Volume 7, Issue 2
February 2015
Allianz Global Investors
Insights
01 Global View
Outperforming the Low-Yield Environment
02 Perspective on the US
Oil Price Drop Fuels High-Yield Winners, Losers03 Viewpoint
Corporate Governance Reforms Aim to Boost Japan Equity Markets
04 Grassroots
SMResearch
4G Driving Strong Mobile Telecom Growth in China05 Soundbites from Research
AllianzGI Joins IASB’s Financial Reporting Programme At our Hong Kong Investment Forumthree years ago, we identified financial repression as the dominant issue affecting economies and markets in the years to come. This January, we met once again in this dynamic city to discuss how our long-term view on capital markets has evolved. Our conclusion? Financial repression is still in effect and asset-class returns will stay muted, leaving investors no choice but to take selective risks and look for active ways to generate alpha.
Understand
With the global economy continuing to suffer from high levels of leverage and slow growth, we fully expect monetary policy globally to remain accommodative, if not expansionary. At the same time, we believe central banks in the US, Europe, UK and Japan can pursue
Global View
Outperforming the Low-Yield
Environment
stimulus – alongside accommodative monetary policy – supporting economic growth.
Demographic change was a key topic at this Investment Forum. Across the globe, a dwindling labour force and a growing number of retirees with lower consumption will hurt economic growth, with the potential for capital markets to separate paths without contradicting
our overall forecast for financially repressive monetary policies. Even with an impending interest rate hike by the US Federal Reserve, it has a long way to go to return rates to their historic levels. The US has resumed its place as the world’s strongest economy and is continuing its post-financial-crisis recovery, moving from healing to healed to healthy. In Europe, we are seeing signs of stabilization, although data from Japan continue to disappoint. While shifting demographics and an ageing development model in Asia are contributing significantly to deflationary pressure, we see supportive signs for our view that while inflation will stay subdued, deflation is not on the cards. The low price of oil should act as a
2
Andreas Utermann
Global Chief Investment Officer
2
The most significant influential factor impacting the high-yield market in the fourth quarter was the drop in oil prices. Energy captured the attention of all investors in the second half of 2014, and it constituted approximately 14 per cent of the high-yield market as of year-end. Otherwise stated, 86 per cent of the high-yield market is not in the energy space.
However, throughout the period, investors sold both energy-related and non-energy issuers, albeit with little regard to quality. The “for sale sign” created uncertainty and investor anxiety. As a result, diversified/integrated, natural gas, refiners and distribution-focused issuers were sold, along with some of the more troubled exploration and production (E&P) and energy services issuers that have high-cost shale exposure. High-cost and unhedged shale E&P issuers were appropriately under pressure, but there were many diversified, low-cost and well-hedged E&P issuers that were also marked down
aggressively. This activity quickly translated into selling pressure
throughout the entire high-yield market. Viewing the market as a whole, however, paints a different picture. The drop in the price of oil has a significant positive impact on all consumer and transportation industries, and several materials-related industries. Therefore, the net effect of lower energy prices for the market as a whole is positive. For energy specifically, there are haves and have-nots. Refiners will be unaffected by the absolute level of prices. They benefit from crack spread’s breadth and have been stable thus far.
With differentiated inputs to supply and demand, natural gas production and pricing are not directly related to oil prices. E&P companies run the full spectrum of long-standing, low-cost E&P to high-cost, new shale. Service-related issuers will be impacted by lower capital expenditures, decreased production and lower drilling activity.
Perspective on the US
Oil Price Drop Fuels High-Yield
Winners, Losers
For each issuer, there is a unique risk profile. Some issuers have a high-risk profile, while others have a low-risk profile. For the sector as a whole, there will clearly be winners and losers. As 2015 begins, energy prices can be viewed as constructive, given the overall lift in demand driven by the US economy – and eventually the world – along with a decrease in US production.
Doug Forsyth
CIO Fixed Income US
be affected as older investors shift their allocations to less risky assets. Yet demography it is not destiny; there is still room to manoeuvre to at least dampen the effects of ageing populations. Structural rigidities in labour markets can be addressed, pension reforms can pave the way to a more flexible or even delayed retirement age, and asset managers can explore creative income-replacement solutions.
Act
The challenges we discussed at this and other Investment Forums continue to point to the value of active investment
managers who are able to turn insights and capabilities into clear solutions:
◾ In a world of lower trend growth and persistently low yields, more-active investment approaches can help deliver reliable alpha.
◾ Lower nominal market returns have reduced the opportunity cost of keeping some cash on the sidelines, which should enable active managers to take advantage of future spikes in volatility.
◾ With geopolitical risks set to have a more significant impact on market returns and volatility, investors should
consider highly diversified, multi-asset, risk-managed solutions.
◾ Traditional approaches to bridging the pension gap are not working anymore, so we continue to expand our range of solutions to help investors to decumulate wealth after retirement. Active investing – this is the primary challenge and opportunity for the months and years to come.
For more on this topic, including asset classes that offer value, read the new Investment Forum publication by Andreas Utermann.
Kazuyuki Terao
CIO Japan Equity
Although structural reforms – the third arrow of Japanese Prime Minister Shinzo Abe’s economic policies, dubbed “Abenomics” – have been slow to develop in Japan, its government is very serious about improving corporate governance, which has been poor in the past. Going forward, the implementation of corporate governance reforms is expected to improve, as it is a key part of Abe’s reform plans.
We have already seen good progress in this area, especially with the Government Pension Investment Fund (GPIF), which committed to use the JPX-Nikkei 400 – the new “good company” equity index – that was introduced last year. This index is composed of companies that have high return on equity (ROE) and adhere to global investment standards, such as efficient capital usage. With this commitment, the GPIF has started to reduce its passive investments that track the Tokyo Stock Price Index, and has added investments that track the JPX-Nikkei 400. This activity has served to motivate Japanese companies to increase their ROE, and some companies have already responded positively. The GPIF’s typical asset allocation had previously been biased to domestic bonds, with a target of 60 per cent. As part of its commitment to the JPX-Nikkei 400, the GPIF decided to reduce the target exposure for domestic bonds to 35 per cent, and increase the target for domestic equity exposure from 12 per cent to 25 per cent. This movement has already caused an impact on the asset allocation of other Japanese pension funds and has increased flows to Japan’s equity market.
In addition, the Japanese government has recently introduced a stewardship code for institutional investors. It requires companies to improve communications with shareholders, and puts an emphasis on increasing shareholder return. Furthermore, the government revised the Japan Finance Corporation Act to require companies to appoint outside directors – or explain why they have not done so. The number of outside directors is indeed increasing, but it is still very low compared to the US and Europe. This suggests Japanese companies still have room for improvement.
The Abe government has also been strongly pushing for continuing the dissolution of cross-holdings involving corporations and banks, and
cross-holdings have fallen while foreign shareholders’ holdings have moved to all-time highs. An upturn in foreign ownership should further improve corporate governance by increasing the focus on shareholder return, which will become a positive catalyst for the Japan equity market. In a global context, shareholder return in Japan has historically been low. In the past five years, however, share buybacks and dividend payouts have been picking up as Japanese companies have become cash-rich and started to pay more attention to enhancing shareholder value. In fact, listed companies’ dividends and share buybacks have eclipsed their 2008 peak. Given the increase in the number of foreign shareholders and the change in stance of corporate management teams, shareholder return is expected to increase.
Viewpoint
Corporate Governance Reforms Aim
to Boost Japan Equity Markets
Regarding tax reform, the Japanese government recently launched the Nippon Individual Savings Account (NISA) system for residents of Japan aged 20 or more. Under NISA, individuals are eligible for an exemption to the 20 per cent tax on income from capital gains, dividends and coupons for annual investments of up to JPY 1 million. This is expected to improve retail inflows to equity markets.
For the fiscal year beginning in April 2015, the government also decided to lower the corporate tax rate by 2.5 percentage points, to 32 per cent, lowering Japan’s corporate tax rate closer to those in effect in most other major economies, especially Asian countries. The benefits of this tax-rate cut will likely be greater for large companies and manufacturing industries. Debate is continuing over additional corporate tax cuts in 2016 and beyond.
Whether Abenomics will work in the longer term is yet to be seen, given persistent structural issues such as demographics and a huge fiscal deficit. But we believe these recent reforms will surely positively impact Japanese listed companies and Japan’s equity markets.
4
Since China Mobile’s December 2013 launch of 4G mobile services, the company has led the way in signing up new mobile subscribers to its TD-LTE1
network. However, competition started to intensify in the third quarter of 2014, when China Unicom and China Telecom were granted FDD-LTE2 licenses in
16 trial cities.
To better understand Chinese consumers’ data usage and ARPU3
trends on smartphones, as well as preferences among the three telecom operators, Grassroots conducted a consumer survey with more than 1,000 mobile phone users in China. The survey results revealed that among existing 2G subscribers surveyed, 45 per cent intended to upgrade to 4G in the next 12 months. With existing 4G subscribers, 88 per cent cited an increase in their monthly mobile phone bill after upgrading to 4G (see chart), which implies that there is the potential for an ARPU increase when more subscribers upgrade to 4G. Meanwhile, among the three telecom operators, China Mobile is generally perceived as the best in terms of voice and data network quality.
“The GrassrootsSM Research survey
results support our positive view on 4G driving strong data revenue growth for the China telecommunications industry,” commented Kathy Chen, Senior Research Analyst in Hong Kong. “Although data unit pricing will fall, we expect strong data volume growth to drive revenue growth. We expect China Mobile’s head start in 4G and its aggressive network rollout will help the company regain some high-end market share in the near term.”
Grassroots
SMResearch
4G Driving Strong Mobile Telecom
Growth in China
Joey Wong
GrassrootsSM Research Analyst
23% 28% 25% 9% 3% 10% 2% Increased by < RMB 30 Increased by RMB 30–49 Increased by RMB 50–99 Increased by RMB 100–199 Increased by > RMB 200 No Change Decreased
Potential for ARPU Increase When Chinese Mobile Phone Subscribers Upgrade to 4G Survey of 4G users: After upgrading to a 4G plan, how much has your monthly telecom spending changed?
Source: GrassrootsSM Research as at 30 October 2014. RMB = Chinese renminbi.
1. Time-division long-term evolution
2. Frequency division duplexing long-term evolution 3. Average revenue per user
About Allianz Global Investors
Understand. Act. This two-word philosophy is at the core of what we do. To stand out as the investment partner our clients trust, we listen closely to understand their needs, then act decisively to deliver solutions. We are a diversified active investment manager with a strong parent company, a culture of risk management and EUR 386 billion in assets under management.* With 23 offices in 17 countries and over 500 investment professionals, we provide global investment and research capabilities with consultative local delivery.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Equities have tended to be volatile, and unlike bonds do not offer a fixed rate of return. Emerging markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates. Bond prices will normally decline as interest rates rise. Below investment grade convertible and fixed-income securities involve a greater risk to principal than investment grade securities. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which
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*Combined worldwide AUM as at 30 September 2014 Source of all data (unless otherwise stated): Allianz Global Investors as at January 2015
AGI-2015-02-02-11506 | FF-00210
Allianz Global Investors was recently approached by the International Accounting Standards Board (IASB) to join its newly launched Investors in Financial Reporting programme, designed to foster greater investor participation in the development of International Financial Reporting Standards (IFRS). The IASB is a global organization of asset managers seeking continued improvement in financial reporting standards, and is the independent standard-setting body of the IFRS Foundation. Our Global Investment Management Group agreed in late November to accept the IASB’s offer, and in doing so, Allianz Global Investors become one of a select group of global asset management companies – including
Soundbites from Research
AllianzGI Joins IASB’s Financial
Reporting Programme
Steve Berexa
Global Head of Research
APG Asset Management, BlackRock, Nomura Asset Management and PGGM – to participate in the launch phase of this important initiative.
As part of the programme, Allianz Global Investors and other selected firms will lend staff to the IASB to work on future projects. Our analysts will also lend their perspectives and knowledge of industries to ongoing IASB projects aimed at improving accounting standards.
AllianzGI has nominated Head of Equity Research Europe Gunnar Miller as our primary contact for the IASB. Gunnar currently serves on the Accounting Council of the Financial Reporting Council, the UK’s independent regulator responsible for promoting high-quality
corporate governance, reporting and audit standards. Gunnar also chairs the Germany-based Corporate Reporting Users’ Forum, a group of buy- and sell-side analysts, credit-rating analysts, fund managers and corporate-governance professionals keen to have a fuller input into the deliberations of the IASB and Financial Accounting Standards Board, as well as other standard setters and regulators.