Gregor Hirt, Allianz Global Investors
The unpredictable investment and economic outlook – amid concerns about inflation and supply chains that fuel market volatility – is forcing investors to consider a new toolkit rather than using traditional approaches to manage their portfolios.
At the same time, they must take into account the abandonment of globalization. It is also another cause of inflation, especially as production is relocated to less efficient sites, inventory increases and labor costs increase.
“In this environment, diversification between 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, AllianzGI.
It explores three specific opportunities. First, given current spreads, he thinks US high yield looks attractive, especially if a major recession isn’t on the radar for 2023.
Second, what he calls “digital Darwinism” potentially puts some tech and big data companies in high demand.
And third, the road to net zero will continue to attract flows to sustainable investments in 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 example, they may consider using the upcoming bond market correction to buy back positions. “We think interest rates could rise even more than expected over the next month, particularly in Europe. In the meantime, we expect the US bond market to rebound over the next 12 months, after many years of overvaluation,” he explained.
Additionally, investors should keep a close eye on equity markets, given the stock price reaction to date. “There are a lot of ingredients at hand for the lower markets and yet retail investors don’t seem to have the same view yet,” Hirt added.
Various factors supporting this development include valuations that remain elevated, rising wages and energy costs eating away at corporate margins, uncertainty about production lines, slowing model growth consumer spending and the likely impact of hawkish central bank policy to reduce available cash.
“Could it be that investors are still pursuing a buy-the-dip strategy, which has indeed worked well in recent years? Hirt asked. “Or are we mainly seeing a reallocation from bonds to equities, the latter offering a better hedge against inflation, being a real asset?”
In the meantime, investors should keep in mind the growing concerns over the Eurozone.
For example, the Euro Stoxx 50, the benchmark index, contains no major tech companies with the same pricing power as their US counterparts. Additionally, Hirt said, Europe has fewer oligopolistic firms and a high reliance 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 strong, while exporters will obviously benefit.”
Beyond stocks and bonds, commodities might be worth a closer look as a useful addition to portfolios, via direct or indirect investments.
According to Hirt, the commodities super cycle, the lack of supply and their overall ability to hedge against inflation favor commodities as an asset class. “The only real downside we see at the moment is that liquidity risks could cause more volatility when the major players leave the market.”
Finally, investors should evaluate strategies that reap risk premiums or target modest absolute returns.
This is based on expectations that ongoing volatility spikes will continue to provide attractive entry points to take advantage of the implied spread to realized volatility.
“Investors will want to stay open to new ideas,” Hirt explained. “Traditional diversification can be useful in normal times, but the global economy has entered new, uncharted territory.”