Given the problems in Europe, investment experts at Allianz Global Investors have a dismal view of the global capital markets.
“We expect financial repression and negative real yields to continue for three to five years,” Andreas Uterman, global chief investment officer of Allianz Global Investors, said at a press briefing today. “We won't see a normalization of capital markets for many years.”
The biggest reason is, of course, the uncertain future of the European Union. Mr. Uterman isn't banking on much from the meeting between EU members in Brussels at the end of this week.
“The summit can only disappoint, because the markets want a quick fix,” he said.
The problem is at its core a communication challenge, Mr. Uterman suggested. “The EU and the [International Monetary Fund] need to convince [European] taxpayers that they should bear the burden they're being asked to. Policymakers are failing to give people a light at the end of the tunnel,” he said.
Beyond a better sales job on the rationale for the European Union and a common currents, Mr. Uterman said three things need to happen to resolve the crisis: the creation of a banking resolution system with the whole of the union underwriting the solution, the European Central Bank's being officially made the lender of last resort with the power to buy government bonds in the open market, as the
Federal Reserve Bank does in the U.S., and a joint underwriting of the excess debt of EU members.
The cost of such a resolution would be lower for peripheral countries and higher for Germany, the Netherlands and other higher-rated countries. So far, Germany has resisted the idea of eurobonds and bills, as well as a more active European central bank.
Europe isn't the only region with major problems to address, however.
“There's rightfully a focus on Europe now, but the U.S. has serious issues to deal with,” said Scott Migliori, chief executive officer of Allianz-owned RCM Capital Management U.S.
The so-called fiscal cliff of increased tax rates and big government spending cuts that awaits the U.S. at the end of the year could have a 2% to 4% impact on the economy in 2013. With political gridlock as stubborn as ever, even the prospect is hurting the economy.
“My concern is, what it means for this year?” said Mr. Migliori. “How can companies trying to determine their investment spending and hiring decide what to do? It's already having an impact on the economy.”
What does the doom and gloom mean for U.S. equity prices?
“We see a muted trading-range market with lower volatility in
dividend-paying stocks,” said Ben Fischer, managing director and portfolio manager at NFJ Investment Group LLC, an advisory affiliate of Allianz. NFJ invests in value stocks paying dividends to investors. Mr. Fischer, like his colleagues, expects interest rates to remain near zero through 2014, and suggests that the “risk on” bet is 10-year bonds and that equities are the “risk off” investment, if you ignore the short-term.
Fed chief Ben S. Bernanke “is forcing people to move into riskier assets, but it's a slow process,” Mr. Fischer said. “It will take four to five years before we get there.”
