There are three overarching investment themes that have emerged following a year of “profound change”, according to Allianz Global Investors.
The Covid-19 pandemic has caused a major shift in markets and economies, as some changes that were already occurring were accelerated by the pandemic.
“The traditional ‘rules’ of investing – which were already being challenged – have become increasingly less relevant,” Allianz’s strategists said.
Now, investors have begun aligning sustainably goals along with financial returns while accepting that the decade-long low interest rate environment could continue.
From this, Allianz has identified three overarching investment themes: investing in a permanently low yield environment, China and sustainability.
“Far more than simple trends, we believe they individually – and together – will have a significant bearing on how and where we invest in the foreseeable future. Because they represent some of the biggest opportunities and risks for client portfolios,” Allianz said.
Below the firm details these three themes and what they could mean for investors.
Lower interest rates and yields will require different investment strategies
Monetary policy has always been an integral part of driving economic growth and played a significant role in financial markets, although the fundamental approach of central banks has changed in the past few years, according to Allianz.
“Stubbornly low interest rates have become the norm, and while long-term rates may rise somewhat in the near future, we are still in the midst of a secular shift to a lower-rate environment,” Allianz said.
This is shown in the fall in 10-year US Treasury yields over the past four decades, down from 16 per cent to 1.6 per cent today.
The asset house doesn’t believe that this low rate environment will change in the near future, especially during the economic recovery from Covid-19 as central banks have already pledged to maintain its monetary policy of low rates and elevated liquidity.
“Indeed, given the level of government indebtedness and the extent to which markets have become ‘hooked’ on cheap money, few decision makers have the appetite to change. So if the environment becomes lower not just longer, but potentially forever, what are the implications?” Allianz said.
“Are central banks simply the servants of governments as a new ‘state capitalism’ takes hold? Most importantly for investors, how should they reposition their portfolios for the unfolding environment? And how can they push for higher yields and better overall returns while keeping risk in check?”
China and how to invest in ‘the new economic power house’
As the epicentre of the initial Covid-19 outbreak, China’s journey through the pandemic has been markedly different to other major economies, both socially and economically.
Setting the precedent for the first major widespread lockdowns, China was able to gain control of the coronavirus outbreak quickly, meaning it could reopen its economy sooner and suffer less of an impact.
Allianz said: “China is perhaps the only major economy that bounced back quickly from the Covid-19 pandemic.”
A main reason for this was that “China had already embarked on a long-term economic transformation that paid dividends after the crisis passed”. This focused on a shift away from China being the manufacturing hub of the world and into a global innovator.
“No longer the low-cost manufacturer to the world, China has implemented a long-term growth strategy that will be powered by innovation in technology, data and science,” Allianz said.
“As China’s economy develops, its capital markets are maturing as well. Their integration into the global financial system is likely to be one of the defining structural shifts in the coming decades. While China A-shares are an increasingly common fixture in portfolios, the growth in China’s bond markets also makes the country an option for investors seeking income.”
The asset house added that while many investors may not have considered China for a notable role in their portfolios previously, now could be the time to reassess.
“As an investment, China is still an enigma for many, but its markets are nevertheless deep, diverse and dynamic. Now is the time for investors to consider China and its role in portfolios, whatever the asset class and wherever they are investing in the world,” Allianz said.
Beyond climate: Exploring the frontiers of sustainable investing
The final theme is sustainability and environmental, social and governance (ESG) investing, which has been a growing market trend over the years but throughout the pandemic emerged as a dominant investment theme. This was especially the case with ‘green’ or climate friendly investments, according to Allianz.
They said: “Today, it is fair to say that the consideration of sustainability – in whatever form – is now standard practice for investors and asset managers alike.
“The growing interest in sustainable investing in recent years has finally translated into significant investments.”
Over the last two years, ESG-focused portfolios took the majority of inflows into equity funds, according to the Calastone Fund Flow index (FFI), with $84 out of every $100 going into them.
“The priority for the industry is to ensure we meet the high expectations that investors have for those investments,” Allianz said.
“With climate change an urgent topic for many investors, we look beyond conventional thinking on climate to explore the far-reaching implications for biodiversity and other so-called planetary boundaries.
“And we are prioritising the ‘S’ in ESG as social issues come to the fore.”
Allianz explained that in its sustainability approach it is aiming to “explore the frontiers of sustainability for our clients”, by not just treating products and asset classes individually but integrating sustainability into its core business approach.
This involves aligning a client’s investment goals with an outcome-oriented results where the ESG impact is measurable. Overall, the asset house said that sustainability has now become “essential to how the world invests”.