Global Deleveraging Dampens Growth Expectations for 2013

  Global Deleveraging Dampens Growth Expectations for 2013

  *Approach to fiscal cliff will determine US growth
  *Positive signals in the eurozone but no stable foundation for confidence
  *Global CIO Utermann advises to diversify over all asset classes
  *US CIO Equities Migliori sees housing and pharma/biotech sectors as likely

Business Wire

NEW YORK -- November 26, 2012

Allianz Global Investors is assuming that global growth over the coming year
will remain slightly under trend, with growth in industrial countries,
especially in the eurozone and UK, likely to remain weak. Asia is projected to
provide a modest tailwind but not at the levels generated in previous years.
Japan, which looks likely to face recession again, is seen as an exception.

Given the disappointing recent economic data in combination with new monetary
stimulus packages from the US Federal Reserve and the Bank of Japan, Andreas
Utermann, co-head and Global Chief Investment Officer (CIO) at Allianz Global
Investors, has a  cautious outlook for 2013: “The quantitative easing measures
could be interpreted as a clear signal of difficult times ahead. And the US
definitely has to face up to its fiscal challenges. Unless President Obama and
Congress reach a new agreement, tax increases and spending cuts amounting to
4% of Gross Domestic Product (GDP) will take effect in the New Year. We
believe that policy makers will, ultimately, pull back from the precipice in
order to avert the negative consequences of the fiscal cliff on American
growth in the coming year.”

Over the longer term, Utermann has fewer concerns about the US economy: “The
US, with its dynamic economy and more favorable demographic fundamentals, has
a better platform than Europe for overcoming its debt situation.”

Positive signals in the European Union but no sign of stability yet

Utermann identifies positive signals in the eurozone. In the middle of 2012,
when sovereign spreads for peripheral EMU members hit record highs and yield
curves for these countries flattened or even inverted, the market consensus
appeared to be that the European Monetary Union (EMU) was not going to survive
in its current form. In his opinion, the resolute and concerted actions of
politicians together with the European Central Bank (ECB) have dealt with the
risk for the time being, but have not yet solved it completely: “At the very
least, the clear statement by Mario Draghi that the ECB would do ‘whatever it
takes’ to save the euro has averted the ignition of a fire in Greece that
would engulf the whole of Europe. This has changed the dynamic of the crisis
in the eurozone insofar as politicians now have the space to regain the
initiative.” He regards the European Stability Mechanism introduced in
September as an important step forward, which is already being reflected
positively in the capital markets. Overall, developments have confirmed his
assessment that the crisis has promoted more intensive cooperative action
within the eurozone rather than a break-up.

Nevertheless, Utermann maintains that this is too early to sound a general
all-clear: “If the European Union is to be placed once more on a stable and
credible foundation, three fundamental measures need to be implemented: the
ECB must act as a lender of last resort for all countries. Steps also need to
be taken in the direction of fiscal union. And thirdly, agreement needs to be
reached on a banking union in order to remove the dependence that exists
between government budget and the banking sector.”

Utermann considers that progress has already been made towards banking union
in particular, with promising initiatives under discussion that include the
ECB as a potential supervisory authority, which could be implemented as early
as 2013. Nevertheless, during this difficult phase it can be assumed that the
substantial parts of the population of the European peripheral countries will
continue to react against the reform projects while the core countries decry
the EU as a bottomless financial pit. Against the background of these highly
charged sentiments, the Italian parliamentary elections in spring and the
German election in the autumn of 2013 are risk factors that should not be

Volatility stays at high levels in 2013

Despite an environment of low-to-negative real interest rates Utermann advises
against focusing solely on continuous gains on stock markets: “Even though it
might be tempting given some of the market gains this past year, only a
long-term distribution of assets could cushion risks. Given the current
economic conditions I believe it is risky to speculate on prices short-term.”
Volatility will likely stay at high levels in 2013 because the markets
continue to be driven by political events.

“Three years ago, we outlined for the first time that the path towards the new
global equilibrium would be a long one against the background of massive
government debts of the industrial nations and increasing savings rates in
other parts of the world. This needs to be accompanied by a change in mindset
on the part of investors: there will be no return to the old benchmarks for
the time being,” says Utermann.

Even though the upside price potential for equities is limited in a generally
fairly low growth environment, Utermann perceives good opportunities within
the equity segment over the coming year. However, he emphasized that careful
selection is more important than ever against a background of global
challenges. There should be growth opportunities for companies with a robust
international business model and a strong competitive position even in market
conditions subject to difficult economic parameters. As he has done for the
past two years, Utermann continues to underline his belief that investors
should focus on dividend stocks. Over the past twelve months, the average
dividend returns from healthy companies have already been significantly above
the level of many standard fixed-income securities, a trend he assumes will

Utermann also believes that, during the course of the upcoming year, defensive
investment alternatives with the necessary potential for yield will include
government bonds from selected emerging economies and their currencies,
corporate bonds including high-interest bonds, and infrastructure

Outlook for the US

Given the uncertainty surrounding the fiscal cliff and the potential for very
divergent economic outcomes depending on how it is resolved, the outlook for
the coming year is cloudier than usual. US CIO Equities Scott Migliori at
Allianz Global Investors, notes that the fiscal cliff, however, is not the
only area of wide divergences in potential outcomes: “There is also a
historically wide divergence between business and consumer confidence, with
business confidence at low levels historically consistent with recession,
while consumer confidence has been rising steadily buoyed by strong returns in
equities and a rebound in home prices. Relatedly, capital goods orders have
been dropping precipitously toward recessionary levels while payroll trends
have diverged and, while certainly not robust, have not yet dropped coincident
with capital goods orders as they have historically. We do not believe any of
these divergences are sustainable for much longer, and their resolution will
largely determine the prospects for growth in GDP and earnings and the
direction of equity markets in 2013.”

Migliori remarks that the positive note of the continuing improvement in
housing trends may signal heightened prospects for continued strong consumer
spending and the eventual recovery of construction related employment
activity. The most recent data shows median home prices rising over 11%
year-over-year, and inventories continue to fall with months’ available supply
now at the lowest levels since February 2006. The housing recovery is expected
to continue and provide a tailwind to economic activity in 2013. However, it
is worth noting that housing is not nearly as large a factor in US GDP as it
was prior to the financial crisis, and there are historical examples where
home prices have recovered while overall economic activity remain challenged
(2001–2002 most recently).

Nonetheless, Migliori cautions on the improvement in housing trends: “The
flipside to the robust housing story is the sorry state of business confidence
and the related decline in capital goods orders. The key question is how much
of this decline in confidence and orders is related to short-term concern
surrounding the election and fiscal cliff, and how much is related to a more
persistent downturn in the business cycle in the US? At this point, we believe
it has more to do with the former than the latter, but we will need to see an
uptick in first quarter capital goods orders to alleviate recessionary

Investing in an environment with large divergences and a wide range of
potential outcomes presents great challenges. Migliori advises “a “barbell”
approach with overweights in areas that have good near-term earnings
visibility (including housing/housing-related and select pharma/biotech
stocks) while also building exposure in beaten down industrial and technology
stocks tied to capital spending, as many of these stocks are trading close to
trough valuations and thus provide a “call option” to any upturn in global
economic activity.”

* Forecasts are not a reliable indicator of future results. This is no
recommendation or solicitation to buy or sell any particular security.

About Allianz Global Investors

Allianz Global Investors, an integral part of Allianz SE’s asset management
business, is a trusted partner for clients across all major asset classes and
regions. AllianzGI’s teams can be found in 19 markets worldwide, with a strong
presence in the US, Europe and Asia-Pacific. With approximately 500 investment
professionals and an integrated investment platform, AllianzGI covers all
major business centres and growth markets. Its global capabilities are
delivered through local teams to ensure best-in-class service. Generating an
information advantage is fundamental to AllianzGI‘s investment philosophy and
is achieved via specialized in-house research teams across the globe.
AllianzGI provides one-stop solutions for complex client needs bringing
together proven competencies in investment strategy consulting and analytics,
risk management as well as pension investing and related-vehicles.


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Past performance is not indicative of future performance. Bond prices will
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The views and opinions expressed herein, which are subject to change without
notice, are those of the issuer and/or its affiliated companies at the time of
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Allianz Global Investors
Megan Frank, +1 212-759-3501
Denise Lee, +1 415-954-8272
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