Allianz Global Investors (AllianzGI) said in its fourth-quarter outlook that the recent interest rate cut by the US Federal Reserve marks the beginning of the end of the period in which cash and technology stocks were “the only game in town”.
The recent decision by the Fed to cut interest rates by 50bp had hardly any impact on markets with the S&P 500 closing the day down slightly at 0.3% lower, while the two-year Treasury yield, which is often used as the litmus test for the impact of monetary policy on markets, was down 0.02 percentage points by the evening.
This was largely a reflection of the extent to which it had been so well telegraphed, although AllianzGI reckons that it represents a seismic shift nonetheless.
“While the opportunity set for investors may not change overnight, we think it marks the beginning of the end of a period where technology stocks and cash (or cash-like instruments) have been the only game in town,” it wrote.
Overall, AllianzGI said that the outlook should be positive for both bonds and equities, with a particular focus on developed market equities, investment grade corporate bonds and sovereign bonds.
In terms of equities, AllianzGI noted that concentration in the US equities market is the highest it has been since the 1970s, although it expects a more diversified set of stocks to drive performance going forward.
AllianzGI said that UK equities look attractively valued, while other areas such as small caps should do well in a lower interest rate environment.
AllianzGI recommends having a slight defensive tilt given the likely volatility surrounding the US election, and so favours stocks linked to the water theme.
In Asia, AllianzGI favours Japan as the sell-off in August has created “attractive opportunities”, while it said that in China the property situation had stabilised so there are selective opportunities there, while in India, the country’s strong growth rate should help its local equities market.
In terms of fixed income, AllianzGI is particularly bullish about emerging market local currency bonds, citing three factors, namely benign inflation, wider spreads compared with US Treasuries and robust economic growth.
It also noted that Japanese sovereign bonds and European investment grade corporate bonds are not far from fair value.
