Update Magazine III/2018 › Download the complete magazine

1 Brexit won’t be resolved in a single decision – and not all sectors will be losers

Economic growth in the UK has slowed in recent years, and the Brexit process has already undermined real GDP. Whatever happens in early 2019, there will be little immediate clarity; the particulars of this divorce will evolve over months and years. What is clear is that not all sectors will be affected by Brexit in the same way. For example, in the event of a “hard” Brexit, a weaker British pound will likely help larger UK exporters – as will their more diversified exposure.

The UK will also need to make up a large trade gap if it loses access to European Union markets in a hard-Brexit outcome. The EU is the UK’s biggest trading partner, but the EU may be less exposed to losing this relationship than the UK is. The same holds true for the UK’s other major partners, including China, the US and the British Commonwealth. Investors should look for UK companies that are better prepared for Brexit or do significant business beyond the EU – more likely large corporations than smaller and mid-sized businesses.

2 Trade wars are bad for markets, but not necessarily for active investors

US President Donald Trump continues to change the terms of global trade, and while this hasn’t yet derailed the US markets, some segments are struggling. Soybeans, for instance, represent more than half of US agriculture exports to China, and farmers are suffering from prices that have fallen by more than 20% since March, according to Bloomberg. But companies that lie higher up the supply chain may be able to pass on higher costs to consumers. Finding those firms could provide an opportunity for active investors.

Investors should look for buying opportunities from the volatility that ensues from the US forging new bilateral agreements with Mexico, Canada and Germany, and other major trading partners. China is squarely in President Trump’s crosshairs, but it may be inclined to resolve its differences with the US, particularly given China’s desire to open up its economy to foreign investors. Still, if there is a slowdown in emerging markets – or if China takes a more retaliatory stance – the US will likely be the safest place for investors.

The Federal Reserve will watch how trade affects growth and inflation as it continues tightening its monetary policy. This is a careful balancing act. The Fed wants to raise rates to keep inflation in check, and create room to manoeuvre in the future. Yet the Fed could make the mistake of raising rates too much or too quickly, slowing down growth and increasing volatility.

3 Economic inequality is disruptive, but focusing on ESG is advantageous

Inequality has become an ever-growing part of political conversations across the US and Europe, where disparities in wealth continue to grow. This is a warning sign that investors must heed – not least because inequality has the potential to cause disruption, instability, environmental degradation and a host of social ills.

There are two primary ways to address this problem from an investment perspective:

• The first is by engaging with corporate management teams on governance issues – a critical part of the increasingly important field of environmental, social and governance (ESG) investing. Executive pay that aligns more closely with performance can reduce income disparities, and a sincere focus on training can help workforces thrive despite the spread of automation and artificial intelligence.
• The second is by increasing participation in capital markets by making them more accessible to more people. This can be done by making financial services more widely available and affordable, thereby improving financial inclusion; by helping to increase financial literacy; and by providing solutions that help more investors manage risk and potentially grow more wealth over time. When investors and asset managers create and share value, we can better address our shared social responsibilities.
  
  

4 It’s time for companies to confront cyber risk head-on

Cyberattacks on major companies have gone from being an annoyance to being a critical issue. We are now in an environment of broad, unpredictable assaults across all sectors, geographies and business sizes. Attacks on major companies have stopped production and prevented critical products from being delivered. For investors, this can mean falling share prices stemming from remediation expenditures or damaged reputations.

The good news is that many companies are making a surprising amount of headway in combating cyber disruption, but some are much better equipped than others to handle these problems. The challenge is how to identify these companies – and active engagement with management teams can show which firms are better prepared to deal with cyber risk.

5 There’s a reason infrastructure investing has quadrupled since 2008

Investors are increasingly looking to infrastructure investments as a way to balance their portfolios. The total amount of infrastructure assets under management has more than quadrupled in the last 10 years, according to Prequin.

This alternative asset class is attractive to investors because of its healthy risk-return profile. It provides stable long-term return potential, improved diversification and the ability to help guard against inflation. And it is an area primed to receive significant government support – particularly the field of green infrastructure. According to the International Finance Corporation, demand for urban water infrastructure investments could exceed USD 13 trillion through 2030, and the wind and solar power market could need USD 6 trillion in investments through 2040.

Like any investment, there are risks associated with infrastructure investing. Yet we believe these can be addressed with careful oversight and engagement with the managing companies involved with infrastructure projects.

6 Combat procyclicality with long-term, active investing

While the global economy is doing relatively well at the moment, the future appears less certain and more volatile. Returns are likely to be more muted over the next five to 10 years, so investors will need to work their money harder – and be less procyclical. Investors shouldn’t make the mistake of pursuing only strategies that performed well in the past, ignoring those that may hold the greatest potential in the future. An active, engaged approach to investing can help generate value and minimise risks to portfolios.

Investing involves risk. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management‘s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. We assume no obligation to update any forward-looking statement. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. There is no guarantee that the strategy will succeed and losses cannot be ruled out. Investors may not get back the full amount invested.

The volatility of fund unit prices may be increased or even strongly increased. Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency.

This is for information only and not to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy or sell any securities. The products or securities described herein may not be available for sale in all jurisdictions or to certain categories of investors. This is for distribution only as permitted by applicable law and in particular not available to residents and/or nationals of the USA. The investment opportunities described herein do not take into account the specific investment objectives, financial situation, knowledge, experience or particular needs of any particular person and are not guaranteed. 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 publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or willful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail.

Contact the issuer electronically or via mail at the address indicated below for a free copy of the sales prospectus, the incorporation documents, the latest annual and semi-annual financial reports and the key investor information document in English. Please read these documents – which are solely binding – carefully before investing.

For investors in Europe (excluding Switzerland): This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42–44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established branches in the United Kingdom, France, Italy, Spain, Luxembourg and the Netherlands. Contact details and information on the local regulation are available here (www.allianzgi.com/Info).

For investors in Switzerland: This is a marketing communication issued by Allianz Global Investors (Schweiz) AG, a 100% subsidiary of Allianz Global Investors GmbH, licensed by FINMA (www.finma.ch) for distribution and by OAKBV (Oberaufsichtskommission berufliche Vorsorge) for asset management related to occupational pensions.. Details about the extent of the local regulation are available from us on request.

This report does not satisfy all legal requirements on the guarantee of impartiality in investment recommendations and investment strategy recommendations and is not subject to any trade restrictions prior to the publication of such recommendations. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted.