The persistent volatility and low market yields in the global economy show no signs of letting up, and investors trying to cope in this environment should look to dividend-yielding equities and medium-term high-yield bonds, said Allianz Global Investors (AGI) Global CIO Andreas Utermann on Tuesday at a New York press briefing.
Markets are punishing eurozone leaders for failing to fix the deteriorating economic picture, Utermann said. In fact, he noted that the time may be coming when investors should “think the unthinkable” and be prepared to pay safe-haven banks to hold their money, such as recently happened with Swiss and Danish short-term debt. (Switzerland on June 19 sold $844 million of three-month debt at a negative yield of -0.79%.)
If Greece drops out of the European Monetary Union (EMU), a collapse of the euro would not be far behind, and average investors and European citizens have no idea how dire the consequences could be, he added.
Euro Zone Collapse Would Make Lehman Look Like a ‘Blip’
“Lehman Brothers would be looked at as a blip compared with the collapse of the eurozone,” Utermann said, in reference to the Lehman bankruptcy that is credited with starting the global market crisis in September 2008. “There are no easy answers. The necessary reforms don’t seem to be materializing in the eyes of the Greek taxpayer. My sense is that we’ll continue to muddle through for some time.”
Utermann (left), who is based in London and serves AGI as global chief investment officer, says equities will probably remain highly volatile, and he advises investors to stay with their convictions and buy dividend-paying stocks along with high-yield intermediate-term bonds.
“Be brave. History tells us that bounces in a financial repression environment might be significant,” he told investors in a note written earlier this month after attending an Allianz investment forum in Hong Kong. “In times of moderate price-earnings ratios and low—not to say negative—real bond yields, dividends should be the main drivers of equity returns.”
AGI portfolio manager Ben Fischer warned that financial repression, which punishes savers, also punishes pensioners by forcing them to invest in riskier equities or high-yield bonds—and Federal Reserve Chairman Ben Bernanke is intentionally putting them in that position. He said advisors are thus in the position of helping their retired clients navigate a zero-yield landscape until 2014.
“Dividend income will be the only refuge of savers,” Fischer said. “Clients have to learn to live with the volatility of dividend-paying stocks.”
Other Investment Recommendations from Utermann:
- Because bondholders are getting squeezed, look for real returns in commodities such as gold and silver, real estate and infrastructure investments.
- Look for companies with sustainable growth even in a low-growth, higher-inflation environment. “Small caps and companies with high payout ratios should be investors’ first choice,” according to Utermann.
- Currencies, primarily Asian ones, such as the Chinese renminbi. “Asian currencies are broadly speaking undervalued while the corresponding economies are catching up,” he writes, adding that Asian bonds are worth a look as well due to moderate budget deficits and tax levels.
Also at the New York briefing, RCM U.S. Chief Executive Scott Migliori predicted that the United States would see additional quantitative easing from the Fed this year. Migliori also said the market stayed neutral in response to the Fed’s recent continuation of Operation Twist because the central bank has few tools remaining in its monetary policy toolbox.
“We will see additional QE later this year. The data in the U.S. are getting worse, not better,” Migliori predicted, pointing to the Philadelphia Fed’s business outlook, which plunged to -16.6 in June versus -5.8 in May.
San Francisco-based RCM, like PIMCO, is an investment company under the AGI umbrella, which is a division of Allianz AG, headquartered in Munich.
Read PIMCO’s Gross: Europe a ‘Localized Tumor,’ Serious Global Cancer on the Way at AdvisorOne.