Agility counts in a year of disruption and divergence

Going into 2022, investors will want to prepare their portfolios for bouts of volatility and lingering inflation, likely by diversifying more broadly across asset classes, styles and regions. But they should also take this opportunity to factor in the disruptive structural trends that are driving – and even upending – our expectations of the future.

Economic growth seems likely to decelerate after the “base effect” rebound we saw in 2021. Covid-related uncertainty and supply bottlenecks will likely prove to be a drag on growth, as well as a continued source of price volatility. There should also be a divergence in growth figures and central bank support in various parts of the world, and the markets will likely react quickly to any positive or negative macroeconomic data. All the while, inflation seems likely to stay higher than many market-watchers expect.

So what does this mean for investors’ portfolios?

We invite you to explore three structural themes that are likely to play a key role in the coming year.

Navigating Rates

Investors need to watch the speed of interest rate adjustments, fluctuating exchange rates and shifting inflation expectations. We think central banks and many investors underestimate the probability that consumer price inflation may turn out higher than expected – and last longer than is currently priced into financial markets. While some central banks have already imposed rate hikes, and others are close behind, they are also likely to remain “behind the curve” in responding to inflationary pressures. So while inflation may creep up, we don’t expect to see an end to the decades-long era of overall low rates – which means investors must find new ways to protect purchasing power and search for yield.

Appreciating China

The world’s second-largest economy is in the midst of an unparalleled strategic transformation, and it’s important not to lose sight of that even as economic growth slows and regulatory clampdowns impact certain sectors. Volatility will continue to be a hallmark of investing in China, but we remain convinced of the long-term investment case. Those who understand China’s wider political context and strategy – and navigate its markets actively – may be best-placed to avoid bumps in the road along the way.

Achieving Sustainability

With the global effort to reach “net-zero” emissions within a few decades, how can investors use their portfolios to have a positive impact? Investor demand, fast-evolving regulations and a deluge of data will raise the bar on what impact investors can achieve – and how they can achieve it. It’s a highly complex topic, involving disparate stakeholders at different stages of their net-zero journeys. We expect sustainability to be a disruptor for the older economy, as citizens around the world look to have a smaller ecological footprint while having a broader environmental and social “handprint”.

2022 perspectives from our experts

Virginie Maisonneuve
Volatile markets may provide fertile ground for stockpickers

From a macroeconomic perspective, there are at least three questions to consider as 2022 unfolds. As these questions are answered, the equity markets will likely be volatile, which can be fertile ground for stockpickers:

  • What will be the evolution of real interest rates given the potential economic slowdown and the cyclical upward pressure on inflation?
  • As China's growth continues to decelerate, what support measures will the government put in place to cushion the slowdown? And how will the trade relationship of China and the US evolve in the context of “digital Darwinism”?
  • How will countries work together on a range of big issues? The energy transition is critical: how will we calibrate the long-term transition to green energy and the shorter-term impact of the recent economic rebound on the oil supply and energy markets? In terms of the global pandemic, how will improved access to the Covid-19 vaccine limit the unpredictability of virus waves and lockdowns, and will this lift global economic growth beyond the “base effect”?

As equity investors, we will be particularly attuned in 2022 to the effort to combat climate change. There will be a growing number of initiatives from investors, asset managers, governments and communities, and all of them will need to be factored into investment decisions. This is where the integration of strong ESG data can make a big difference. Above all, it will be important for equity investors to be highly selective. At the same time, they must remain focused on their established investment processes and risk controls.

Franck Dixmier
Amid low yields, look for proactive central banks and “green” bonds

While the global economy is set to remain in expansionary territory in 2022, we recognise that the initial impressive economic growth rates achieved as economies reopened following the Covid lockdowns will not be sustained. Central bank and government action since the onset of the pandemic has significantly reduced some of the worst-case scenarios for the global economy, and dramatically diminished the prospects of a credit crunch. The path of inflation over the next 12 months will have to be watched closely, along with the way central banks react to these pressures.

Given that multiple factors indicate that interest rates will stay lower for even longer, rethinking portfolios to account for this outlook should be an urgent priority for investors. Risk management and diversification strategies must become far more agile. We are looking closely at selectively overweighting bonds from emerging-market countries where central banks have been proactive in addressing inflation risks – as long as valuations look attractive. In addition, global issuance of green, social and sustainability-linked (GSS) bonds recently hit a record high – evidence of fixed-income investors growing increasingly serious about tackling climate risks and social challenges.

Greg Hirt
Address low rates, high valuations and inflation with multi-asset strategies

Growth and inflation data will likely remain much more volatile than in past cycles, making predictions increasingly hard to make. That is why we will pay particularly close attention to the potential for negative shocks, such as the risk of a new Covid-19 variant. But overall, we continue to hold a cautiously optimistic view for 2022.

Equities and other risk assets should be partially supported by the tail end of the post-Covid global recovery, and by cash-rich investors fighting off the effects of negative real (after-inflation) rates. Traditional fixed income may be somewhat challenged, as inflation risks stay elevated and major central banks reduce their government-bond purchases. As investors seek diversification against inflation risk, they may want to use a combination of commodities, liquid alternatives and inflation-linked bonds. Overall, the current environment of low to negative interest rates, high valuations and higher inflation might prove challenging for traditional asset classes. Multi-asset strategies that offer exposure to a broad set of asset classes – and have the flexibility to take long and short positions – may help investors address a wider range of risks.

Emmanuel Deblanc
2022 may offer a favourable backdrop for private markets

Given the wide amount of uncertainty inherent in the macroeconomic outlook for 2022, institutional investors should consider the diversifying effect of private markets – which in the main have limited correlation to public markets. From private equity to private debt, from renewable infrastructure to development finance, private markets can cover a wide range of investment scenarios. And with the ability of some private-markets strategies to deploy over a multi-year time horizon, investors can aim to further enhance their overall diversification.

Investors may want to pay particular attention to these areas in 2022:

  • Growing geopolitical tensions (particularly between the US and China) seem likely to help certain countries (such as Vietnam and India) benefit from a reorganisation of supply chains. Private-credit strategies focused on the Asia-Pacific region may be well-positioned in such an environment.
  • The urgency of responding to climate change has triggered an acceleration of concrete opportunities in energy-transition transactions – particularly infrastructure investments accessed through the private markets. This marks a tremendous and swift paradigm shift.
  • No matter your view on inflation, it can likely be accommodated through infrastructure investments. For investors with long-term horizons, infrastructure equity provides a robust solution. And for investors seeking to navigate potential interest-rate increases while yields are near historic lows, the high-yielding infrastructure credit space can offer attractive floating rates and even short durations.
Matt Christensen
Emphasise sustainability while looking “beyond climate”

As the year progresses, we will likely have answers to several critical questions around sustainability and its impact on the economy:

  • Will COP-26 prove to be a defining moment for net zero, how will countries finance and fulfil their pledges, and how will their decisions affect economic growth?
  • What could be the near and longer-term implications of the climate transition on inflation and the affordability of goods?
  • What surprises can we expect from increased scrutiny of the modern economic value chain, and can reporting practices coalesce around clear standards?

The answers to these questions will add to the growing amount of data that investors need to embed into their decisions, and it’s not yet clear whether this will be helpful or a hindrance. Moreover, as sustainability becomes an increasingly essential factor in asset allocations, we may see more volatility and divergence in market performance – which will be yet another input for investors to process. This foots back to what will make 2022 an important year for impact investing. As investors push for positive societal outcomes related to climate and beyond, there will be a deluge of data on how those outcomes are scoped, measured and reported. Making this information actionable will be a challenge, but one that will ultimately facilitate positive change for the planet.

 

MSCI All Country World Index (ACWI) is an unmanaged index designed to represent performance of large- and mid-cap stocks across 23 developed and 24 emerging markets. MSCI China Index is an unmanaged index that captures large- and mid-cap representation across approximately 85% of the China equity universe. Investors cannot invest directly in an index.

There is no guarantee that actively managed investments will outperform the broader market. Environmental, Social and Governance (ESG) strategies consider factors beyond traditional financial information to select securities or eliminate exposure which could result in relative investment performance deviating from other strategies or broad market benchmarks.

Investing in fixed income instruments (if applicable) may expose investors to various risks, including but not limited to creditworthiness, interest rate, liquidity and restricted flexibility risks. Changes to the economic environment and market conditions may affect these risks, resulting in an adverse effect to the value of the investment. During periods of rising nominal interest rates, the values of fixed income instruments (including short positions with respect to fixed income instruments) are generally expected to decline. Conversely, during periods of declining interest rates, the values are generally expected to rise. Liquidity risk may possibly delay or prevent account withdrawals or redemptions.

Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice. No offer or solicitation to buy or sell securities and no investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this material but should seek independent professional advice. However, if you choose not to seek professional advice, you should consider the suitability of the product for yourself. Investment involves risks including the possible loss of principal amount invested and risks associated with investment in emerging and less developed markets. Past performance of the fund manager(s), or any prediction, projection or forecast, is not indicative of future performance. This material has not been reviewed by any regulatory authorities. Issued by Allianz Global Investors Asia Pacific Limited.

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  • Allianz Global Investors Fund (“AGIF”)

    • Allianz Global Investors Fund (“AGIF”) as an umbrella fund under the UCITS regulations has within it different sub-funds investing in fixed income securities, equities, and derivative instruments, each with a different investment objective and/or risk profile.

    • All sub-funds (“Sub-Funds”) may invest in financial derivative instruments (“FDI”) which may expose to higher leverage, counterparty, liquidity, valuation, volatility, market and over the counter transaction risks. A Sub-Fund’s net derivative exposure may be up to 50% of its NAV. 

    • Some Sub-Funds as part of their investments may invest in any one or a combination of the instruments such as fixed income securities, emerging market securities, and/or mortgage-backed securities, asset-backed securities, property-backed securities (especially REITs) and/or structured products and/or FDI, exposing to various potential risks (including leverage, counterparty, liquidity, valuation, volatility, market, fluctuations in the value of and the rental income received in respect of the underlying property, and over the counter transaction risks). 

    • Some Sub-Funds may invest in single countries or industry sectors (in particular small/mid cap companies) which may reduce risk diversification. Some Sub-Funds are exposed to significant risks which include investment/general market, country and region, emerging market (such as Mainland China), creditworthiness/credit rating/downgrading, default, asset allocation, interest rate, volatility and liquidity, counterparty, sovereign debt, valuation, credit rating agency, company-specific, currency  (in particular RMB), RMB debt securities and Mainland China tax risks. 

    • Some Sub-Funds may invest in convertible bonds, high-yield, non-investment grade investments and unrated securities that may subject to higher risks (include volatility, loss of principal and interest, creditworthiness and downgrading, default, interest rate, general market and liquidity risks) and therefore may adversely impact the net asset value of the Sub-Funds. Convertibles will be exposed prepayment risk, equity movement and greater volatility than straight bond investments.

    • Some Sub-Funds may invest a significant portion of the assets in interest-bearing securities issued or guaranteed by a non-investment grade sovereign issuer (e.g. Philippines) and is subject to higher risks of liquidity, credit, concentration and default of the sovereign issuer as well as greater volatility and higher risk profile that may result in significant losses to the investors. 

    • Some Sub-Funds may invest in European countries. The economic and financial difficulties in Europe may get worse and adversely affect the Sub-Funds (such as increased volatility, liquidity and currency risks associated with investments in Europe).

    • Some Sub-Funds may invest in the China A-Shares market, China B-Shares market and/or debt securities directly  via the Stock Connect or the China Interbank Bond Market or Bond Connect and or other foreign access regimes and/or other permitted means and/or indirectly through all eligible instruments the qualified foreign institutional investor program regime and thus is subject to the associated risks (including quota limitations, change in rule and regulations, repatriation of the Fund’s monies, trade restrictions, clearing and settlement, China market volatility and uncertainty, China market volatility and uncertainty, potential clearing and/or settlement difficulties and, change in economic, social and political policy in the PRC and taxation Mainland China tax risks).  Investing in RMB share classes is also exposed to RMB currency risks and adverse impact on the share classes due to currency depreciation.

    • Some Sub-Funds may adopt the following strategies, Sustainable and Responsible Investment Strategy, SDG-Aligned Strategy, Sustainability Key Performance Indicator Strategy (Relative), Green Bond Strategy, Multi Asset Sustainable Strategy, Sustainability Key Performance Indicator Strategy (Absolute Threshold), Environment, Social and Governance (“ESG”) Score Strategy, and Sustainability Key Performance Indicator Strategy (Absolute). The Sub-Funds may be exposed to sustainable investment risks relating to the strategies (such as foregoing opportunities to buy certain securities when it might otherwise be advantageous to do so, selling securities when it might be disadvantageous to do so, and/or relying on information and data from third party ESG research data providers and internal analyses which may be subjective, incomplete, inaccurate or unavailable and/or reducing risk diversifications compared to broadly based funds) which may result in the Sub-Fund being more volatile and have adverse impact on the performance of the Sub-Fund and consequently adversely affect an investor’s investment in the Sub-Fund. Also, some Sub-Funds may be particularly focusing on the GHG efficiency of the investee companies rather than their financial performance which may have an adverse impact on the Fund’s performance.

    • Some Sub-Funds may invest in share class with fixed distribution percentage (Class AMf). Investors should note that fixed distribution percentage is not guaranteed. The share class is not an alternative to fixed interest paying investment. The percentage of distributions paid by these share classes is unrelated to expected or past income or returns of these share classes or the Sub-Funds. Distribution will continue even the Sub-Fund has negative returns and may adversely impact the net asset value of the Sub-Fund.  Positive distribution yield does not imply positive return.

    • Investment involves risks that could result in loss of part or entire amount of investors’ investment.

    • In making investment decisions, investors should not rely solely on this [website/material].

    Note: Dividend payments may, at the sole discretion of the Investment Manager, be made out of the Sub-Fund’s capital or effectively out of the Sub-Fund’s capital which represents a return or withdrawal of part of the amount investors originally invested and/or capital gains attributable to the original investment. This may result in an immediate decrease in the NAV per share and the capital of the Sub-Fund available for investment in the future and capital growth may be reduced, in particular for hedged share classes for which the distribution amount and NAV of any hedged share classes (HSC) may be adversely affected by differences in the interests rates of the reference currency of the HSC and the base currency of the respective Sub-Fund. Dividend payments are applicable for Class A/AM/AMg/AMi/AMgi/AQ Dis (Annually/Monthly/Quarterly distribution) and for reference only but not guaranteed.  Positive distribution yield does not imply positive return. For details, please refer to the Sub-Fund’s distribution policy disclosed in the offering documents.


    Allianz Global Investors Asia Fund

    • Allianz Global Investors Asia Fund (the “Trust”) is an umbrella unit trust constituted under the laws of Hong Kong pursuant to the Trust Deed. Allianz Thematic Income and Allianz Selection Income and Growth and Allianz Yield Plus Fund are the sub-funds of the Trust (each a “Sub-Fund”) investing in fixed income securities, equities and derivative instrument, each with a different investment objective and/or risk profile.

    • Some Sub-Funds are exposed to significant risks which include investment/general market, company-specific, emerging market, creditworthiness/credit rating/downgrading, default, volatility and liquidity, valuation, sovereign debt, thematic concentration, thematic-based investment strategy, counterparty, interest rate changes, country and region, asset allocation risks and currency (such as exchange controls, in particular RMB), and the adverse impact on RMB share classes due to currency depreciation.  

    • Some Sub-Funds may invest in other underlying collective schemes and exchange traded funds. Investing in exchange traded funds may expose to additional risks such as passive investment, tracking error, underlying index, trading and termination. While investing in other underlying collective schemes (“CIS”) may subject to the risks associated to such CIS. 

    • Some Sub-Funds may invest in high-yield (non-investment grade and unrated) investments and/or convertible bonds which may subject to higher risks, such as volatility, creditworthiness, default, interest rate changes, general market and liquidity risks and therefore may  adversely impact the net asset value of the Fund. Convertibles may also expose to risks such as prepayment, equity movement, and greater volatility than straight bond investments.

    • All Sub-Funds may invest in financial derivative instruments (“FDI”) which may expose to higher leverage, counterparty, liquidity, valuation, volatility, market and over the counter transaction risks.  The use of derivatives may result in losses to the Sub-Funds which are greater than the amount originally invested. A Sub-Fund’s net derivative exposure may be up to 50% of its NAV.

    • These investments may involve risks that could result in loss of part or entire amount of investors’ investment.

    • In making investment decisions, investors should not rely solely on this website.

    Note: Dividend payments may, at the sole discretion of the Investment Manager, be made out of the Sub-Fund’s income and/or capital which in the latter case represents a return or withdrawal of part of the amount investors originally invested and/or capital gains attributable to the original investment. This may result in an immediate decrease in the NAV per distribution unit and the capital of the Sub-Fund available for investment in the future and capital growth may be reduced, in particular for hedged share classes for which the distribution amount and NAV of any hedged share classes (HSC) may be adversely affected by differences in the interests rates of the reference currency of the HSC and the base currency of the Sub-Fund. Dividend payments are applicable for Class A/AM/AMg/AMi/AMgi Dis (Annually/Monthly distribution) and for reference only but not guaranteed.  Positive distribution yield does not imply positive return. For details, please refer to the Sub-Fund’s distribution policy disclosed in the offering documents.

     

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