Allianz Global Investors’ specialists still consider high yield bonds and equities attractive investments in an environment still controlled by central banks. Metal recycling is seen as an important long-term opportunity in line with the climate transition.
Allianz Global Investors presented its macroeconomic outlook for the second half of the year. Franck Dixmier (photo) (Global CIO Fixed Income) states that economic growth will remain high in 2021. The nominal yields of US government bonds will rise. This is mainly due to accelerating inflation in the United States.
Inflation
“There is a lot of uncertainty today about the structural nature of US inflation. The biggest risk is that the Fed will have to intervene too soon, and more heavily than expected. At the moment, it is difficult to say which factors will have a transitory or cyclical impact on inflation by 2022.”
He expects the US central bank to normalise (tapering) policy by the Jackson Hole meeting in late August. That policy will be rolled out by early next year.
We will have to monitor employment figures in particular to assess the extent to which monetary policy will be tightened. However, Franck Dixmier believes that most of the correction in US interest rates is already behind us.
“The rise that is still to come should be limited. And in Europe, the ECB has been quite intransigent about movements on the yield curve. We think European interest rates will be kept under tight control.”
Corporate bonds up
In such an environment, European high yield bonds are still the preferred choice for European investors. Vincent Marioni (head of corporate bonds) emphasises that the increase in debt levels we have seen in 2020 has mainly affected 15% of issuers who are suffering greatly from the pandemic.
“In the coming months, the financial health of many issuers should improve significantly as economies reopen.”
He also states that the peak of defaults on high-yield bonds fell at the end of last year.
However, a large number of issuers have been able to refinance despite high debt ratios. The defaults of sectors that were hit hard by Covid should fall to 3.5 per cent in 2021.
Finally, Vincent Marioni also underlines that the ECB has intervened in this market segment. The central bank currently holds 25% of the investable corporate bond universe. And this share will only increase. Purchases of could rise to 50-65% of all new issues in the course of the year. Spreads should therefore be contained, although the yield relative to government bonds should remain relatively attractive.
Sector rotation
Regarding equity markets, Catherine Garrigues (Head of Equity Strategy) argues that markets have stabilised at a high level. “The impact of the health crisis has now been fully digested. Since February 2021, the technology sector has taken a breather. Other sectors have taken over.” For 2021, corporate earnings should average above 2019 levels, although certain sectors are still struggling.
She also stresses that companies currently seem confident in their pricing power and can pass on rising commodity prices to their customers. “European markets are still attractively valued, especially in light of the expected increase in corporate profits over the next 12 months. In that context, you need to maintain a good balance between the different styles in the portfolios.”
Themes
She sees potential in certain themes and in consumer companies that have considerable pricing power and are therefore better able to deal with inflationary pressures, such as the alcoholic beverages sector. “We also remain strongly convinced of luxury. Stock prices continue to rise. Global turnover should exceed €400 billion for the first time in 2025.” In 2021, it will be 316 billion euros.
She also says that Europe remains the place to be for investors looking for ESG solutions, and that recycling companies have an important role to play in this regard. To ensure that electric cars take off and that there is sufficient capacity in renewable energy, the demand for certain metals will explode in the years ahead. In that respect, a company like Umicore is perfectly placed to benefit from this trend.