Income and Growth Strategy: An all-weather solution for modern day investors By Allianz Global Investors 6 July 2021
Risk assets entered 2021 on a strong footing as investors were optimistic on the prospect of additional fiscal stimulus from the US, continued easy monetary policy, vaccine rollout and a quicker-than- expected re-opening of the US economy.
At the same time, this positive outlook of economic recovery and higher fiscal deficits drove bond yields higher. The sharp acceleration in rates, market sell-off and concerns about higher inflation have led to broad-based moves and some volatility across various asset classes.
Even within the same asset class, the rotation from COVID-beneficiaries to the COVID-laggards has also accelerated, leading to return divergences.
Higher rates also led to a steepening of the yield curve, which typically indicates stronger economic activity and generally positivity for the overall profitability of US corporations. It is also a reflection of the US Federal Reserve’s commitment to accommodative policy and to prevent a repeat of the 2013 taper tantrum.
What should investors do in the current market environment where rates are treading higher but absolute yields remain low? Where and how does inflation cause market volatility?
Investors need look no further than a strategy that could offer income opportunities plus capture potential capital growth, which is essential in an environment where real yields are low. Allianz Income and Growth fund is a multi-asset strategy that invests primarily in a portfolio of one-third high- quality large-cap stocks, one-third high- yield bonds and one-third convertible bonds.
Historically, high yield and convertibles have low correlation to the traditional fixed income asset classes and are slightly negatively correlated to interest rate movements. More so, the three underlying asset classes tend to perform well regardless of interest rate environments (see Chart 1). A higher rate environment accompanied by modest inflation as the US economy reopens should benefit a wide range of companies. While there are some concerns certain companies are overvalued, there are still plenty of opportunity sets with respect to identifying companies that demonstrate the ability to improve their fundamental characteristics.
After bottoming in 2020, corporate profits should reaccelerate in 2021 amid a strong economic recovery.
According to market strategists, quarterly earnings are expected to trend higher throughout the year, resulting in double- digit year-over-year earnings growth for the S&P 500 Index (see Chart 2). US companies are well positioned to benefit from operating leverage as strengthening top-line growth is met with productivity gains, driving margin expansion and bottom-line growth.
Almost any portfolio could benefit from the many advantages that income can provide, from lowering volatility to contributing to potential total return and inflation protection. The bottom line for investors is that they must not allow short- term market uncertainty to derail their long-term goals. Investors would be wise to “re-risk” their portfolios and consider a range of income-generating strategies that have historically held up well during down markets, offering both stock-like potential returns and a way to moderate volatility.
Stay covered with Allianz Global Investors fixed income solutions. Visit sg.allianzgi.com/fixedincome
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