AllianzGI Insights - June 2015

6
Volume 7, Issue 6
Allianz Global Investors
Insights
June 2015
Global View
Lower-for-Longer Accommodation
Still Underwriting Risk
Economic news has once again disappointed
on a broad front: US, Chinese and German
economic data are all pointing to a significant
slowdown heading into the summer – once
again confounding expectations of a
sustained acceleration of global economic
activity. This is all the more surprising given
the growth in real wages and employment as
well as the much lower price of oil.
Expectations have thus been for central banks
to step up to the plate and, once again,
underwrite risk – or, in the words of one of my
colleagues, provide market participants with
“a giant put option”. And so they have – most
notably the European Central Bank (ECB) and
the Bank of Japan (BOJ), but also the US
Federal Reserve (Fed), which has begun
scaling back its hawkish rhetoric.
In due course, equities obliged, with many
markets recently reaching all-time or at least
multi-year highs. Bonds, however, have
suffered a significant and unexpected sell-off,
as exemplified by the 10-year German bund:
Its yield was close to zero in late April before it
sold off to 70 basis points in early May.
What, then, should market participants make
of this apparent global trend toward
“uncoupling” – not only in terms of the
direction of equities and bonds, but in terms of
central-bank narratives and economic
fundamentals? Moreover, might this even be
the long-awaited turn in the bond markets?
The answer to the latter question is possibly –
but most likely not. For starters, global bonds,
in particular those in the euro zone and Japan,
are priced for prolonged economic malaise –
perhaps even a calamity, likely returning a
Andreas Utermann
Global Chief Investment Officer
negative real yield over all maturities. The idea
that this would happen even after the recent
sell-off is troubling, to say the least.
What is more likely is that central banks have
succeeded in manipulating bond prices to a
significant extent by fundamentally altering
the supply/demand balance – an insight that
has not escaped the attention of the markets.
The ensuing fixed-income sell-off from an
(Cont. on page 2)
02 Perspective on Asia-Pacific
How Sustainable Is China’s Rally?
03 Viewpoint
It Ain’t Over ’Til It’s Over
04 GrassrootsSM Research
Two Perspectives on Online
Shopping in India
Allianz Global Investors Insights
Global View
extremely expensive level to a very expensive
one was likely triggered by significant price
action in a short period of time in very illiquid
market conditions – and by momentum
feeding off itself.
follows a pattern of similar occurrences in the
bond markets – the US Treasury flash crash,
the 2013 and 2014 emerging-market-debt
sell-offs – as well as the volatility seen in equity
markets over the past few years.
This bout of bond-market volatility was of
course entirely predictable – and predicted by
AllianzGI – not so much in when it happened
but in the fact that it was bound to happen. It
This is a pattern that we predict will continue.
The fundamentals of the post-financial-crisis
macro framework have not changed: We
continue to see very significant debt levels as a
proportion of gross domestic product (GDP),
coupled with real wage growth depressing
globalization and weakening demographics
globally.
All these factors conspire to produce one, and
only one, policy mix: Central banks will
continue to be more accommodative for an
extended period of time – that is, lower for
longer. As a result, risk continues to be
underwritten by monetary policy, and we as
investors partake in this environment with
very mixed feelings indeed.
Perspective on Asia-Pacific
How Sustainable Is China’s Rally?
China’s markets have been strong in the last
12 months, with A-shares and H-shares up
more than 100 per cent and 40 per cent,
respectively.1 This frequently results in two
key questions for our clients: Are we seeing a
bubble, and is the China rally sustainable?
Valuation-wise, Chinese stocks are no longer
cheap, but we believe they are not expensive
yet. Admittedly, the latest rally is heavily
liquidity-driven and the huge amount of builtin leverage is worrying: Margin lending has
more than tripled in the past year to more
than 8 per cent of total free-float market
capitalization in China. By comparison,
this figure was 6 per cent when Taiwan’s
market hit its peak in the late 1990s.2
This reliance on leverage and liquidity
indicates that the latest upswing may be
more vulnerable to a change in investor
perceptions. That, in turn, makes it important
to analyze and understand the intentions
of policymakers, who can easily sway
investor sentiment.
1. Source: Bloomberg as at 31 May 2015.
2. Source: Nomura as at 1 May 2015.
2
We believe a strong equity market is favorable
for Chinese policymakers, because a strong
market facilitates recapitalizing the bank
sector, reforming and privatizing state-owned
enterprises, and channeling funding to the
corporate sector. The resultant wealth impact
could also stimulate consumption over time.
This explains why Beijing has showed interest
in boosting Chinese equities in the past few
months, and why it is likely to continue to
do so.
As a result, while China’s markets exhibit some
bubble characteristics and we do expect more
volatility going forward, it is too early to take
an overall short position in this market.
Valuations on the main board are not yet at
extreme levels, and Beijing policymakers have
a clear roadmap to use the bull market to
achieve much-needed reforms.
Raymond Chan
CIO Equity Asia Pacific
Allianz Global Investors Insights
Viewpoint
It Ain’t Over ’Til It’s Over
For everyone who thought that the end of
quantitative easing (QE) by the Fed might be
the beginning of the end of the ultra-low yield
environment, perhaps the situation is best
summed up by the lyrics and title of a hit
Lenny Kravitz song – It Ain’t Over ’Til It’s Over!
The fact is, expansionary monetary policy
worldwide is far from finished. A federal funds
rate hike might be in the cards, but there is no
exit on the horizon anytime soon for the Fed’s
unconventional balance-sheet policy. In
addition, the Bank of England’s rate hikes are
on hold, while the BOJ is moving along with
Abenomics and the ECB has just started QE
in the euro zone.
Overall, the stimulus from the central banks in
the US, the UK, the Economic and Monetary
Union and Japan will continue. Until the end of
next year, the monetary base of these central
banks is expected to account for roughly 15
per cent of world GDP. By the end of next year,
the BOJ’s share of world GDP will be more than
5 per cent and the ECB’s will be above 4 per
cent; other central banks are in an overall
expansionary mode. In addition, 26 countries
have cut interest rates in 2015, including 19
in emerging-market countries.3
As Mr Kravitz might have said, after so many
tears investors cried with so much pain inside,
with financial repression entering a new stage
in the euro zone and beyond. Our new QE
Monitor study shows that as at early May, 25
per cent of outstanding bonds in the euro
zone have negative yields, whereas more than
50 per cent of German bunds and 40 per cent
of French OATs4 also yield below zero.5 And
even the parts of the yield curve that are still in
positive territory are close to or below zero
when you take consumer price inflation into
account – and this is not even considering
the risk of future inflation. There is no such
thing as a risk-free yield any longer.
Indeed, to paraphrase Mr Kravitz further,
so many years investors have tried to keep
their love with bonds alive – and the
consequences seem to be quite clear:
◾◾ The ECB has taken control of the yield
curve, especially for government bonds
with high credit ratings, while negative
yields have started to become “the norm”
in the euro zone.
◾◾ The enormous bond purchases are
undeniably distorting prices in the
entire Eurobond market.
◾◾ Liquidity risks should not be
underestimated. Particularly in an
environment of falling public debt and the
associated decline in new issues, the ECB’s
purchase program could lead to “crowding
out” and bottlenecks in the tradability of
government bonds. In extreme cases, the
purchases could even lead to a drying up of
liquidity in certain segments, as was
Hans-Jörg Naumer
Global Head of Capital Markets & Thematic Research
observed in the Japanese government bond
market last year. The ECB has introduced
securities lending to mitigate this effect.
◾◾ The fact remains that the challenges in the
euro zone cannot be fixed with liquidity
instruments alone, but will also require
economic policy reforms at the country
level. In this spirit, beyond the positive
impact on financial markets in the short
term, the direct economic effects of the
ECB’s QE are expected to be rather limited,
hinging on a more favorable policy mix
and further structural reforms.
◾◾ From a global perspective, there might be
a divergence in the monetary policy of the
major central banks, but QE and low yields
are here to stay.
◾◾ One way or the other, the flood of liquidity
will continue to swell and should rush
investors to move up the risk ladder even
further – and not just in the euro zone.
3. Source: Datastream and AllianzGI as at May 2015.
4. Obligations Assimilables du Trésors
5. Source: Datastream and AllianzGI as at May 2015.
3
Allianz Global Investors Insights
GrassrootsSM Research
Two Perspectives on Online
Shopping in India
India has the third largest Internet user base
in the world, but its nationwide Internet
penetration is only approximately 20 per cent.
With its continuous adoption of 3G and
4G connectivity, the growth of Internet
penetration in India is expected to accelerate,
which in turn will open up e-commerce
opportunities.
towns and villages, as delivery companies do
not carry packages containing valuables to
these places for fear of theft.” According to
another source, “Indian consumers are pricesensitive and prefer a rival seller if his price is
marginally less. We have to be the first to list
[merchandise] and get a few orders before
rivals start offering [a] lower price.”
In April 2015, GrassrootsSM Research was
commissioned to do two studies in an effort
to understand the online shopping behavior
and growth potential in India, from the
perspectives of both consumers and
merchants.
Despite these concerns, all of the merchants
interviewed expect online sales to grow
robustly in the next 12 months. Convenience,
cheaper selling prices and improving
distribution are the key drivers, according to
our sources – one of which said, “Our sales
have jumped more than 100 per cent in the
past 12 months, and we expect strong sales
to continue as shopping platforms improve
distribution.”
Insights into India’s consumers
According to the consumer study, 67 per cent
of online shoppers surveyed shop online more
frequently today versus 12 months ago, and
65 per cent expect they likely will increase
their online shopping frequency in next 12
months. The convenience of being able to
shop anywhere at anytime, and the availability
of attractive discounts, appear to be the most
appealing reasons to shop online. As shown in
the accompanying chart, PCs are used more
than mobile devices for online shopping in
India, implying that there is room to expand
the penetration of mobile shopping as 3G
and 4G networks continue to improve.
Perspectives from India’s merchants
Meanwhile, from the merchants’ point of view,
the key challenges of selling online today
include delivery issues and price competition.
As one source explained, “We have to decline
orders from customers residing in smaller
4
Joey Wong
GrassrootsSM Research Analyst
“Our objective of initiating these studies was to
understand online shopping behavior in India;
to gauge which company is doing the best in
the eyes of both consumers and merchants;
and to gauge which business model is more
effective in India’s market. Although there are
limited investment opportunities today, we
expect many companies to eventually hold
initial public offerings.”
Investment implications
AllianzGI Senior Research Analyst Kathy Chen
expanded upon these intriguing results:
PCs Are the Preferred Way to Shop Online in India
GrassrootsSM Research asked consumers if they prefer online shopping on PCs or mobile devices.
Both: More on PC Than
on Mobile Devices
47%
Both: More on Mobile
Devices Than PC
26%
20%
On PC Only
On Mobile Devices Only
7%
Source: GrassrootsSM Research as at April 2015.
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