Market Equities • Restraint is called for with regard to emerging market equities:
• On the one hand, growth trends continued to be on the weaker
side, on the other hand, a strong Dollar in the past has made for
headwind.
• This group of countries is, however, very diverse, which makes
selection necessary.
Sectors
• A moderately cyclical sector orientation continues to seem
reasonable, although the situation is somewhat ambiguous. Low
yields should support defensive growth companies, but the
growth picture we expect speaks more in favour of cyclicals.
• Overweightings should be undertaken particularly through
technology and consumer discretionary stocks.
• In some cases, there are extreme differences in valuations. For
example, commodity stocks are trading at a significant discount
to consumer stocks.
Investment theme European Equities
• The gap in profit performance in relation to the US has grown
sharply. In this respect, a counter-movement in the next few
quarters in favour of European equities is expected, and the
weak Euro should make a contribution here.
• The segment got a tailwind from large net capital inflows,
which hit record highs at the end of February.
• In terms of the cyclically-adjusted Shiller P/E ratio, European
equities (i.e. including the UK) are trading at a discount of
approximately 25% compared to the world market.
2
Allianz Global Investors: Capital Markets Monthly – March 2015
Euro Bonds
• In the Eurozone, a continuation of the directional movement
of the yield curve should be expected for now, i.e. steepening
when markets are weak and flattening when markets are
strong. At the same time, large parts of this bond segment
are in negative territory in terms of yields.
• Peripheral government bonds in the Eurozone remain well
supported by the accommodating ECB monetary policy, even
if they have further narrowed. Still, the default probabilities
priced in remain above pre-crisis levels.
• Bonds from peripheral countries should therefore remain
overweight.
• Currencies should continue to be driven mainly by monetary
policy, and the US Dollar should accordingly remain strong.
• For certain currencies such as the Ruble, the Canadian and
Australian Dollar and the Norwegian Krone, the development
of commodity prices is an additional factor.
• The Chinese Renminbi appears to be cyclically sensitive. But in
terms of its fair value in accordance with the purchasing power
parity theory, its potential for appreciation over the medium to
long term remains unchanged.
International Bonds
• In terms of implicit 5-year swap interest rates in the US and the
Eurozone, inflation expectations have continued to fall
significantly. However, longer-term 10-year inflation
expectations remain stable.
• Government bonds on both sides of the Atlantic remain
expensive.
• As a result of the continued robust economic environment
and the anticipation of higher US interest rates starting from
mid-2015, Treasury yields should be expected to rise gradually.
Continued financial repression, however, should have a
dampening effect on the expected increase in yields.
Emerging Market Bonds
• Structurally the environment for bonds from emerging
countries remains intact, but it is tense in the short term due to
the economic data situation.
• High and continued positive real returns, particularly
compared to the industrial countries, are providing support.
Corporate Bonds • The ambitious valuations of investment-grade corporate
bonds and high yield segments in the Eurozone are offset by
a continued expansionary monetary policy and improving
fundamentals.
• Credit risk premiums on US corporate bonds are moving near
their historical average.
• However, according to our models, based on economic data,
liquidity and market volatility, the risk premiums priced in can
be regarded as fundamentally justified.
Currencies
• A side effect of low yields in the bond markets was inevitable:
currency volatility.
• The volatility of the G10 currency basket temporarily climbed
to levels which were exceeded only two times during the last
25 years, namely in 1992 and 2008.
3
Allianz Global Investors: Capital Markets Monthly – March 2015
Do you know the other publications of Allianz GI Global Capital Markets & Thematic Research
Active Management
→→ The Changing Nature of Equity Markets and the Need for
More Active Management
→→ Harvesting risk premium in equity investing
→→ Active Management
Smart Risk: Risk Management & Multi Asset
→→ Smart Risk with Multi Asset Solutions
→→ Smart Risk investing in times of financial repression
→→ Strategic Asset Allocation
→→ The new Zoology of Investment Risk Management
→→ Constant Proportion Portfolio Insurance (CPPI)
→→ Dynamic Risk Parity – a smart way to manage risks
→→ Portfolio Health Check®: Preparing for „Financial Repression“
Financial Repression
→→ Shrinking mountains of debt
→→ International monetary policy in the era of financial
repression: a paradigm shift
→→ Silent deleveraging or debt haircut?
→→ Financial Repression – it is happening already
→→ Financial Repression – a silent way to reduce debt
Strategy and Investment
→→ Equities – the new safe option for portfolios?
→→ Is small beautiful?
→→ Dividendstrategies in times of financial repression
EMU
→→ Macroprudential policy – necessary, but not a panacea
→→ The Banking Union in a Nutshell
Bonds
→→ The case of emerging market currencies in the long run
→→ Global Emerging Markets – In the Spotlight
→→ China’s long march from Mao to market
→→ High-Yield Corporate Bonds
→→ US High-Yield Bond Market – large, liquid, attractive
→→ Credit Spreads
→→ Corporate Bonds
→→ Convertible Bonds – The best of both worlds?
Demography – Pension
→→ Financial Repression and Regulation: Paradigm Shift for
Insurance Companies & Institutions for Occupational
Retirement Provision
→→ Discount rates low on the reporting date
→→ IFRS Accounting of Pension Obligations
→→ Demographic Turning Point (Part 1)
→→ Pension Systems in a Demographic Transition (Part 2)
→→ Demography as an Investment Opportunity (Part 3)
Behavioral Finance
→→ Reining in Lack of Investor Discipline:
The Ulysses Strategy
→→ Overcoming Investor Paralysis: Invest More Tomorrow
→→ Outsmart Yourself! – Investors are only human too
→→ Two minds at work
All our publications, analysis and studies can be found on the
following webpage:
http://www.allianzglobalinvestors.com
@AllianzGI_VIEW
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Imprint
Allianz Global Investors GmbH
Bockenheimer Landstraße 42-44
60323 Frankfurt/Main
Global Capital Markets & Thematic Research
Hans-Jörg Naumer (hjn), Stefan Scheurer (st),
Ann-Katrin Petersen (akp)
Data origin – if not otherwise noted: Thomson Reuters Datastream.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Bond prices will normally
decline as interest rates rise. Bonds are subject to the credit risk of the issuer. High-yield or “junk” bonds have lower credit ratings and involve a greater risk to principal.
Emerging markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates. Equities
have tended to be volatile, and unlike bonds do not offer a fixed rate of return. 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. 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.
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