Andreas Utermann, global CIO at Allianz Global Investors, thinks central banks will surprise markets with looser-than-expected policy through 2014, keeping bond yields contained in an environment of “muted and fragmented” global growth.
“I feel like I’m going through the financial markets equivalent of ‘Groundhog Day’,” Utermann said, name-checking the classic 1993 comedy in which Bill Murray lives through the same 24 hours over and over again, at a press conference in London following his firm’s Investment Forum in New York. “Our position for 2014 is essentially the same we had going into 2011, 2012 and 2013.”
Some of that position is now looking a little more contrarian, however.
Utermann warned against high exposure to risk assets in Japan and advised investors to buy into weakness in emerging market local currency debt.
“We are relatively shorter in the US and Germany; relatively more sanguine on the euro-zone peripherals; and pretty bullish on emerging market debt in local-currency terms – and that has been our position for several years,” he said.
Nominal and real interest rates in the core developed economies will remain lower for longer than the market currently anticipates as central banks continue to “surprise” financial markets, as the Fed did recently with the decision to postpone ‘tapering’, he argued.
Utermann emphasised the importance of this “surprise” element: one can get one’s bets about tapering wrong, he suggested, but one can confidently assume central banks will do what is necessary to surprise markets, based on their perception of current sentiment.
That means continued ‘financial repression’, savers remaining disadvantaged, currency movements hurting investors in certain regions and no “massive sell-off” in developed market sovereign bonds.
Despite this, Utermann said the risk of low returns and capital losses if investors wanted to exit positions meant Allianz Global Investors was not advising clients to hold these bonds.
Despite “muted and fragmented global growth” and fear of tapering being replaced by fear of deflation, the policy environment will continue to favour risk assets.
Equities will “probably earn their risk premium”, he said.
“Equities have done substantially better than I’d have expected, despite stagnating earnings – we have seen a significant re-rating,” he added.
“Dividends will continue to be an important driver of equity returns.”
Utermann warned that the big Japan trade of 2013 might have run its course because the absence of a “real crisis” in the country would delay genuine structural reform of labour markets, in particular.
“There is a limit to how big central bank balance sheets can grow, so investing in Japanese risk assets today looks to us like a trade on borrowed time,” he said.
But the firm’s long-term bullishness on emerging market local currency bonds remains intact in the face of this year’s sell-off.
“Tapering makes people concerned about renewed volatility in that asset class, but it should be a buying opportunity, not a time to sell,” he said.
“We expect less volatility next time around because we feel a lot of this is in the price, now. That means the buying opportunity could be short-lived.”