Secular themes will win out in the long term, says Allianz GI CIO

Focusing on tactical asset allocation in today’s markets works no more, and investors must “focus on secular themes and stick with them” instead, according to Andreas Utermann, global CIO of Allianz Global Investors.

Utermann said the mass of “contrarian news” flooding the markets day by day meant there was a great temptation “to buy when everyone feels bullish, and sell when everyone feels bearish, but you have to stick with secular themes – boring though they may be, and even though they can take some time [to play out].”

He said the theme of global rebalancing of wealth – with Europe’s crisis as one symptom – would either happen via financial markets, or militarily by force. At the moment, the former process can seem just as damaging.

“Global rebalancing is painful not least for policy makers, but they have the ready-made answer of financial repression so they are keeping interest rates low and engaging in massive balance sheet expansion.”

Governments can also “redefine what is risky, and what is not,” he added.

“With real returns from companies that are producing real cash flows are deemed to be risky while bonds from governments that are over-leveraged and potentially in trouble are deemed to be safe.

“But governments force investors to buy them which is a sinister development and sinister process, because those people that are thrifty and work hard to save their money are being punished. But financial repression is here to stay for the foreseeable future and at least for the next five years.”

Utermann spoke before yields on Spanish sovereigns hit 6.6%, and yields on short-term Bunds turned negative yet again.

He said there was a “false sense of security” in times when European inflation was between 1.5% and 3%, “and people do not think there is inflation in the system, but with rates where they are, even a small bout of inflation is sufficient to get very negative real interest rates.”

All is not lost, though.

Utermann said companies are reinstating dividends – and the yields exceed that on their debt – however buying dividend stocks “is still associated with risk, so investors are not yet doing it”.

He noted also PE ratios were back to levels not seen since the 1980s, though pensions and insurance companies, which would historically have stepped in to buy at such levels, are now much less inclined to step in at these valuations, due to capital requirements.

Apart from dividends, another possibility for income is emerging markets, Utermann said.

AllianzGI launched a Renminbi bond fund one year ago, capping it on strong demand after barely two weeks. Chinese bonds yield about 3% across maturities, far superior to Bunds and Treasuries, he said.

He noted other exporting countries – Germany, South Korea, Japan – began with significantly undervalued currencies, but ended very well valued indeed, and there was no reason to believe China’s yuan would act significantly differently.

He predicted the yuan would sit alongside the US dollar as a global reserve currency in 10 years.

Utermann said he did not expect a close link between economic, and stock market growth, “it will be more about productivity growth, and one needs to play that theme over many years rather than over any one year.”


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