21st June 2013
Investors need to take “smart risks” with their investments rather than sticking with traditional holdings to navigate the current economic situation says James Dilworth, CEO Allianz GI Europ.
Speaking at an Allianz event in London this week, Dilworth said: “Investors need returns and traditional holdings will not provide it. The low interest rates of traditional fixed income investments will barely deliver positive real returns and the risk they bear with regard to rising rates seems to be widely underestimated.
“Taking smart risk will become a necessity, not an option. This is not just an issue for capital market participants , but goes to the foundations of intra generational justice in western societies. Just consider that numbers of people entering retirement age will peak in the coming decades, and their time spent in retirement will be more than double compared to forty years ago.”
Investors also need to rethink asset allocation in view of new central bank orthodoxies and the fact that the line between monetary and fiscal policy is blurring as central bank independence is eroded says the group.
Andreas Utermann, Global CIO and Co-Head of Allianz Global Investors, said: “Central bank balance sheets within the OECD have exploded since 2008. Money or inflation targeting will probably relegated to the dustbin of history. Central bank independence, once so important, is now being subtly eroded as governments find their fiscal room for manoeuvre increasingly constrained.
“The old division between the organs of monetary and fiscal policy is starting to blur. This change can be observed not only in the explicit financing of government debt but also in the greater receptiveness towards central banks leaning against the wind. Meanwhile, maximum inflation targets are being adjusted upwards and minimum inflation levels set, as the example of Japan shows. Consequently, erring on the side of caution now means central bankers being behind not ahead of the curve.”
Utermann says: “In this environment, investors should try to tap the full potential of risk premia offered by the markets and stay as flexible as possible. A flexible allocation approach that takes advantage of beta opportunities of various asset classes as well as alpha components is more important than ever. In the current economic environment, with low but rising inflation rates, equities have historically outperformed bonds.
“Even though stock markets have rallied in the past months reaching new all-time highs, equities are still at reasonable valuations. Within the bond market, spread products such as high yield or emerging market bonds are not only providing higher returns potential but also may offer a certain risk buffer compared to sovereign debt in a scenario where interest rates rise. The aggressive quantitative easing policies across most of the OECD have had the effect of bringing a much swifter (downward) adjustment of real exchange rates relative to emerging economies. This is part of an important rebalancing of the global economy and supports the continued appreciation of emerging market currencies, notably the renminbi over the coming decade.”
Wolfgang Mader, Head of Asset Allocation Strategies at AllianzGI Global Solutions added: “Achieving the desired risk and return profiles in a world of financial repression requires taking additional risk. But investors should be highly vigilant which types of risk they take. Staying in government bond portfolios can actually be a very risky option and is likely to miss return and risk targets. To close the return gap, more risky assets must be included and alpha as an uncorrelated returns source should be added. To bring back risk to target levels, we believe that investors should apply global and broad diversification across risk factors and apply dynamic risk management techniques to stay ahead of the curve in very volatile market conditions.”