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Global Fixed Income: Opportunities Amidst Confusion BY FRANCK DIXMIER, CHIEF INVESTMENT OFFICER FIXED INCOME AT ALLIANZ GLOBAL INVESTORS, AND MATTHEW CHALDECOTT, PRODUCT SPECIALIST GLOBAL FIXED INCOME AT ALLIANZ GLOBAL INVESTORS
It is hard to overstate the speed of disruption in economic activity and financial markets in 2020, due to the pandemic and the fall in oil prices. The full measure of the decline in economic activity may not be known for some time, but indicators from across the world suggest bigger contractions than witnessed even during the 2008/09 Global Financial Crisis. Predicting the form of any recovery is challenging to say the least, but our base case is for only a shallow recovery. In the financial markets, the threats of
The rating agencies, not wishing to
securities could achieve a sale with
demand destruction and deflation set
repeat the mistakes of the Global
lower quality names left unbid.
off a chain reaction: with corporate
Financial Crisis, have acted swiftly and
revenues and asset prices declining,
assertively to downgrade companies.
This all sums up to one of the most significant dislocations in the market,
while future liabilities remained fixed or increased in real terms, equity values
While they have been justified in most
surpassing in many respects that
quickly shrank with falls of around 25-
cases, these actions have exacerbated
witnessed in the Global Financial Crisis.
30% in major stock markets.
the situation as many institutional
The uncertain outlook for the pandemic
investors or mutual funds are
and its effects on the economy,
With equity cushions eroded and
restricted in holding sub-investment
combined with forced liquidations, have
enterprise valuations diminished, the
grade names.
completely divorced security prices from their fundamentals.
contagion into credit was next as the threat of downgrades and default
Finally, many mutual funds and
became elevated. This is clearly a
institutional portfolios faced
How to respond
function of company creditworthiness
substantial redemptions and collateral
Investing must always be a forward-
and proximity to the shocks, so credit
calls, such that they were forced to sell
looking exercise however, so we must
spreads reacted accordingly, with lower-
holdings on short notice and with few
think past the pandemic and into the
rated companies, energy and leisure/
takers on the other side. In many cases,
recovery phase. Central banks have
travel-related names suffering the most.
only the highest quality and most liquid
announced measures to combat the deflation threat, which is many times
Photos: Archive Allianz Global Investors
larger than that during the Great Financial Crisis; likewise, governments are enacting fiscal stimulus on a scale not seen since World War II. Companies (and countries) will be seeking to repair their balance sheets; at first this will be negative for equities as cash is preserved and dividends or share buybacks are deferred. But these activities are credit positive, so returns within corporate bonds can be strong. Here we see many opportunities amidst the confusion, which can be captured most effectively by the following three FRANCK DIXMIER
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FINANCIAL INVESTIGATOR
NUMMER 4 / 2020
MATTHEW CHALDECOTT
principles:
