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

Allianz Global Investors' Source and Disclaimer

¹ Copyright © 2021 Morningstar Asia Limited (“Morningstar”). All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice. No offer or solicitation to buy or sell securities and no investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this advertisement but should seek independent professional advice. However, if you choose not to seek professional advice, you should consider the suitability of the product for yourself. The above information is used for the purpose to demonstrate the Fund’s investment strategy only, it is not a recommendation nor investment advice to buy or sell any shares of securities. Past performance of the fund manager(s) and the fund is not indicative of future performance. Prices of units in the Fund and the income from them, if any, may fall as well as rise and cannot be guaranteed. Distribution payments of the Fund, where applicable, may at the sole discretion of the Manager, be made out of either income and/or net capital gains or capital of the Fund. As a result of the payment, the Fund’s net asset value is expected to be immediately reduced. The dividend yields and payouts are not guaranteed and might change depending on the market conditions or at the Manager’s discretion; past payout yields and payments do not represent future payout yields and payments. Investment involves risks including the possible loss of principal amount invested and risks associated with investment in emerging and less developed markets. The Fund may invest in financial derivative instruments and/or structured products and be subject to various risks (including counterparty, liquidity, credit and market risks etc.). Investing in fixed income instruments (if applicable) may expose investors to various risks, including but not limited to creditworthiness, interest rate, liquidity and restricted flexibility risks. Changes to the economic environment and market conditions may affect these risks, resulting in an adverse effect to the value of the investment. During periods of rising nominal interest rates, the values of fixed income instruments (including short positions with respect to fixed income instruments) are generally expected to decline. Conversely, during periods of declining interest rates, the values are generally expected to rise. Liquidity risk may possibly delay or prevent account withdrawals or redemptions. Past performance, or any prediction, projection or forecast, is not indicative of future performance. Investors should read the Prospectus obtainable from Allianz Global Investors Singapore Limited or any of its appointed distributors for further details including the risk factors, before investing. This advertisement has not been reviewed by the Monetary Authority of Singapore (MAS). MAS authorization/recognition is not a recommendation or endorsement. The issuer of this advertisement is Allianz Global Investors Singapore Limited (79 Robinson Road, #09-03, Singapore 068897, Company Registration No.199907169Z).