Neil Dwane, global strategist at Allianz Global Investors.
Neil Dwane, global strategist at Allianz Global Investors.

Global recession unlikely, says strategist

Economy July 01, 2017 01:00


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DESPITE reflation optimism, financial repression remains in place and Allianz Global Investors’ long-term view is that global growth can be expected to remain dull, says the firm’s global strategist Neil Dwane.

However, the good news is that a recession is not likely. As we move through the year, it appears that the populist shock wave started by British voters’ decision to take their country out of the European Union and the election of US President Donald Trump may be fading. Yet Brexit is not over by any means – the recent UK election resulted in a hung parliament, piling uncertainty on uncertainty. 

Though the exact implications of Brexit are not immediately clear, this may augur a more realistic and pragmatic approach to the forthcoming negotiations.

Dwane, who is also portfolio manager and managing director of Allianz Global Investors, said that elsewhere in Europe, clouds could be lifting with worries over austerity, political uncertainty and low confidence beginning to clear up. We are seeing a positive spiral of economic growth, rising consumption, improving investment and falling unemployment. 

Political risks abound due to the “election super cycle”, but there is no cause for fear of a political crisis – though Italy still has the capacity to shake Europe and the euro. 

In the US, he said, Trumponomics has not yielded any tangible benefits despite its high expectations, and the president’s seven-point trade plan may be a further setback for global trade. There could be negative implications for the US dollar if Trump begins implementing protectionist trade policies, which would also have an impact on Asian countries – export-oriented countries like Japan, China and Malaysia, in particular, would likely bear the brunt of it.

“With low growth and financial repression still plaguing many developed markets, investors need growth potential – which Asia is in a good position to provide, given good valuations, still-positive real interest rates and low sovereign leverage,” Dwane said. 

“Increasing Western populism and trade friction [are] likely to have a smaller impact on Asia, given the growth of intra-regional trade. Moreover, China’s ‘One Belt, One Road’ initiative should, over time, boost economic development throughout the region and across its frontiers. This should increase the size of many markets in Asia, which would give corporations an abundance of choice about where to invest their resources.” 

He said that like the West, many countries in Asia were suffering from ageing populations. And despite increasing levels of household earnings around the region, there is still a risk that many Asians will neither save enough nor have enough children to survive without government assistance.

At the same time, there is an important mega-trend taking shape: the emergence of the Asian middle class. While the global middle class has already grown at an extremely rapid pace, Asia is set to account for even more explosive growth in the coming years. This represents extraordinary potential spending power over the coming decades, and we are seeing the centre of many investment opportunities for individuals and corporations moving east. 

Asia is also home to a young, increasingly well-educated, technology-enabled and hard-working population – with a median age of only 30, versus 42 for Europe. 

Overall, this puts the region in a strong position, demographically speaking, compared with the US, Japan and Europe.

“We also see disruptive forces changing corporate behaviour in the region,” Dwane said. “While US tech giants such as the FANGs [Facebook, Amazon, Netflix and Google)]have held sway in other markets, they may not be able to fully capitalise on Asia’s true potential. This is because their brands and culture may not be sufficiently local to appeal to Asia’s millennials. 

“In contrast, a growing number of their Asian counterparts – including China’s BATs [Baidu, Alibaba and Tencent] – are well positioned to do so, given their knowledge of the region and ability to stay ‘plugged in’ to what regional consumers want.” 

He said volatility was still expected to rise. Amid political uncertainty, a muddling global economy and a “lower for longer” interest-rate environment, the “hunt for income” remains a strong theme and is going global. 

Investors need to add income strategies to earn return potential, and must be prepared to take an ACTive (agile, confident and thorough) approach, as well as some risk, in the hunt for income in such an environment.

“For income investors, opportunities abound in all regions. Asian and EM [emerging markets] sovereign and corporate debt continue to look attractive, as with US high-yield bonds. We are also positive on the European economy and markets, which are well supported, with a bad election result in Italy being its |only key threat in the near term,” Dwane said.