Financial repression dominates the European investment climate thanks to ongoing low yields and inflation concerns, said chief investment officers from Allianz Global Investors.
Speaking at the money manager's annual investment forum in Frankfurt, Germany, Andreas Utermann, CEO and global CIO based in London, said: “Allianz expects no real return in fixed income” and therefore “active management is more relevant than ever.”
In fixed income, investors have largely focused on the search for yield. However, Mauro Vittorangeli, CIO conviction fixed income at AllianzGI, said it now is apparent that in addition to the risk of low interest rates fund managers must consider another risk, which is “very little protection of the coupon.”
“As yields will not go up very soon, investors have to minimize capital losses resulting from negative interest rates,” he said.
Investment officers participating in the forum held Sept. 8, said the European Central Bank has changed its tack regarding inflation, aiming to generate it rather than control it as they had in the past. The CIOs said the European economy is beginning to resemble that of Japan. As the ECB continues to work reinflate the economy, it is expected to prolong its asset purchase program through September 2017, according to Mr. Vittorangeli.
The ECB could also increase the range of maturities it purchases to include 1.5-year and 50-year bonds in an effort to keep yields low, said Brian Tomlinson, portfolio manager fixed income. He warned that even after 10 years, financial repression in Europe might not be over.
“Pension funds have to carefully consider the risks created by central banking policies and these issues have to be actively considered even if solutions are 10-20 years away,” said Neil Dwane, global strategist at AllianzGI and chairman for the forum.
However, central bank policies have made asset classes in other regions more desirable. “Since the Brexit vote, it is becoming increasingly clear that money is leaving Europe and finding its way back to Asia,” said Raymond Chan, CIO equity Asia-Pacific.
Allianz fixed-income specialists believe that adding Asian fixed income, such as Indonesian bonds, to a portfolio is beneficial in this environment, due to a smaller number of defaults in those bonds and their ability to still generate a 6% to 7% return.
Pension funds and central banks continue to be interested in highly rated Singapore sovereign bonds, said David Tan, CIO fixed income Asia-Pacific.
Elsewhere, European equities are similarly attractive, undervalued and underowned, offering 5.5% dividend income flow, added Jorg de Vries-Hippen, CIO equity Europe.