Gregor Hirt, Allianz Global Investors
The unpredictable investment and economic outlook – on the back of worries about inflation and supply chains that fuel market volatility – require investors to consider a new toolkit rather than use traditional approaches to managing their portfolios.
At the same time, they need to factor in the move away from globalisation. This is also another cause of inflation, particularly as production is repatriated to less efficient locations, inventories expand and labour costs increase.
“In this environment, diversifying across and within asset classes may not be sufficient; it may be time to adjust existing positions and add new approaches,” said Gregor Hirt, global chief investment officer, multi-asset, at AllianzGI.
He is exploring three specific opportunities. Firstly, at current spreads, he believes US high yield is looking attractive, especially if a major recession is not on the radar for 2023.
Secondly, what he refers to as a “digital Darwinism” potentially puts certain tech and big data companies in high demand.
And thirdly, the road to net zero will continue to attract flows into sustainable investments in both liquid and private markets, especially as European regulators enact MiFID II.
An investment roadmap
There are several courses of action that Hirt identifies for investors to follow in response to the current market environment – and the need for them to be nimble and flexible.
For instance, they can consider using the next bond-market correction to buy back positions. “We think interest rates could rise even further than expected in the next month, especially in Europe. Meanwhile, we expect the US bond market to bounce back over the next 12 months, after many years of overvaluation,” he explained.
In addition, investors should keep a close eye on equity markets, given the reaction of stock prices to date. “Many ingredients are on hand for lower markets and yet retail investors don’t yet seem to have the same view,” added Hirt.
Various factors supporting this include valuations remaining high, rising wages and energy costs eating into companies’ margins, uncertainty about production chains, the drag on growth from consumption patterns and the likely impact of central banks’ hawkishness to reduce free cash.
“Could it be that investors are still pursuing a ‘buy-the-dip’ strategy, which indeed worked well in past years?” asked Hirt. “Or are we seeing primarily a reallocation from bonds to equities, as the latter offers a better inflation hedge, being a real asset?”
Meanwhile, investors need to bear in mind rising concerns in relation to the euro zone.
For example, the Euro Stoxx 50, the benchmark index, contains no large technology companies that have the same pricing power as their US counterparts do. Moreover, said Hirt, Europe has fewer oligopolistic companies and a high dependency on energy.
Emerging markets, on the other hand, are more complex, he added. “Commodity importers will continue to suffer, especially if the US dollar remains solid, while exporters will obviously profit.”
Beyond equities and bonds, commodities might be worth a closer look as a helpful addition to portfolios, via either direct or indirect investment.
In Hirt’s view, the commodities super-cycle, the lack of supply and their overall ability to be an inflation hedge favour commodities as an asset class. “The only real downside we see for now is that liquidity risks could provoke more volatility when key players exit the market.”
Finally, investors should assess strategies that harvest risk premia or target modest absolute returns.
This is based on expectations that ongoing spikes in volatility will continue to offer attractive entry points to profit from the spread implied over realised volatility.
“Investors will want to stay open to new ideas,” explained Hirt. “Traditional diversification can be helpful during normal times, but the global economy has entered uncharted new territory.”
