Mid-Year Outlook: Be More Selective in the Second Half

Mid-Year Outlook: Be More Selective in the Second Half

by Neil Dwane, Cheif Investment Strategist, Allianz Global Investors


After a strong first half to 2017 for equities, the message for the remainder of the year is to seek returns more carefully. Neil Dwane says the "country factor" is key: Investors can no longer rely on a rising tide of cyclical data to lift all boats.

Key takeaways

  • The return of the "country factor"
    For the last 12 months, a rising tide of strong synchronized cyclical data has been lifting most asset classes. We expect that to change: The EU and Japan should strengthen while the US, China and the UK slow or stall.
  • Europe is a bright spot
    With many European corporations – particularly in the financial, utility and telecoms sectors – trading at large discounts to their US competitors, European equities may present a contrarian opportunity, after six years of near-chronic underperformance.
  • You must take risk for the potential to earn a return
    Brexit, President Trump and geopolitics remain some of the key risks on the horizon. But with yields globally still repressed, and central banks looking to taper or even raise interest rates, traditional low-risk investments may not protect one's wealth.

At the mid-year point, US equities seem expensively valued in the face of dull economic growth and rising rates. By contrast, Europe looks attractive as some of the key political risks fade and the positive momentum surrounding President Emmanuel Macron's election provides new energy. Meanwhile, the UK continues to labor under a troubled political outlook driven by Brexit-related uncertainties. In Asia, a burgeoning middle class of enthusiastic consumers is extending the investment story beyond China.

Geopolitical factors, including ongoing tensions with North Korea, continue to play on investor sentiment. In our 2017 Risk Monitor study, 59% of institutional investors say that recent political events have caused them to increase their focus on risk management. Overall, more than 9 in 10 are worried about event risk – up from three-quarters last year1 – reinforcing the importance of taking an active approach to investment to keep portfolios on track as 2017 unfolds.

What to expect in the second half

The global economy has been in a cyclical "sweet spot" for more than a year. But now, actively differentiating between regions and countries will become more important for investors.

Regional differences in economic performance
Global Sweet SpotNote: Macro breadth growth indices track the direction of important economic sentiment and activity data on a monthly basis. Source: Thomson Reuters Datastream, Bloomberg, AllianzGI Global Capital Markets & Thematic Research, as of June 30, 2017. The above graph is used for illustrative purposes; it is not a recommendation nor investment advice to buy or sell any shares of securities. Past performance is not a reliable indicator of future results.

Global macroeconomic view

  • The steady flow of macroeconomic news – not monetary policy or political events – has been the primary cyclical driver of financial markets in recent years.
  • Global growth continues at around 3%, and we expect moderately higher core inflation over the medium term.
  • While the economic landscape remains solid globally, it is expected to become somewhat patchier over the months ahead. Country-specific risk factors will become more important to asset-allocation strategies.
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