Allianz Global Investors’ Franck Dixmier expects faster monetary easing in the US now that inflation there is now largely under control. But only later in the year. In terms of allocations he favours investment-grade credit, emerging debt and sovereigns with short maturities.
“We have not fundamentally changed our view in recent weeks: the market is still expecting too many rate cuts over the next few months,” Dixmier, global CIO fixed income at Paris-based Allianz GI, said in an interview on the fringes of a recent investor meeting in Brussels. “At present, there is still no formal evidence that inflation is slowing in the European Union.”
Dixmier pointed in particular to ongoing wage negotiations in many countries, notably Germany, against a backdrop of stagnating productivity. “Any rise in wages automatically leads to a rise in unit labour costs, a factor which is now being closely monitored by the ECB, and which in my view rules out a cut in the key rate before June”.
American resilience
In terms of economic activity, Dixmier said he assumes a scenario of weak growth or mild recession in both Europe and the United States. This situation should allow the Federal Reserve to start easing its key rate in the second half of 2024. “In the US, there is a real easing of inflationary pressure, and the Fed also has a dual mandate that includes maintaining employment as well as controlling inflation. It should therefore be more aggressive in its easing policy.”
It’s still too premature to expect such a cut at the January FOMC meeting. “Given the resilience of the US economy, we don’t expect the Fed to give a precise timetable for its first rate cut, which we do not anticipate until the second half of the year.”
At the same time, the economic situation continues to point towards resilient growth, “with the US consumer still managing to surprise us favourably”. In Europe, Dixmier pointed out that the slowdown has already occurred, and that “the wage growth expected in 2024 will help to boost wages and purchasing power”.
Short maturities preferred
Against this backdrop, Allianz’s positioning on sovereign debt favours short maturities of two to five years in order to take full advantage of the expected steepening of the curve, mainly in the United States.
“You need to be exposed today to take advantage of this movement, whether or not there is a three-month delay in relation to market expectations. We have also noted the very strong demand for primary issues in the eurozone since the start of the year, which has totalled more than 1,000 billion euro. This demand confirms that the market is now looking for opportunities”.
Stay clear of High Yield
On the credit market, Dixmier said he believes that investors should stay away from high yield both in Europe and the United States, which is currently valued at a default rate of just 1.5% in 2024. This is a very low level by historical standards, and investors today have no protection in the event of a rise in volatility. However, we are bound to continue to have questions about the economic data to be published over the coming months”. As a result, he said that European investment grade credit should be preferred, as it is more reasonably priced.
Accelerated deleveraging
While 2024 should prove benign in terms of refinancing, 2025 will see a much larger volume of debt reaching maturity. “However, companies are anticipating this, and many have started to sell non-core businesses to accelerate their deleveraging. We are now seeing more ratings being upgraded than downgraded by the rating agencies”.
More specifically, he pointed out that the real estate sector currently offers opportunities in an environment where some players will not be in a position to sell assets on sufficiently favourable terms. “You have to be selective, but risk premiums are currently very attractive.”
Dixmier said investors should be slightly overweight emerging market debt, particularly in certain investment grade countries such as Mexico. “Their fiscal position is sound, and they are further along in the monetary easing cycle. Western investors continue to lack appetite for this asset class, but we believe it is an area to hold for the rest of the year.”
Further reading on Investment Officer:
- ‘Fixed income portfolios now require a tactical approach’
- What 2024 will bring for bonds, equities, private assets
- Allianz CIO: ‘Monetary policy is really starting to bite’