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

Neil Dwane | Global Strategist

AllianzGI Outlook for 2017 - what are trumps ?

Paris January 2017

Allianz Global Investors House View Summary

Source: Allianz Global Investors, 11 January 2017. 2

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

Strategic Perspectives

1 Financial Repression remains in place despite reflation optimism 1 Expect global growth to be low, though supported by some fiscal stimulus 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 longer 3 The “ Hunt for Income” has gone global; add some income-generating strategies to earn returns 4 Politics and geopolitics to evolve rapidly due to upcoming elections and political tweeting 4 Trend towards de-globalisation and populism continues, investors should 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.

Hong Kong Investment Forum

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 under-represented in indices 2 Despite justified concern over capital outflows, long term opportunities exist. 3 Technology and changing customer behaviour are disrupting most industries globally 3 Disruption is inevitable. Become a disrupter and use intrinsic research to avoid the losers 4 2017 will face a number of important European elections and interesting Trump tweets 4 The USA may become more self-centric. Europe needs to establish its 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

And Trumps are …

3 2 1 5

No Trumps

Use Volatility to generate returns

Diamonds Themes Clubs Politics & Markets Hearts Demographics

4

Spades Millennials

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

There will be profound consequences for many countries as they wrestle with falling and ageing populations

5

Africa may be the cradle of civilisation … but it is not getting its act together yet

…

Household consumption in Emerging Asia set to grow strongly

Household consumption vs GDP per capita

40,000

USA India Pakistan Philippines Thailand Indonesia China Malaysia Korea Italy Japan Hong Kong France UK Germany

5,000 10,000 15,000 20,000 25,000 30,000 35,000

10,000 20,000 30,000

GDP per capita (current USD)

40,000 50,000 60,000

$10,000 GDP/capita the trigger for accelerating household consumption

Final Household Consumption 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 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. A stronger USD makes deficits easier to fund, but a weaker USD … what does Trump want longer term ?

9 Source: AllianzGI Economics & Strategy, IMF, CBO, FactSet; November 10, 2016

Supporting & detracting Factors on US Growth for 2017-18 and beyond

The “Trump Effect” - Impact on US Growth

Short-term Gain – Long-term Pain?

US

Growth

Lower taxes

Less environmental / financial regulation Infrastructure / defence spending Higher Debt Burden Lower immigration = lower labour supply Rising Risks for Crisis later 2017

• 2018
• 2019

Longer term Trend Growth Tightening financial conditions (USD, Fed)

America First / Protectionism

Lower Competition = lower innovation and productivity

Source: AllianzGI Econsomics&Strategy 10

Trump Infrastructure boost …

• placed in context of welfare programs due in next 15 years

Trump’s infraspend and lower taxes are DWARFED by welfare commitments booming ….. 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…

11

Trade-reliant countries with large US trade surpluses may be flash points Trump’s 7-point trade plan deviates from current US policy 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

Trump‘s victory may be a further set-back for global trade

12 Source: AllianzGI Economics & Strategy, Cornerstone Macro, Citi; October 11, 2016

13

The Impact of a Trump Victory on Asia

13 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.

* 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

A stronger US-Dollar-Index is becoming less favorable for global trade and Asian countries* alike. Export-oriented countries such as Japan, China and Malaysia are likely to bear the brunt.

weaker USD stronger USD

Source: Allianz Global Investors, as of September 2016.

Structural reform happening. Southeast Asia is the bright spot

China

• 13th 5-year plan initiatives
• China continues to open up

capital account, likely to see inclusion in MSCI global indices in future

President Xi Jinping

India

• Goods & Services Tax to be

harmonised across the country

• New Bankruptcy Code to allow

financial sector to speed up process for non-repayment of loans

Prime Minister Narendra Modi

Indonesia

• Opening more industries to

foreign ownership

• Increase in infrastructure

spending

President Joko Widodo

14

EMU member state EU, non-EMU member state EU member state with an opt-out

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. Portugal How stable is the minority government? Repeated budget clash with Brussels likely due to lacking budget discipline Spain New minority government tolerated by socialists might prove unstable. Repeated budget clash with Brussels likely due to lacking budget discipline. Catalonia‘s independence aspirations France Reform fatigue. Slowdown of fiscal

• consolidation. Rise of Front National.

Presidential elections (23 Apr / 7 May) and Parliamentary elections (11 / 18 June 2017) UK Paralyzing political uncertainty after BREXIT “leap in the dark”. Supreme Court judgment (expected Jan 2017) could weaken govt.’s position on hard Brexit, and eventually trigger new general elections. Italy Referendum defeat, Italy to keep lame-duck

• administration. New electoral law key to political tail

risk given rise of euro-sceptic M5S. NPL / Bad bank

• problems. Fiscal consolidation fatigue. “ Snap

election” anytime in 2017 ….. Finland FIXIT movement: Will the British vote provide tailwind for a Finnish referendum? Greece Fragile government despite recent cabinet reshuffle. Huge pending reform agenda. Negotiations on second ESM review yet to be

• finalized. Unresolved fiscal

sustainability issue despite latest relief measures. IMF participation in third programme still uncertain Germany Political backlash against government’s refugee policies. Rise of right-wing populist

• AfD. General elections on 22 Oct 2017

the latest Hungary/Poland Nationalist / Anti-EU governments Continued conflict over Ukraine Netherlands General elections (15 Mar 2017). Islam critic PVV as strongest force in parliament?

15 Sources: EU, national governments, Allianz Global Investors GmbH. As of 7 December 2016.

Political sentiment – where do we stand?

Policy uncertainty is on the rise, while only around a third of Europeans trust the EU National sovereignty and common solidarity can be at odds with one another

Eurobarometer

33%

Economic Policy Uncertainty Index billion “Firepower” left for financial support, but enough for…?

Legitimacy of the EU to be tested and the safety mechanisms not yet in place ……

16 Sources: Datastream, ESM, EU Commission, GESIS – Leibniz Institute for the Social Sciences, www.PolicyUncertainty.com, Allianz Global Investors GmbH.

2016e Government debt, % of GDP Budget balance, % of GDP Greece 181.6

• 2.5

Cyprus 107.1

• 0.3

Spain 99.5

• 4.6

Italy 133.0 ~ EUR 2 221

• 2.4

More integration desirable / feasible:

• Defense, asylum policy, internal security

Single market / capital markets union Climate policy

“Quo vadis, Europa ?” - given increasing centrifugal forces?

• “ shrink to grow “ may emerge in 2017…

1) as suggested in “The Five Presidents’ Report: Completing Europe’s Economic and Monetary Union”, see https://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf, which lays down a roadmap to deepen the Economic and Monetary Union in two stages as of July 2015 (“deepening by doing”) and complete it by 2025 (“completing EMU”) at the latest. Sources: German

At the 25th anniversary of Maastricht, Europe finds itself at political crossroads: four major scenarios are imaginable An “ever closer union”1, i.e. more integration, combined with greater democratic accountability and legitimacy A “muddling through”, with the status quo continuing A “coalition of the willing”, resulting in a core and/or multi- speed Europe A fall-back to nationalism and a further disintegration

• f the EU and

subsequently the Eurozone Strengthening subsidiarity is key to regain support for the integration process National responsibilities: Fiscal policy + Social policy Labour market + policy Reinvigorate principle of subsidiarity

17 Council of Economic Experts, EU, Allianz Global Investors GmbH.

Headline inflation rate ready to accelerate

Oil will be moving inflation higher into H1 2017 – PCE at Fed target with labour market already tightening…

18 Source : AGI Data. Data as of September 30, 2016

3

Trumps are … Diamonds Themes

19

Fiscal Stimulus – a driver of economic growth

Political momentum growing for fiscal and infrastructure investments to boost or sustain economic growth

Source: McKinsey Analysis; McKinsey Global Insitute analysis, October 2016 20

China is THE driver of commodity consumption, not the USA … Infra-spend multipliers are not as great as many expect especially for DM economies

2017 oil price averages > $60/bbl

Peak demand is a while away yet!

Oil prices <$60 don’t work for National or Independent Oil Companies:

• OPEC is dysfunctional but Saudi can move oil prices

alone

• Saudi is financially stressed
• Russia is likely supportive
• IOC’s have made impressive cost cuts but still struggle to

cover reduced capex and dividends below $60

• 2017 forward curve sees a gradual increase to $55 by

year end – the market is still pretty negative

• $60 is the tipping point at which the industry can start to

sanction projects

• Upside in oil price rebound is capped to $65/70 by

unusually high supply outages normalising and US shale growing again

• Demand is likely to increase by > 1mn bbl/d unless we

have a global recession

Oil still likely to drift higher as supply and investment are constrained

Sources: Bloomberg, OECD/IEA 2016, October 2016. 21

Digital & Urbanization change how we trade

– positive for the logistic property market globally

Dense urban areas require large industrial platform

Urbanization trend is an opportunity

• Densification of metropolitan areas
• More retail clients for one property

Logistic properties come of age

• Out of town was not favored by institutional investors
• Now, this asset class is one of the favorite of institutional investors

Undersupply will drive rents up

• Logistic properties benefit the most from e-commerce
• online retailers cannot develop themselves properly without a strong distribution

arm.

• Online sales would require more and more space
• should the on-line sales continue to increase, we believe 10%+ new supply each

year is needed.

($, trillions)

Global online sales are still on its way up

Commercial property will be disrupted by changing retail and

• nline customer behaviors. Some out of town “boxes” will

become worthless again and online favors specific logistic- friendly locations

22 Source: Prologis, AllianzGI as of October 2016. See additional disclosure at the end of this presentation.

Big Data is Beginning to Unlock New Opportunities

Recent advancements in computing power and predictive analytics on massive amounts of big data are enabling new intelligent systems and artificial intelligence. We have only just begun a new era towards cognitive systems. Big Data

Big Data growth is accelerating as more of the world's activity is expressed digitally. Not

• nly is it increasing in volume, but also in

speed, variety and uncertainty. Most data now comes in unstructured forms such as video, images, transactional data, social interaction, communications, senor data, web data (interest & habits), and natural language.

Predictive Analytics

A new generation of advanced analytics is helping businesses to quickly process and make sense of the data, and enhance and extend these insights into software applications, systems, and devices.

Smarter Apps & Intelligent Systems

With better intelligence, smarter applications and systems are being built to make real-time decisions such as answering questions via voice commands, recommending medical treatments, predicting purchase habits, self-driving tractors & cars, etc. These systems get better over time with more data and knowledge.

Artificial Intelligence (AI) & Cognitive Computing

Rather than being programmed to anticipate every possible answer or action needed to perform a function or set of tasks, cognitive computing systems are trained using artificial intelligence and machine learning algorithms to sense, predict, infer and, think.

Source: IBM This document has been distributed for informational purposes only, and any reference to a particular investment or security is not a recommendation to buy, sell, or hold such investment or security, and should not be considered investment advice. Some or all the securities identified and described may represent securities purchased in client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.

Industries will anticipate their clients...and disrupt them

23

Digital Device Exhaustion

• Checking smartphones 221x a day (UK average as
• f 10/2014), anxiety over social media notifications,

screen fatigue, personal relationships increasingly digital, short attention spans, a loss of control! People may have reached their limit with ever invasive technology and seek to limit exposure for the sake of mental health Related concerns limiting the love affair with technology are those of privacy and ever invasive targeted marketing Product marketers and future disruptors to focus

• n real world experiences and target what actually

matters to people such as a sense of accomplishment, learning a skill, trying something new, face to face interaction, travel and health 2017 is likely to see an increased technology rationing with consumers ever more aware of what makes them happy and motivated to limit continual distraction and reclaim their time.

• MAN strikes back !

24 See additional disclosure at the end of this presentation.

A growing need for security

Global deaths from conflict are at a 30 year high Cybercrime is a rapidly growing threat to property, causing five times more damage in the US than it did ten years ago. In the UK, nearly half of all reported crimes are cybercrimes.. The world is becoming a more uncertain and dangerous place… this will spur demand for protection

Sad, but true

With fears over security rising, investments in cyber and defense are to surge globally for countries and companies

Sources for charts: UCDP via Institute for Economics & Peace (left) 2014 ; FBI, IC3 and US DoJ via Statista 2015(right) 25

“STRONG REASONS MAKE STRONG ACTIONS”

(Shakespeare)

Employee satisfaction: The reason for strong performance

• When it comes to the workforce’s contribution to a competitive advantage, Henry Ford might not have agreed with
• Shakespeare. His assembly-line success depended on unskilled employees keeping pace or being replaced – investing in

their wellbeing would have eroded margins.

• However, in the 21st century, human capital is arguably the greatest source of value creation. Alex Edmans, London

Business School, argues that investing in the workforce is no longer a zero-sum game. The retention and motivation benefits from remuneration and empowering employees leads to superior performance.

• Employee satisfaction is intangible and hard to measure but Edmans’ methodology tracks companies listed in the ‘Best

Companies to Work For’ against the market, industry and companies of similar characteristics in the US since 1984.

• This robust analysis considers causality (whether satisfied employees cause firm performance – or whether only well-

performing firms can afford to invest in their satisfaction) and controls for industry performance, outliers, risk, size, dividends, and other determinants of stock returns.

Compelling results

• Over the last 3 decades in the US, ‘Best Companies To Work For’
• utperformed the market by an average of 3.6% p.a.

—Industry outperformance was 2.4% p.a. —Outperformance compared to companies of similar characterises was 2.9% p.a.

• In the UK, companies in the Times’ ‘100 Best Companies to Work For’
• utperformed the market by 9% p.a. between 2001 and 2013.
• Outperformance rates were similar for services and manufacturing sectors

but countries with flexible labour markets showed greater abnormal returns than those without.

Employee Engagement makes business sense!

26 Source: Edmans, Alex (2014). Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around the World. Chart source: Russell Investment Group.

4

Trumps are … Spades Millennials

27

Organic food market growth

• World organic food & drink markets grew 12% from 1999-2014.

Market watchdogs TechSci and Euromonitor forecasting acceleration to 16% in 2015-2020.

• 2015 US organic food demand 11% > total US food 3%
• 52% of US organic shoppers are Millennials with children,
• 35% are Generation X parents,
• 14% Baby Boomer parents.
• Eating habbits of Chinese and Indian parents and middle-class

households equally changing towards clean/green labels.

• Risk of adverse mix shifts for processed food, flavor, color,

nutrition ingredients

• Organic inputs more expensive, prices more volatile, markets

less fragmented.. Organic food substitution to potentially weigh on growth and mix of the traditional market incumbents.

Source: FIBL, IFOAM, Forbes 28

China: the next generation …

Where the young are wealthy !

Millennials are different but in China, they are different, more numerous and gaining spending power ….

Source: Credit Suisse Emerging Consumer Survey 2016. Income data is based on 2015 full year income. China income level is based on 2625 respondents from 10 different locations in China, among which 68% are from urban areas, rest from rural

Income by age - US

• 4,000

10,000 3,000 9,000 2,000 8,000 1,000 5,000 18-29 30-45 46-55 56-65 Monthly income (USD)

Age (years)

Income by age - China

Monthly income (RMB)

Age (years)

7,000 11,000 18-29 30-45 46-55 56-65

29 areas.

• Consumers are becoming more health conscious
• They choose moresports and recreational activities,
• the „well-being“ trend is at the forefront .
• Millennials, who put more effort on work-life balance
• 50+ generation, which nowadays devotes more time and mon

to sports and outdoor activities.

• Being active is a truly global trend.

ey

Active Lifestyle – Up for a run?! Excel in 2017.

Get ACTive – eat well, live well, ……live longer !

30 Source: Thule Investor Presentation, 2016. Thule Annual Report 2015.

5

Trumps are … No trumps

31

Source: Bloomberg, J.P. Morgan, Allianz Global Investors, as at 30 September 2016. * Developed market and Asian local currency (LC) yields based on 5 year government bond yields in local currency terms. Other Asian yields are based on sub- sectors of the J.P. Morgan Asia Credit Index (JACI) which comprises Asian bonds denominated in USD. The above is for illustrative purposes only and is not a recommendation or advice to buy or sell. Past performance, or any predication, projection or forecast, is not indicative of future performance.

• 0.8
• 0.6
• 0.4
• 0.3

0.3 0.2 1.2 3.4 3.4 5.1 6.1 6.8 6.9

(2.0) (1.0) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0

• Switzerland 5Y

Germany 5Y France 5Y Japan 5Y Italy 5Y UK 5Y US 5Y Asian USD IG Corp Asian USD Financials Asia USD BB Corp Asia USD B Corp Indonesia LC 5Y India LC 5Y

Comparison of bond yields* (%)

In respective local currencies

32

Where to find yield?

Asia / EM and US High Yield look attractive within the global „ Hunt for Income „..... US High Yield

CAPE overview: investors pay for either high or reliable growth

– US stays top, cyclically exposed DM (e.g. Sweden, Japan) catching up

Overview of Global equity markets cyclically adjusted P/E (S&P 500, otherwise MSCI indices in local currency)

5 10 20

130+-year US historic average

15

33 Source: AllianzGI, Datastream, *numbers for regional indices without inflation adjustment. Latest data available (December 2016)

25 30

Expected per annum return over next 10 years 8 – 10 % 1 – 2 % 15-17 %

Ratio of cyclically adjusted P/E ratios: S&P 500 (Shiller data) vs. MSCI Europe

Valuation: Europe at record discount to the US on cyclically adjusted P/E (CAPE)

Europe trades at a record ~40% discount cycle-adjusted valuations Europe cheaper vs. US

Source: AllianzGI Economics & Strategy, Datastream, Robert Shiller. Data as of August 2016 Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future results. 34

Europe vs US: Sector adjusted relative Price/Book (same MSCI global sector weights)

Europe excessively cheap also on other valuation measures

Europe cheaper than at any point during 'euro' crisis, and US M&A targeting European companies

Source: Thomson Datastream, UBS European Equity Strategy, August 2016 Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future results. 35

Our Clients’ Strategic Challenge Key conclusions from an European perspective…

With Volatility rising from monetary policy and POTUS election, Clients must be ACTive - Agile Confident Thorough

Understand.

• 1. Financial Repression remains in place

globally, “ hunt for income” gone global, with the ECB pre-committed to easy money all year

• 2. Global growth low, slow and fragile and will

remain so despite reflation hopes, thus need to invest in growth stocks for capital appreciation

• 3. BREXIT and Trump it is !

Expect Volatility in 2017 Act.

Source: Allianz Global Investors, 2016. 36

• 1. “ Hunt for Income “ means US, Asian and EM

Fixed Income attractive globally, European equities offer highest dividend yields for €uro investors

• 2. Growth and SMIDs strategies can still access

longer term compounding opportunities

• 3. Politics globally will move markets, so Clients

must be active and can use Volatility and TAA as a way of improving returns

Books to read for US investors, and Neil’s Global Strategist perspectives

Capt M Abrashoff – It’s your ship ! AllianzGI disruption topic is now on-line, @www.allianzgi.com/disruption

Neil‘s Global Strategist perspectives can be found at: www.allianzgi.com

Ray Kurzweil – The Singularity is near Philip T etlock - Superforecasting Henry Kissinger – World Order Niall Howe – Millenials Rising Michael Lewis – Flashboys Nancy Isenberg – White Trash Charles Murray – Coming Apart Greg McKeown - Essentialism Martin Ford – The Rise of the Robots Thomas Frank - Listen, Liberal Stephen Denning – Squirrel Inc J D Vance – Hillbilly Elegy Connect with Neil and follow his articles on

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Disclosures

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan. 100144