AllianzGI Outlook for 2017 - what are trumps ? Paris January 2017 - PowerPoint PPT Presentation

AllianzGI Outlook for 2017 - what are trumps ? Paris January 2017 Neil Dwane | Global Strategist

Allianz Global Investors House View Summary Conclusions from the Hong Kong Investment Forum on 11 January 2017 The Global Policy Committee (GPC) combines the expertise of 40 senior investment and research leaders every month to formulate the Allianz Global Investors ‘House View’. Next GPC meeting: 23 February 2017. Understand Act 1 Financial Repression remains in place despite reflation optimism 1 Expect global growth to be low, though supported by some fiscal stimulus Strategic Perspectives 2 Global debt levels are high and will rise even faster with more fiscal spending 2 The cost of debt will restrain both global growth and higher interest rates 3 Globally, monetary policy remains cautious, accommodative and lower for 3 The “ Hunt for Income” has gone global; add some income-generating longer strategies to earn returns 4 Politics and geopolitics to evolve rapidly due to upcoming elections and 4 Trend towards de-globalisation and populism continues, investors should political tweeting look to capitalize on it. 5 Many asset classes have been overly distorted by monetary policy 5 Alpha is essential to generate returns as beta offers little return 6 Some taking of risk is needed to earn a return 6 With volatility rising, clients must be ACTive (agile, confident and thorough) to protect their savings. 1 The journey of China as an asset class is well under way 1 President Xi will set the strategic priorities for the next 5 years 2 China has deep, liquid and diverse equity and bond markets, however they are 2 Despite justified concern over capital outflows, long term opportunities exist. under-represented in indices Investment Forum Hong Kong 3 Technology and changing customer behaviour are disrupting most industries 3 Disruption is inevitable. Become a disrupter and use intrinsic research to globally avoid the losers 4 2017 will face a number of important European elections and interesting Trump 4 The USA may become more self-centric. Europe needs to establish its tweets future purpose 5 The global economy will continue to muddle through 5 “Fat tail“ risks remain and should be managed ACTively 6 Despite the reflation rally, investment returns are still hard to achieve 6 To navigate the “fat tails”, take risk to earn an attractive income Source: Allianz Global Investors, 11 January 2017. 2

And Trumps are … Hearts 1 Demographics Clubs 2 Politics & Markets Diamonds 3 Themes Spades 4 Millennials No Trumps 5 Use Volatility to generate returns 3

1 Trumps are … Hearts Demographics 4

In 20 years, the world’s population ex-Africa will start to slow – this may be profoundly deflationary Africa may be the cradle of civilisation … but it is not getting its act together yet … There will be profound consequences for many countries as they wrestle with falling and ageing populations 5

Household consumption in Emerging Asia set to grow strongly Household consumption vs GDP per capita 40,000 USA 35,000 30,000 UK Final Household Consumption per capita (current USD) Hong Kong Germany 25,000 France Japan Italy $10,000 GDP/capita the trigger for 20,000 accelerating household consumption 15,000 Korea 10,000 Malaysia 5,000 Philippines Thailand China Pakistan Indonesia India 0 0 10,000 20,000 30,000 40,000 50,000 60,000 GDP per capita (current USD) 4 bn consumers are already emerging aided by mobility and the internet … 6 Source: World Bank, Allianz GI, 2014. GDP and household consumption data are as at end of 2014, quoted in current USD. Japan and USA household consumption are 2013 data.

Mobile Growth is the Potential in Emerging Markets but how may it affect Developed economies? Emerging markets will require a new business model 7

2 Trumps are…Clubs Politics & Markets 8

Debt sustainability and reflation - The One Topic That‘s Not Being Discussed... Deficit spending—which improved in recent years—is set to worsen again A stronger USD makes deficits easier to fund, but a weaker USD … what does Trump want longer term ? Neither Hillary Clinton nor Donald Trump had a plan that would materially reduce government debt. The rise in government debt—a hallmark of financial repression—may take years to resolve. 9 Source: AllianzGI Economics & Strategy, IMF, CBO, FactSet; November 10, 2016

The “Trump Effect” - Impact on US Growth Short-term Gain – Long-term Pain? Supporting & detracting Factors on US Growth for 2017-18 and beyond Tightening financial conditions (USD, Fed) Lower Competition = lower America First / Protectionism innovation and productivity Infrastructure / defence spending Rising Risks for Crisis later Lower taxes Lower immigration = lower Less environmental / financial labour supply Higher Debt Burden regulation US Growth 2017 - 2018 - 2019 Longer term Trend Growth Source: AllianzGI Econsomics&Strategy 10

Trump Infrastructure boost … - placed in context of welfare programs due in next 15 years US debt / GDP is already c 100 % and will compound faster than GDP growth even before more Trumpflation as baby boomers retire in greater and greater numbers… Trump’s infraspend and lower taxes are DWARFED by welfare commitments booming ….. 11

Trump‘s victory may be a further set-back for global trade Trump’s 7-point trade plan deviates from current US policy Trade-reliant countries with large US trade surpluses may be flash points With complaints about China, Mexico, NAFTA and the TPP , Trump embodies the anti-trade, anti-globalization, anti- immigration movement in the US. The Mexican peso hit a record low versus the USD - China and Asea would be hit badly , but could respond through the OBOR initiative 12 Source: AllianzGI Economics & Strategy, Cornerstone Macro, Citi; October 11, 2016

The Impact of a Trump Victory on Asia A stronger US-Dollar-Index is becoming less favorable for Export-oriented countries such as Japan, China and global trade and Asian countries* alike. Malaysia are likely to bear the brunt. stronger USD weaker USD Export-oriented countries such as Japan, China and Malaysia are likely to bear the brunt of any increase in trade protectionism under a Trump administration. Korea, which has benefited from the Korea-US Free Trade Agreement could be hurt the most, if it came to be negotiated. 13 13 * measured by a simple average of exports from China, Korea and Taiwan as the region’s bellwethers for the global industrial cycle. Past performance is not a reliable indicator of future results. Source: Datastream, AllianzGI Global Economics & Strategy

Structural reform happening. Southeast Asia is the bright spot China  13 th 5-year plan initiatives  China continues to open up capital account, likely to see inclusion in MSCI global indices in India President Xi future Jinping  Goods & Services Tax to be harmonised across the country  New Bankruptcy Code to allow financial sector to speed up process for non-repayment of Prime Minister Indonesia loans Narendra Modi  Opening more industries to foreign ownership  Increase in infrastructure spending President Joko Widodo Source: Allianz Global Investors, as of September 2016. 14

Europe: not running short of political risks … as 2017 election super cycle is looming Eurozone Refugee crisis. Terror fears. Growing anti- establishment and centrifugal political forces. Germany Political backlash against government’s Netherlands Finland refugee policies. Rise of right-wing populist General elections ( 15 Mar 2017 ). FIXIT movement: Will the British AfD. General elections on 22 Oct 2017 Islam critic PVV as strongest force vote provide tailwind for a Finnish the latest in parliament? referendum? UK Hungary/Poland Paralyzing political uncertainty after BREXIT Nationalist / Anti-EU governments “leap in the dark”. Supreme Court judgment (expected Jan 2017) could weaken govt.’s position on hard Brexit, and eventually trigger Continued conflict over Ukraine new general elections. Greece France Fragile government despite recent Reform fatigue. Slowdown of fiscal cabinet reshuffle. Huge pending consolidation. Rise of Front National. reform agenda. Negotiations on Presidential elections ( 23 Apr / 7 May ) and second ESM review yet to be Parliamentary elections ( 11 / 18 June 2017 ) finalized. Unresolved fiscal sustainability issue despite latest Portugal relief measures. IMF participation How stable is the minority government? in third programme still uncertain Repeated budget clash with Brussels likely due to lacking budget discipline Spain Italy New minority government tolerated by socialists Referendum defeat, Italy to keep lame-duck might prove unstable. Repeated budget clash with administration. New electoral law key to political tail EMU member state Brussels likely due to lacking budget discipline. risk given rise of euro-sceptic M5S. NPL / Bad bank EU, non-EMU member state Catalonia‘s independence aspirations problems. Fiscal consolidation fatigue. “ Snap EU member state with an opt-out election” anytime in 2017 ….. 15 Sources: EU, national governments, Allianz Global Investors GmbH. As of 7 December 2016.