LIVING ON WITH A COVID-19 HUM - ALLIANZ RESEARCH - Euler Hermes
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ALLIANZ RESEARCH
Photo on Unsplash
LIVING ON WITH
A COVID-19 HUM
24 September 2020
04 A stop-and-go approach until the return to normal in 2022
06 An initial uneven or “dual” recovery for trade, consumers and investment
08 Capital markets: Not the time to take risks
11 Political risk could be back like a boomerang
14 Fiscal and monetary policy: The devil is in the details
17 Scarring effects? Covid-19 has changed the rules of the game for economic
growth and capital markets
18 Regional outlooks
Allianz Research
Stop-and-go containment measures confirm a return to normal in 2022. After strong
post-lockdown catch-up effects, we expect the recovery to slow in Q4 2020 and Q1
EXECUTIVE
2021 as distancing measures tighten again and ongoing job shedding keeps spend-
ing and investment in check. Therefore we lower our GDP growth forecasts for 2021
to +4.6% (vs. +4.8% expected in June), following a contraction of -4.7% in 2020. Q2
data has already confirmed diverging recovery paths, with China and its Asian trade
SUMMARY partners, Germany and Brazil outpacing the rest of Western Europe and the U.S. The
sharpest trend reversals in activity should be visible starting in Q4 2020 in Europe
(mainly Spain, France and the UK), the U.S. and in Emerging Markets such as Brazil
and Mexico. In this context, the gradual phasing out of temporary policy measures
designed to support companies will lead to a major trend reversal in business insol-
vencies, with a +31% increase expected by the end of 2021.
Ludovic Subran, Chief Economist A dual recovery for trade, consumers and investors. First, despite a stronger-than-
+49 (0) 1 75 58 42 725 expected recovery in goods trade worldwide, the U.S. and Western Europe are trail-
ludovic.subran@allianz.com
ing China, Emerging Asia and Eastern Europe’s export recovery. In 2020, we forecast
a fall in global trade in goods and services by -13% (vs.-11% in 2009) in volume
Alexis Garatti, Head of Economic Research terms, leading to USD4tn of trade losses. In 2021, we forecast a +7% technical re-
alexis.garatti@eulerhermes.com bound but expect a return to pre-crisis levels only in 2023 as services continue to
struggle and calls for de-globalization emerge. Meanwhile, a loss of purchasing
Eric Barthalon, Head of Capital Markets Research power for the most fragile households will be hard to recover. The asymmetric expo-
eric.barthalon@allianz.com sure to job losses meant young, less qualified and part-time workers were hit the
hardest, implying a K-shaped or “dual” recovery in consumer spending ahead.
Ana Boata, Head of Macroeconomic Research
ana.boata@eulerhermes.com Political risk could be back like a boomerang. Odds for a no-deal Brexit have risen
to 45%, while the U.S. elections are paving the way for a new fiscal cliff and a judici-
Maxime Lemerle, Head of Sector and Insolvency ary dispute at the end of the year. In 2021, the tech war between the U.S. and China,
Research tensions in the Mediterranean Sea and the U.S.-Russia dispute will remain top of
maxime.lemerle@eulerhermes.com mind. The risk of policy mistakes for Emerging Markets that loosened their fiscal dis-
cipline to fight the crisis will rise in 2022: anticipations of higher U.S. rates should ma-
Arne Holzhausen, Head of Insurance, Wealth and
Trend Research
terialize then and debt sustainability worries could trigger pressures on EM curren-
arne.holzhausen@allianz.com cies.
Not the time to take risks. In the current market environment, it is important to con-
Jordi Basco Carrera, Fixed Income Strategist
jordi.basco@allianz.com
sider that there is greater economic uncertainty now than at the beginning of the
year, despite the current monetary and fiscal policy mix, as well as more geopolitical
Georges Dib, Economist for Latin America, Spain and risks and tighter valuations. In this context, equity markets show a persistent detach-
Portugal ment from fundamental determinants, making the recent rally hardly justifiable.
georges.dib@eulerhermes.com Because of that we still expect the equity market to underperform in 2020 and to
start a muted rally in 2021. When it comes to corporate credit, both investment
Françoise Huang, Senior Economist for APAC grade and high-yield corporate spreads look too tight. As in equities, corporate
francoise.huang@eulerhermes.com credit markets remain detached from fundamentals on the back of the central
banks’ perpetual put option. Hence, we expect corporate spreads to converge to-
Patrick Krizan, Senior Economist for Italy and Greece wards higher values due to higher than expected market volatility and increasing
patrick.krizan@allianz.com
default rates. Lastly, with the short-end of most developed countries’ sovereign yield
Selin Ozyurt, Senior Economist for France and Africa curves anchored by their respective central banks, we expect a timid curve steepen-
selin.ozyurt@eulerhermes.com ing towards the end of 2020 and 2021. This gradual increase in term premium will
occur on the back of higher inflation expectations and a halt in the recent decline of
Manfred Stamer, Senior Economist for Emerging real yields. On the other hand, long-term Emerging Market sovereign spreads look
Europe and the Middle East overbought. The combination of this extreme bullish positioning and the current
manfred.stamer@eulerhermes.com market fragility is a perfect combination for EM assets to become a victim of a sec-
ond “risk-off” rotation in the wake of a second risky-assets market correction.
Katharina Utermöhl, Senior Economist for Europe
katharina.utermoehl@allianz.com Fiscal and monetary policy: The devil is in the details. EU member states agreed on
issuing common debt to boost the recovery in a historical move. Yet the different
Markus Zimmer, Senior Expert, ESG natures and spending calendars of fiscal policies will matter: countries focusing on
markus.zimmer@allianz.com (short-term) demand (Germany, U.S., China etc.) could see a faster recovery than
those betting on supply (France). Some countries still need to do more (Spain, Italy,
the UK). In the immediate crisis aftermath, inflation is likely to remain muted despite
these policy impulses; we see it moderately and temporarily overshooting in the US
starting in 2022. On the monetary policy side, we expect an acceleration of the U.S.
Fed’s securities purchases in H1 2021, with a tapering of its QE program to only start
from mid-2022 and a first rate hike in Q3 2023. The ECB should announce an addi-
tional EUR500bn in Quantitative Easing in December 2020.
2
24 September 2020
Scarring effects? Covid-19 has changed the rules of the game for economic growth
and capital markets. First, the fight for regional primacy will lead to a regular
“weaponization” of technology, trade, currencies and payment systems. Second, the
balance between the state and markets will change, to the disadvantage of the
latter. And as the state gets more and more entangled in the private sector, market
dynamics for innovation will get weaker while the number of zombie companies
rises. Private players in social security – such as life insurers – might be pushed
against the wall. The growing role of the state also has ramifications for monetary
policy. High (unsustainable) debt levels will force central banks to backstop sove-
reign and corporate bond markets to ensure favorable refinancing conditions. In the
end, these ultra-expansionary monetary policies may strip markets of their ability to
price and allocate resources appropriately and encourage excessive risk-taking by
both debtors and investors. However, every cloud has a silver lining: Covid-19 has
showed how quickly change is possible; it is a welcome break-up of encrusted struc-
tures and a boost to digitalization. The way we work has changed for good. Future
work will see more remote working and flexible team structures but less business
trips. Finally, it has also raised society’s risk awareness, including for low-probability,
high impact tail risks. The upshot: More demand for and better pricing of risk cover.
This should be a boon for insurers – if they are able to offer comprehensive and
simple solutions.
-4.7%
Forecast for global
GDP contraction in 2020.
3
Allianz Research
A STOP-AND-GO APPROACH UNTIL
THE RETURN TO NORMAL IN 2022
Q2 data confirmed an unprecedented evolution of the sanitary crisis. Back in potential access to potential vaccines.
contraction in global GDP (-6.1% q/q vs. April we identified four different phases Phase 3 will also see the implementa-
-7.0% q/q expected by us) after the Co- of the Covid-19 crisis. During phase 1, tion of new fiscal stimulus packages but
vid-19 shock, close to four times worse characterized by the urgency of mo- a slightly lower degree of central bank
than the 2009 trough and double the netary, fiscal and sanitary measures, activity, keeping the global economy
Q1 contraction. However, some coun- real activity suffered heavily from the below pre-crisis levels until end-2021.
tries were hit much harder than others lockdowns, as mirrored by the sharp
due to differences in lockdown intensity contraction of GDP across countries. Still some way to go until we reach the
and in the structure of their economies Now, we are in phase 2, characterized fourth and final phase of the Covid-19
(share of services vs. manufacturing): by more targeted and progressive sani- crisis: What would it take for a full nor-
France (81% of pre-crisis GDP level), tary restrictions in response to rising malization by 2022? We assume a fina-
Italy (83%), the UK (78%) and Spain infections, with persisting threats of a lization of vaccination campaigns in
(77%) were much more impacted than lockdown in countries where the se- mid-2022. From the beginning of 2022
the U.S. (90%), Germany (88%) and the cond wave materializes. Hence, the onwards, vaccines should be available
Netherlands (90%). recovery is expected to soften in Q4 at a large scale for the most advanced
During the summer, de-confinement and in some cases transform into a W- countries in this race (Russia, China, UK
strategies gained traction, allowing shaped one. We expect the highest and the U.S.) and be progressively dis-
several positive surprises in the econo- trend reversal activity in Q4 in Europe tributed to the rest of the world. In line
mic data, notably for order books, the (France, Spain, UK) and in the U.S. with the World Health Organization’s
residential market and retail sales, (WHO) own assessment, the full distri-
thanks to pent-up demand post- Phase 3 of the Covid-19 crisis: Transitio- bution of a vaccine at a global level
lockdown. On the industrial side, global ning towards normalization, with a stop could be completed by the end of
production stood at -8% y/y in June -and-go approach until the end of 2022. In this context, stringency indices
(after a trough at -16% y/y in April) and 2021. During phase 3 (from Q4 2020 should return to their minimum levels
confidence in the manufacturing sector until end-2021), we expect a succession and 80% of global GDP will be back to
reached pre-crisis levels. This confirmed of tighter and targeted sanitary restric- pre-crisis levels. However, we should
our call of a faster return to pre-crisis tions, followed by periods of easing. not underestimate the risk of a possible
levels for activity in the manufacturing This stop-and-go trend in stringency will temporary disruption in the transporta-
sector (vs. services). continue until end 2021, assuming a tion sector during the global vaccina-
However, we think the recovery will lose vaccine would be widely available from tion campaign. In fact, vaccine delivery
steam in Q4 on the back of tighter sani- September 2021 and that at least 6 could mobilize half of the global trans-
tary restrictions and the ongoing job months would be needed for vaccina- portation capacity for several months.
shedding, which will keep spending tion campaigns. While it will not freeze
and investment plants in check. the new investment cycle, it will hamper
it, causing asymmetries across countries
We remain in Phase 2 of the Covid-19 due to heterogeneous initial conditions,
crisis, which means re-opening will re- different sized stimuli, variable re-
main divergent and dependent on the confinement strategies and unequal
4
24 September 2020
Figure 1: Real GDP forecasts, %
2017 2018 2019 2020 2021
World GDP growth 3.3 3.1 2.5 -4.7 4.6
United States 2.4 2.9 2.3 -5.3 3.7
Latin America 1.0 1.0 0.1 -7.9 3.3
Brazil 1.3 1.3 1.1 -6.5 2.5
United Kingdom 1.8 1.3 1.5 -11.8 2.5
Eurozone members 2.7 1.9 1.3 -7.9 4.8
Germany 2.8 1.5 0.6 -6.0 3.5
France 2.4 1.8 1.5 -9.8 6.9
Italy 1.7 0.7 0.3 -10.1 4.2
Spain 2.9 2.4 2.0 -11.8 6.4
Russia 1.8 2.5 1.3 -5.1 2.9
Turkey 7.5 3.0 0.9 -4.7 4.0
Asia-Pacific 5.2 4.7 4.2 -1.5 6.2
China 6.9 6.7 6.1 2.0 8.4
Japan 2.2 0.3 0.7 -5.5 2.5
India 7.0 6.1 4.2 -7.2 6.5
Middle East 1.4 0.9 0.3 -7.1 2.3
Saudi Arabia -0.7 2.4 0.3 -5.1 2.0
Africa 3.1 2.7 1.9 -4.3 3.4
South Africa 1.4 0.8 0.3 -8.2 2.7
* Weights in glob al GDP at market price, 2019
*Weights in global GDP at market price, 2019
NB: fiscal year for India
NB: fiscal year for India
Sources: national sources, Allianz Research
Watch out for the massive trend rever- ures. Our EH Global Insolvency Index to increase by +10% y/y in 2020 and by
sal in business insolvencies. Up to Sep- posted a -13% y/y decline in Q2 and - +19% in 2021. We expect all regions to
tember 2020, the temporary adjust- 7% y/y for H1. This decline continued in post a double-digit increase in insolven-
ments made to insolvency frameworks most countries during the summer. Yet, cies by 2021 but with an uneven tempo
across countries - designed to give time the overall outlook remains that of a between 2020 and 2021, ranging from
and flexibility to companies before they sharp increase in insolvencies by 2021 +21% in Asia to +64% in North America.
resort to filing for bankruptcy – as well (+31% by 2021 compared to 2019). This In 2020, the larger increases are ex-
as the temporary business support trend reversal will begin in Q4 2020 in pected in North America, Latin America
measures (such tax deferrals, social most countries and accelerate in H1 and Central Europe, while Western Eu-
security charges and loan repayments; 2021 amid the gradual withdrawal of rope and Asia will post larger annual
guaranteed loans, etc.) designed to various support measures and the zom- increases in 2021.
prevent liquidity crisis, have resulted in bification of many companies. This
significant decreases in business fail- would lead our Global Insolvency Index
Figure 2: Insolvency figures and forecasts (selected countries)
2020 Forecasts
Last point 3m y/y Ytd y/y 2020 2021 2020 y/y 2021 y/y 2021/2019
U.S. June -11% -3% 31500 37500 39% 19% 65%
Canada July -26% -30% 2850 3450 4% 21% 26%
Brazil June -26% -16% 3450 3800 20% 10% 32%
Germany June -9% -6% 19350 20850 3% 8% 11%
France August -37% -36% 46800 62000 -9% 32% 21%
United Kingdom June -31% -20% 22929 30072 4% 31% 36%
Italy 11660 14039 6% 20% 28%
Spain August 13% -1% 4600 5600 11% 22% 35%
The Netherlands August -23% -7% 4000 5000 5% 25% 32%
Russia June -25% -4% 13800 14500 18% 5% 23%
Turkey July 8% 4% 17200 18400 22% 7% 31%
Poland July 32% 3% 1100 1210 13% 10% 24%
South Africa July -7% -20% 2280 2450 12% 7% 20%
Morocco June -87% -38% 8861 10456 5% 18% 24%
China August 1% 7% 13500 14700 14% 9% 24%
Japan August 1% 0% 8600 9400 3% 9% 12%
India June -75% -25% 750 2100 -60% 180% 11%
Australia July -51% -34% 6150 7150 -4% 16% 12%
South Korea August -34% -41% 400 470 -3% 18% 14%
GLOBAL INDEX 10% 19% 31%
Sources: national sources, Allianz Research
5Allianz Research
AN INITIAL UNEVEN OR “DUAL” RECOVERY
FOR TRADE, CONSUMERS AND INVESTMENT
Recovery for trade in goods, but result of the faster recovery of mer- The loss of purchasing power for most
remember it’s a services crisis chandise trade, we revise upwards our fragile households will be hard to reco-
forecast of a yearly contraction of ver
Global merchandise trade suffered a trade in goods and services from -15%
historic blow in Q2 2020 compared to to -13% (compared to -11% in 2009) in After a historical wave of layoffs, which
Q2 2019, contracting by close to -15% volume terms. The recent depreciation brought the U.S. unemployment rate to
in volume terms y/y and -21% in value of the USD should alleviate the nega- 14.7% in April 2020, job market condi-
(USD) terms. Overall, in H1 2020, mer- tive price effect of the oil and commo- tions improved alongside the reope-
chandise trade was -9% lower than in dity price shock in H1, bringing the ning of the economy. However, U.S.
H1 2019 in volume and -13% in value trade contraction in USD value terms to initial claims recently rose to close to
terms. Yet June figures and the latest -16% this year (vs. -20% in our previous one million, confirming the fact that the
real-time maritime data show that in forecast). This is equivalent to USD4tn recovery is running out of steam. The
August, maritime trade (80% of total of trade losses. policy cliff effect is visible via the addi-
trade) was back at only -3% below the In 2021, global trade in volume terms tional payment on U.S. unemployment
levels of a year earlier. The recovery in should grow +7%, and in value terms it benefits, which has been reduced from
merchandise trade was thus faster than could grow by +13%, finally recovering USD600 per week to USD400 per week
we previously expected, outpacing the all its losses by early 2023. The recovery from August until 06 December amid
2009 recovery. However, the U.S. and in global demand will drive trade vo- large uncertainties over the voting of a
Western Europe are trailing China, lumes, while values will be helped by a new stimulus package by the U.S. Con-
emerging Asia, and Eastern Europe’s lower USD (EUR1=USD1.15 in 2020 and gress.
export recovery. On the services side, 1.22 in 2021 vs. 1.12 in 2019) and mo-
we estimate the collapse in the value of derately higher commodity prices
trade was even stronger in Q1 (-18.5%) (Brent oil at USD44 in 2020, USD51 in
and could be much worse in Q2. As a 2021).
Figure 3: Global trade growth, in volume terms and value (%, y/y)
15%
Volume Price Value
13.0%
10.2%
10% 9.7%
3.3% 4.0% 6.0%
5% 3.0% 5.0%
2.5% 7.0%
2.8% 5.5% 1.3%
1.9% 4.3% 3.5% 3.2%
0%
-2.0%
-1.6%
-5%
-13.0%
-10%
-10.8%
-15%
-16.0%
-20%
-25%
13 14 15 16 17 18 19e 20f 21f 22f 23f
Sources: national sources, Allianz Research
624 September 2020
In Europe, the adjustment of the job Workers under the age of 25 repre- lockdown and whose employment has
market is less visible because of the sent close to 26% of people not been impacted by its fallout.
priority given to job protection with par- working in sectors highly exposed
tial unemployment mechanisms (vs. to Covid-19, against 10% for those But we doubt that this boom is sustain-
enhanced unemployment benefits in sectors that are less exposed. able. After all, in many development
the U.S.). In the five largest European Part-time workers make up 32.3% economies, housing markets are cur-
countries, we estimate that 9 million of labor in highly exposed sectors rently still shielded from the economic
workers or 20% of those currently enrol- versus 18.5% in other sectors implications of the pandemic, thanks to
led in short-work schemes face an ele- Workers with a lower educational government support measures includ-
vated risk of becoming unemployed in attainment have a much higher ing mortgage payment holidays, stamp
2021 because of the muted recovery in weight in highly exposed sectors duty cuts as well as short-work
late bloomer sectors and the “policy The median hourly wage of full- schemes. As these are phased out and
cliff” effect i.e. the end of emergency time highly exposed workers is at the consequences are felt more –
public support measures. The Eurozone USD17 versus USD 23 for the non- above all in the form of rising unem-
unemployment rate increased from highly exposed ones ployment and tighter mortgage condi-
7.2% in March 2020 to 7.6% in June and The lowest quintiles in family in- tions – the pandemic could yet bite
should end 2021 at 9.4% come are over-represented in housing markets as many households
This asymmetric exposure to job losses highly exposed sectors. will be priced out of the market. This is
implies a K-shaped or “dual” recovery in already visible in the U.S. where the
consumer spending. The social charac- A K-shaped recovery is also visible in most fragile households face difficulties
teristics of those most exposed to job the housing market. In sharp contrast to as evidenced by the significant increase
losses can explain interesting patterns the 2008 crisis in the U.S. and the Euro- of the default rate.
in terms of consumer spending. Spen- zone debt crisis, the Covid-19 crisis has The recovery of residential investment
ding on durable goods has out- not seen a collapse of housing markets and the stock market rally hide the Co-
performed as car sales experienced a but has rather proven to be a source of vid-19 profitability shock. This should
strong rebound (due to the preference stability, with property prices up across weigh on corporate investment inten-
for avoiding public transportation), major developed economies. One fac- tions, notably as a majority of state sup-
while spending in equipment for hou- tor driving this trend is central banks’ port schemes arrive at maturity by the
sing followed the strong rebound in ultra-expansive policy response, which end of 2020. Cash-hoarding in the pri-
housing activity. However, Eurozone has sent mortgage rates to record lows. vate sector shows a lack of confidence
and UK household saving intentions Beyond low rates and demand pent up and suggests a difficult start for a new
stood at a record high in July, reflecting during the pandemic, sales have been investment cycle. On the financial mar-
consumer cautiousness as their expec- driven by households looking for more kets side, dual strategies between short
tations of rising unemployment in the space for remote working and/or learn- -term and long-term investors, between
next 12 months has hit to its highest ing, as well as well as larger houses retail and institutional investors, as well
level since 2009. We expect the saving with gardens in suburban and rural as the strong influence of administrated
rate in the U.S. and in Europe to remain areas as commuting times now matter aspects, point toward higher volatility
significantly above pre-crisis levels for less. Moreover, constrained supply with to come. At the same time, while the
the rest of 2020 and until the end of the shutdown weighing on construction wave of liquidity sparked by central
2021. But behind these macro-trends activity has also pushed up prices. But banks preserved the financial market
hides a more detailed picture of the the stellar headline figures – with for from stress, it is also further inflating
unequally distributed hit from Covid-19 instance property prices in the UK rising imbalances and underlying risks.
and divergent recovery thereafter. to an all-time high in August – conceal
A look at U.S. statistics helps compre- a very polarized market: This is not a
hend the magnitude of K-shaped boom for everyone; rather, housing
trends that can be seen in many deve- markets are currently propped up by
loped economies: buyers that were not affected during
Photo on Unsplash
7Allianz Research
CAPITAL MARKETS:
NOT THE TIME TO TAKE RISKS
In the current market environment, it is comes to corporate credit, both in- 2020 and 2021. This gradual increase
important to consider that there is vestment grade and high-yield corpo- in term premium will occur on the back
greater economic uncertainty than at rate spreads look too tight. As in equi- of higher inflation expectations and a
the beginning of the year despite the ties, corporate credit markets remain halt in the recent decline of real yields.
current monetary and fiscal policy mix; detached from fundamentals on the On the other hand, long-term Emerging
there are more geopolitical risks than back of the central banks’ perpetual Market sovereign spreads look over-
at the beginning of the year and valua- put option. Due to that, we expect cor- bought. The combination of this ex-
tions are tighter. In this context, equity porate spreads to converge towards treme bullish positioning and the cur-
markets have been showing a persis- higher values due to higher than ex- rent market fragility is a perfect combi-
tent detachment from fundamental pected market volatility and increasing nation for EM assets to become a vic-
determinants, making the recent global default rates. Lastly, with the short-end tim of a second “risk-off” rotation in the
equity market rally hardly justifiable. of most developed countries’ sovereign wake of a second risky-assets market
Because of that, we still expect the EQ yield curves anchored by their respec- correction.
market to underperform in 2020 and to tive central banks, we expect a timid
start a muted rally in 2021. When it curve steepening towards the end of
Figure 4: Capital markets forecasts 2020-2021
year-end figures Latest Value Unit 2020 2021
Eurozone
Sovereign Rates
year-end figures Latest Value Unit 2020 2021
Eurozone
Sovereign Rates
10y yield “risk-free” sovereign (Bunds) -0,5 % -0.5 -0.3
10y Swap Rate -0,2 % 0.0 0.3
Italy - Germany spread (10y) 148 bps 175 (220) 160 (170)
France - Germany spread (10y) 27 bps 40 (90) 30 (40)
Spain - Germany spread (10y) 75 bps 90 (110) 80 (70)
Corporate Credit Spreads
Investment grade credit spreads 113 bps 180 150
High yield credit spreads 438 bps 750 600
Equities
MSCI EMU: total return p.a -9 % -22 10
United States
Sovereign Rates
10y yield “risk-free” sovereign
0,7 % 1 1.4
(Treasuries)
Corporate Credit Spreads
Investment grade credit spreads 136 bps 230 180
High yield credit spreads 514 bps 800 650
Equities
MSCI USA: total return p.a. in USD 3 % -20 15
Emerging Markets
Sovereign Rates
Hard Currency Spread (USD) 341 bps 450 370
Equities
MSCI EM: total return p.a. in USD -4 % -24 20
* Old forecasts in parenthesis
** We have reviewed our EUR spreads down as the ECB impact on peripheral spreads was larger than anticipated.
Sources: Allianz Research, Refinitiv
824 September 2020
Global bond markets: pricing stagfla- been rising while real yields remain at inflation rate of 2%, (i.e. allowing some
tion. Despite the recent repricing of historical lows. Overall, U.S. and EUR overshooting above 2%). According to
long-term inflation expectations, nomi- government bond markets are unwil- our “fair value” estimation, inflation
nal yields have barely budged, thanks ling to believe in a rapid economic re- expectations are unlikely to substantial-
to a fall in real yields. To put current covery scenario and are positioned for ly overshoot the 2% upper limit. In con-
levels into perspective, at -1.1% real a stagflation one. trast, EUR long-term inflation expecta-
yields are now at the lowest point in U.S. inflation expectations: back to tions are nowhere near their “fair va-
recorded history. The current bearish square one. The recent increase in oil lue”, as monetary stimulus has not yet
growth positioning within the U.S. go- prices and employment has led U.S. convinced market participants. Accor-
vernment bond market contrasts with long-term inflation expectations to fol- ding to our model, EUR inflation expec-
the latest equity market exuberance, low a V-shaped trajectory around their tations could still move closer to 1.5% in
although partially corrected, fueling March low. Since the trough, inflation the near future, but any overshoot
doubts about the mid-term equity rally expectations have been on an upward beyond that level would not be sustai-
sustainability. As in the U.S., long-term trajectory, exacerbated by the Fed’s nable.
inflation expectations in the EMU have recent decision to target an average
Figure 5a: U.S. market-based inflation expectations model Figure 5b: EMU market-based inflation expectations model
% %
3,0 3,0
2,5 2,5
2,0 2,0
1,5 1,5
10-Year EUR breakeven inflation rate
1,0 10-Year US TIPS breakeven inflation rate
1,0
In sample estimation
In sample estimation Out-of-sample forecast
Out-of-sample forecast
+/- 1 std-deviation
0,5 +/- 1 std-deviation 0,5
0,0 0,0
04 06 08 10 12 14 16 18 20 08 10 12 14 16 18 20
Sources: Allianz Research, Refinitiv Sources: Allianz Research, Refinitiv
Where are the institutional bulls? The nies usually clustered around one in- Corporate credit: hard to keep a pro-
recent U.S. equity market frothiness is dustry group / economic sector. These mise. Since April, the Fed has bought up
relatively hard to explain as both mu- days, the technology sector accounts to ~45bn worth of corporate credit.
tual fund and ETF flows show persistent for more than 25% of the U.S. EQ mar- However, since the beginning of July, it
transfers from equity funds towards ket capitalization. Additionally, the con- has significantly reduced its weekly pur-
fixed income and money market funds. centration risk is higher since the sector chases as credit markets are once
This is a symptom of the actual market not only accounts for more than one again extremely tight. Yet, credit mar-
fragility as structural long-term inves- fourth of the index, but the number of ket spreads have not reversed back to
tors seem unwilling to participate in the companies within the sector itself has pre-Covid-19 levels and remain 10-20%
market, thus leaving the floor to stock been reduced by 20-40% since the dot- above pre-pandemic levels. In contrast,
pickers and option traders (e.g. Soft- com bubble. In the case of the Euro- the USD1.919trn U.S. corporate credit
bank). However, the Eurozone equity zone, the equity market has been per- issuance in the first nine months of 2020
market does not show any signs of manently dominated, in terms of has already surpassed the historical
exuberance (yet) as most EUR equity weight, by the financial sector. Ne- record of USD1.916trn set during the 12
indices have settled around -10%ytd. vertheless, this dominance is starting to months of 2017. Interestingly, most of
Nevertheless, looking at fund flow data, be challenged by the technology and that fresh money will most likely not be
one can see a small acceleration in the healthcare sectors, as their respective invested into the issuing companies as
inflows into EUR EQ funds, with Germa- weights within the market have increa- 42% of all new issuances are expected
ny and France leading the pack. sed since the 2008 crisis. This over- to be dedicated to debt refinancing
Technology, the outstanding student. concentration in tech-related risk has purposes.
Historically, each financial cycle has led major indices to underperform du-
been led by a limited group of compa- ring the latest market correction.
9Allianz Research
Figure 6: U.S. Federal Reserve Corporate Purchases (USDbn) vs spreads (bp)
50 Commercial Paper 1200
Corporate Credit
45 Investment Grade Spread (RHS)
High Yield Spread (RHS)
1000
40
35
800
30
25 600
20
400
15
10
200
5
0 0
Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20
Sources: Allianz Research , Refinitiv
Equity exuberance: high expectations! 02 September). In the past, this per- appreciation is to be expected from
The equity market is falling prey to a ceived return has been higher in only further PE expansion; EPS growth will
positive feedback loop whereby rising 1.2% of observations (i.e. six days out of be the main driver of its future return,
prices increase the demand for equities, 500). As this expectation disproportion- but 50%+ earnings growth looks ambi-
which in turn fosters a further rise in ately depends on recent price move- tious and unsustainable. Consequently,
prices. We estimate, for example, that ments (the ones observed during only equity markets may keep hissing in the
the recent performance of Apple leads the last 1.6 years), it is inherently unsta- near future.
market participants to expect a 56.7% ble. Furthermore, as the Apple stock is
annual return from the company (as of already trading at a multiple of 40, little
Figure 7: U.S. tech sector – expected return
Expected annual rate of return Relevant past data for current
02/09/2020 Price
(%) return determination (in years)
Alphabet-Google 1,717.39 21.5 3.62
Amazon 3,531.45 56 1.66
Apple 131.4 56.7 1.58
Bitcoin 11,398.44 46.1 1.79
Oil Brent 44.51 -0.8 24.21
Facebook 302.50 20.9 3.64
Gold 1 940.23 7.6 7.27
Microsoft 231.65 33.3 2.5
Netflix 552.84 46.7 1.86
Tesla 447.37 228.2 0.6
TRY to 1 USD 7.38 18.4 3.92
Zoom Video Comm. 423.56 38.7 1.97
Sources: Allianz Research , Refinitiv
10
1024 September 2020
POLITICAL RISK COULD BE BACK
LIKE A BOOMERANG
Markets look complacent but are not EU has threatened sanctions, the likeli- think the worst-case scenario can still
blind to the return of short-term politi- hood of a Hard Brexit at year-end has be avoided.
cal risk: (i) Brexit, (ii) U.S. elections; (iii) considerably increased (from 20% to Back in 2019, Boris Johnson tried a simi-
tensions in the Mediterranean Sea; (iv) 45%); the deadline for an agreement at lar strategy of harsh threats before
continued protectionism / a new “tech” the European Council on 15-16 Octo- agreeing to the Withdrawal Agreement
war; (v) U.S.-Russia tensions. ber seems difficult to meet. While the 10 days later. However, should a Hard
economic environment is not conduc- Brexit materialize by the UK not asking
Odds for a no-deal Brexit at year-end tive for a Hard Brexit, as the UK was hit for an extension of the transition peri-
have considerably increased (45%), but particularly hard by the Covid-19 crisis, od, we think that it will return to the
we expect a last-minute compromise, but also given extremely low interest negotiating table in 2021. A Hard Brexit
with a FTA implementation by end- rates and market complacency with is likely to be very costly politically for
2021. UK PM Boris Johnson unexpect- regard to public debt levels, the UK the Conservative Party as it will not only
edly decided to make a last-minute government might deem it “feasible” as cause serious economic disruption
change in the Withdrawal Agreement it would count on increased fiscal and (close to -5% contraction in GDP, drop
that was ratified by both the UK and monetary support to help UK compa- of -15% of exports and above 4% infla-
the EU in January 2020. There are two nies withstand the shock (including sub- tion) but it also risks compromising the
main points on which the UK seeks sidies and a moratorium against com- finalization of around 20 international
greater flexibility, notably in the context pany defaults). However, given the high FTAs that are currently under negotia-
of a no-deal by year-end: (i) state aid risk of social tensions on the island of tion (incl. the one with the U.S., notably
for Northern Ireland, which is deemed Ireland (against the 1998 Belfast in the context of a potential Joe Biden
to be subject to EU regulations; (ii) the Agreement), the loss of popularity for Presidency). Hence, we think early elec-
border in the Irish sea and the dual cus- Boris Johnson in favor of the Scottish tions are likely in this scenario, which
tom checks post exit from the Custom National Party and Labor Party, as well could lead to a minority government
Union. As this last-minute turnaround as the highly probable blocking of a and make the final FTA take longer.
goes against international law and the Hard Brexit by the House of Lords, we
Figure 8: Brexit scenarios and economic impact
Soft Br exit with ver y-last m inu te c om pr om ise and F TA im plem entation Har d Br exit on Jan 1st, 2021 with likely c om ebac k into negotiations du r ing 2021 after
by m id-2021 (55%) ear ly elec tions (45%)
2020 2021 2020 2021
-11.8 + 2.5 -10.9 -4.8
-13.3 5.9 -12.0 0.7
-26.8 -15.1 -26.8 -25.8
-13.7 1.8 -13.7 -13.0
0.7 1.5 0.7 4.5
7.0 8.5 7.0 10.0
-2.0 -3.0 -2.0 -10.0
4.0 31.0 4.0 53.0
QE increased by 5% of GDP (around GBP100bn) and implemented until mid-2021, rates unchanged at 0.1% Rates cut into negative territory and QE increased by GBP250-300bn, similar to the Covid-19 package
4% of GDP in 2021 mainly focused on infrastructure spending and measures to protect consumers
2% of GDP in 2021 (after only 1.5% in 2020)
purchasing power. State guaranteed loans prolonged until end-2021.
mainly focused on infrastructure spending and tax cuts
10y GILT at 0.4%(eoy) 10y GILT at 0.6%(eoy) 10y GILT at -0.2%(eoy) 10y GILT at 0.1%(eoy)
FTSE 100 at -22%yoy (eoy) FTSE 100 at +10%yoy(eoy) FTSE 100 at -50%yoy (eoy) FTSE 100 at -10%yoy(eoy)
Source: Allianz Research
11Allianz Research
U.S. elections have the potential to remote voting. There is therefore a high China’s leading chipmaking compa-
create a judiciary battle with a climate probability just after the end of elec- nies, saw its shares tumble after the U.S.
of extremely high uncertainty. We tions that Republicans could be in a took steps to blacklist it. Moreover, (i)
maintain our 2018-2019 call of a pos- lead position for the time needed to U.S. Secretary of State Mike Pompeo
sible victory of Biden in the approa- access and collect all ballots. Then it has threatened a broad crackdown on
ching U.S. elections. Initially this was could take a month to eventually con- Chinese tech companies with access to
based on traditionally pro-Republican firm a Democrat win. President Trump American data, including barring an
voters, i.e. farmers and inhabitants of has already announced that he could unspecified number of the country’s
the rust belt, being the victims of the reject the result of an election organi- apps and limiting its cloud computing
current U.S. President’s protectionist zed with mass mail-voting. A risk scena- groups that operate on American soil;
policy. The Covid-19 crisis has led to an rio could therefore bring us to the Su- (ii) the White House’s fiscal year 2021
accentuation of the Democrat lead as preme Court for one or two months of budget proposal includes USD1.5bn for
Joe Biden now benefits from 50.7% of extremely high uncertainty. artificial intelligence (+USD0.38bn com-
vote intentions, while President Trump pared to 2020), and USD699mn for
currently stands at 42.6%. Paradoxical- Tensions in the Mediterranean Sea are quantum information science
ly, the outcome of the election could likely to create more noise than facts. (+USD120mn); (iii) members of Con-
not be as clear-cut as suggested by We think that the situation will remain gress have introduced bills aiming at
public opinion polls. Indeed, bet polls under control as Turkey is more likely to (a) boosting domestic semiconductor
suggest that the race could be much seek a (financial) compromise rather manufacturing – remaking the Natio-
tighter as the approaching debates than a military escalation while the EU nal Science Foundation, and creating a
between Biden and President Trump will not agree on a unified military in- national research cloud, (b) making
could represent a risk for the Democrat tervention. Nevertheless, an “accident” immigrant visas more easily attainable
leader, who will be challenged by the cannot be ruled out entirely. In the for AI-specialized profiles and people
intensity of the debate. short run, this should keep uncertainty with knowledge of other valuable tech-
The end of 2020 will see an extremely at high levels amid the already fragile nologies for national security. On the
high level of uncertainty in the U.S. be- diplomatic relationship between Turkey Chinese side, policy moves include: (i)
cause of these elections. Tangible si- and the EU. Any economic impact will the National People’s Congress’ five-
gnals of this nervousness are already mainly be felt by Turkey, which is alrea- year USD1.4trn plan allowing munici-
visible in the option market, which mir- dy in dire straits. The country is on the palities, provinces and companies to
rors a significant increase of the risk brink of another severe currency crisis, invest in building new infrastructure on
premium during this election period. owing to its questionable policy res- AI, data centers, 5G, the Industrial Inter-
U.S. banks are also rushing to issue ponse to the Covid-19 crisis, as well as net and other new technologies; (ii)
debt in advance as they bet on much other critical political involvements out- other policies to support the chip indus-
higher volatility and tighter credit con- side its borders (Syria, Libya). The latest tries: tax benefits, R&D support, incen-
ditions at the end of the year. event could be the tipping point for tives for international semiconductor
Moreover, only 25% of Democrat voters Turkey to slide into a full-blown finan- companies to relocate to China; (iii) as
traditionally opt for the direct vote, the cial crisis, and that could also prevent many as 3,000 chip engineers, inclu-
rest preferring to use mail votes, whe- the situation from escalating too much. ding top-level talent from Taiwan’s
reas two thirds of Republican voters world-leading companies, having been
use to opt for direct vote. The context of 2021 will see an intensification of the attracted to mainland competitors; (iv)
Covid-19 has incited states to send a new cold “technology” war. After a suc- Beijing establishing a USD29bn semi-
record high level of ballots to allow cessful listing in mid-July, SMIC, one of conductor fund.
Photo on Unsplash
1224 September 2020
Figure 9: U.S. election scenarios
Scenario Biden large victory Biden short/contested victory Trump short/contested victory Trump large victory
Probability 30% 40% 20% 10%
• Trump cannot claim there was • Trump victory claim before full counting of • Biden refuses verdict – argues for Russia • Biden cannot advocate for
fraud. ballots interferences, potential voting fraud, institutional fraud.
• Democrat majority in congress. • Fraud claim after Biden’s victory official pressures, voter suppression • Whole congress turns
Scenario • Rapid voting of a USD 3.7 trillion • Possible validation from the supreme court 1 • No clear majority in the Congress. Democrat house, Republican.
description package over next 10yr to 2 months after election Republican Senate
• Negotiation blockade on budget in the • Validation from the supreme court 1 to 2 months
Congress maintains a possibility of after the election possible.
shutdown until Q2 2021.
• New investment cycle with big • Less ambitious program. Consensus on • Supply-side policy, extended tax cuts for individuals, • Tax cuts, new protectionist
infrastructure projects and Infrastructure projects but lower re- Smaller size Infrastructure project. Uncertainty on measures, bipartisan adoption
redistributive policies. distribution in favor of households, not external policy, perspective of harsher tone on of infrastructure program, but
• Decline of unemployment rate at fulfilling half the promise of increasing China and re-shoring weighs on the investment less extensive than Biden
Economic
5.5% by the end of 2022 (8.4% corporate tax rate from 21% to 28% cycle despite tax cut announcements. because of less ambitious
impact today). • US GDP growth comes at -5.3% in 2020; • Bold moves on the external side (tech cold war, green plan.
• US GDP growth at -5.3% in 2020, +3.7% in 2021 and +2.5% in 2022 tariffs, & sanctions on US companies located • US GDP growth comes at -
+4.2% in 2021 and +3.0% in 2022 abroad) penalizes growth (-5.3% in 2020; +1.7% in 5.3% in 2020, 2.7% in 2021,
2021 and +1.2% in 2022) 1.8% in 2022
• FED balance sheet levels off as • FED balance sheet increases until end-Q2 • FED balance sheet increase until end Q3 2021, • FED balance sheet levels off in
early as Q1 2021 after a steady 2021 (to alleviate significant amount of then levels off. Political uncertainty is as high as in Q2 2021 after a steady increase
FED response increase since Q4 2020. uncertainty) then levels off. the short Biden victory case. since Q4 2020.
• First rate hike as early as Q3 2022 • First rate hike from Q3 2023 only. • First rate hike Q1 2024 • First rate hike Q4 2023
• The dollar is set to depreciate • The dollar is set to depreciate versus the • The dollar is set to depreciate versus the EUR by up • The dollar is set to depreciate
versus the EUR by up to 2,5% EUR by up to 5% (~1.25) within the next 12 to 7.5% within the next 12 months; versus the EUR by up to 10%
USD within the next 12 months; months; • Then re-appreciates by 2-3% one year later within the next 12 months;
• Then re-appreciates by 4-6% one • Then re-appreciates by 2-3% one year later • Then re-appreciates by 4-6%
year later one year later
10-year • 1.25% at the end 2020; 1.8% at the • 1% at the end 2020; 1.4% at the end of • 1% at the end 2020; 1.4% at the end of 2021 • 1.15% at the end 2020; 1.6% at
end of 2021 2021 the end of 2021
Treasury yield
Source: Allianz Research
Recent official gatherings suggest that strong responses against other coun- latory restrictions will continue to dam-
China’s international relations tries could be decided (especially when age doing business in Russia in 2020–
(particularly those with the U.S. and sovereignty issues are at stake), but we 2021, with firms linked to the Kremlin
some of its allies) are likely to affect the think it unlikely that Chinese authorities being the most likely targets for poten-
country’s economic planning. Chinese would actively damage external rela- tial new sanctions. The events in and
authorities are currently preparing the tions and risk economic links and access related to Belarus resemble those that
14th five-year plan (2021-2025), which to foreign technology. occurred in 2013-2014 in Ukraine. Rus-
will be discussed and finalized in Octo- sia will not accept a democratic and
ber 2020 and we expect goals such as Russia may experience intensified potentially Western-friendly regime in
continuing the upgrade of China’s man- Western sanctions while trade will shift its neighbor and will, if necessary, know
ufacturing base and rebalancing fur- to China. Two recent events have led to how to prevent this.
ther towards domestic demand are still a further deterioration in Russia- Russia will continue to pursue its politi-
likely to be included.. After the imple- Western relations: (i) Russia’s support cal interests strongly, notwithstanding
mentation of the National Security Law for Belarusian President Lukashenko, any (potential) adverse economic
in Hong Kong in July this year, there are whose disputed re-election in August effects. We believe that it is even willing
concerns China could turn more ag- 2020 has caused ongoing social unrest to risk a last-minute collapse of the
gressive in its (geo)political strategy. as well as Western condemnation; (ii) Nord Stream 2 pipeline project with
This is not in our central scenario. While the apparent poisoning of Alexei Na- Germany. Western FDI inflows to Russia
China aims to increase its global posi- valny, currently the most prominent already dropped sharply in the wake of
tion in the long run, a complete reversal leader of Russia’s independent opposi- the 2014 sanctions and have never re-
of current orders in coming years is un- tion. Existing Western sanctions – likely covered. Non-sanction-imposing coun-
likely. There seems to be a growing view to become more and more permanent tries, notably China, compensated for
among Chinese officials that a prag- – combined with the threat of new re- that, in part. We expect that this re-
matic long-term term approach needs strictions, especially by the U.S., and balancing of Western trade and invest-
to be adopted. That is not to say that retaliatory Russian sanctions and regu- ment flows to China will continue.
13Allianz Research
FISCAL AND MONETARY POLICY:
THE DEVIL IS IN THE DETAILS
Disinflation in the short-run, temporary progressively fade as the global econo- overshoot (to around above 2.3% - 2.5%
overshoot in the medium-run my will gradually return to pre-crisis y/y in the U.S.), but for a limited period
levels in 2022-23 amid a synchronized of time. Crucially, central banks’ tole-
2020: The immediate crisis aftermath – acceleration in global growth. Pent-up rance will depend on the key driver
messy, as both supply and demand demand will emerge, supported by the behind inflationary pressures.
collapse. In the very short run, inflation reduction in excess savings, while the
is likely to remain muted as a result of full transmission of fiscal stimulus pack- A sustained shift to fiscal dominance is
the sharp decline in economic activity, ages will be visible. Consequently, oil unlikely. Confidence in central banks
lower oil prices and limited monetary prices are likely to accelerate modera- independence should thus remain in-
policy pass-through on the back of high tely. Rising unit labor costs will also be tact. Massive crisis stimuli (monetary as
uncertainty. Upside pressures on prices driven by higher wages on the back of well as fiscal) will be gradually drawn
could come from income-support poli- growing social discontent and higher down, in line with the recovery. Several
cies that prop up demand and pockets state interventionism, coupled with pro- long-term structural factors should also
of cost-push inflation, from ongoing ductivity losses post Covid-19. The keep inflation at bay, e.g. aging and
sanitary restrictions and reduced capa- green transition and regulatory factors digitalization (robotization, automa-
city. Less favorable terms of trade and could also be at play (carbon tax, digi- tion).
supply constraints could also support tal tax, border adjustment tax) in aug-
inflation. We expect these pressures to menting energy costs. All in all, inflation expectations are li-
be limited. Temporary factors will dis- kely to remain in check in the absence
tort inflation figures (changed con- Some momentum around reshoring of another supply shock and/or oil
sumption patterns, disruption to price and lingering protectionism could prop price shock. We do not expect drastic
collection, VAT reduction, delayed sum- up inflation, but it is likely to remain in paradigm changes regarding globali-
mer sales etc.). All in all, in 2020, we check, given the negative impact on zation and the interaction between
expect inflation to reach +0.3% and economic growth. Against this, central monetary and fiscal policy that could
+1.1% in the Eurozone and the U.S., res- banks’ switch to average inflation tar- lead to large inflation pressures. Our
pectively. geting without the introduction of new forecasts based on the output gap
tools is unlikely to produce much higher point to +1.2% in the Eurozone in 2022
2021: Disinflationary recovery as supply inflation rates. There could be some and +2.1% in the U.S.
recovers faster than demand. Lower
income and elevated unemployment
will continue weighing on inflation sta- Figure 10: Inflation forecasts, %
bilization as fiscal support schemes will
only allow a progressive reduction in 2020 2021 2022 2023
the enormous amount of slack created Eurozone
in the job market. Disinflationary pres- Central scenario 0.3 0.9 1.2 1.4
sures are likely to persist as the recove-
ry of demand would lag behind that of Protracted crisis -0.1 -1.5 -1.2 -1.1
supply. In 2021, we expect inflation at United States
+0.9% and +1.6% in the Eurozone and Central scenario 1.1 1.6 2.1 2.7
the U.S., respectively. Protracted crisis 0.5 -0.4 0/7 0.7
2022 and beyond: Demand exceeds Source: Allianz Research
supply, leading to temporary inflation
overshoot. Disinflationary forces will
1424 September 2020
Fiscal policy: the devil is in the details as only, given the Fed’s policy shift to aver- strategy shift towards implicitly con-
disbursement of the stimulus 2.0 and age inflation targeting (AIT) that effec- cluded the ECB’s own strategy overhaul
political agendas will shape the recov- tively focusses on pushing inflation up before it even kicked off – at least as far
ery in 2021-2022. Monetary policy will to 2% for an extended period. However, as the inflation target is concerned. This
have no choice but to follow. In the U.S., the monetary policy won’t be powerful does not mean that the ECB will copy
high uncertainty will force the Fed to enough to solve the K-shaped scenario the Fed’s precedent to a T. After all, it
alleviate market fears and avoid a wid- currently visible in the labor, consumer does not feature a dual mandate and
ening of spreads by re-injecting signifi- and housing markets. To tackle the sig- more importantly switching to a regime
cant amounts of liquidity, leading to an nificant impoverishment of the most that requires making up for a below-
increase of its balance sheet from 33% fragile fringe of the population, the Fed target inflation would not be very credi-
of GDP to 34.5% of GDP by mid-2021. It has clearly called for further fiscal sup- ble, given the very subdued inflationary
should stabilize at this level as new im- port. pressures in recent years. But we think
pulses coming from U.S. fiscal policy In the Eurozone, the ratification of the that the ECB will probably signal its
should help reactivate a new invest- EUR750bn EU Recovery Fund is ongo- readiness to also tolerate a temporary
ment cycle from H2 2021. In our scenar- ing as the European Parliament is de- inflation overshoot by making its 2%
io of Biden’s victory, the realization of a bating its size. Despite this blocking, we price stability target symmetric. How to
more redistributive economic program expect it to be operational before June meet this slightly higher goalpost while
should support growth in 2021 by +1pp, 2021, boosting Southern and Eastern keeping financial stability risks at bay
albeit to a lower extent compared with European countries’ nominal GDP by remains anyone’s guess. Going forward,
2020 (+1.7pp impact on growth of the more than +1.5% over two years. On the best proxy for ECB policy action
so-called USD2.2trn CARES Act average, the annual EU nominal GDP may be the state of the U.S. labor mar-
(Coronavirus Aid, Relief, and Economic will be boosted by +0.4%. The European ket. Due to this prevailing policy de-
Security Act)) as direct cash payments political calendar (general elections in pendency, as the Fed is ready to stay
to households in particular had quicker Germany and the Netherlands in 2021, lower-for-longer (we don’t expect a
and higher multiplier impacts. After the local elections in the UK in 2021 and rate hike on either side of the Atlantic
elections, we estimate the size of the French Presidential elections in 2022) before 2023) in an effort to support the
new stimulus at USD2.7trn over 10 are likely to shape economic policies labor market, the ECB will have little
years, leading to an accumulation of and allow for more redistribution to- choice but to do the same. After all, the
deficits close to -16% in 2020, -10% in wards middle-class households. ECB’s few attempts (remember 2008
2021 and –5% in 2022. We expect the ECB to act decisively by and 2011) to swim against the U.S. fi-
In this context, we expect a tapering of year-end with a EUR500bn top-up to its nancial cycle failed miserably. With the
the Fed policy to only start from mid- 2021 QE. Even if PSPP comes with less ECB bound to wait for the Fed to make
2022 until mid-2023, a point from which flexibility, we think it will be easier to the first move, we expect it to remain on
the Fed could consider re-initiating rate rally support within the governing coun- hold until at least 2023.
hikes. In our view, a first interest rate cil around a QE boost. Doves are in the
hike could take place from Q3 2023 air – also in the medium-term: the Fed’s
Figure 11: Balance sheets, % of GDP Figure 12: Key interest rate forecasts, %
6
70
60 5
50 4
40
3
30
2
20
10 1
0
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 0
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
ECB (lhs) BoE (lhs) PBoC (lhs) FED (lhs)
-1 10yr Bund 10yr UST ECB deposit rate Fed Funds
Source: Allianz Research Source: Allianz Research
15Allianz Research
Figure 13: Expected impact on GDP growth from fiscal stimulus
packages, pp
4,5
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
China US Germany UK Italy Spain France
2020 2021 2022
Source: Allianz Research
Emerging Markets (EMs) are likely to all have negative real policy interest profile policy rate cuts, but liquidity in-
benefit from higher risk appetite until rates and thus may be forced to tighten jections to ensure the smooth functio-
2022, albeit unevenly. Negative real monetary policy next year. We expect ning in the banking system are likely.
interest rates in advanced economies 2022 to be a tricky year for EMs as ma- On the fiscal side, support could decline
should support risk appetite for EM turing debt is peaking and investors from 7.1% of GDP in 2020 to c.5.5% in
assets and, as long as the USD depre- anticipate the start of the normaliza- 2021, as the government bond is-
ciates, positive net capital flows into tion of the Fed’s monetary stimulus. suance quotas and tax and fee cuts are
EMs should continue. However, inves- Brazil, Thailand, India, Turkey and In- likely to be smaller. That said, the fiscal
tors will discriminate against markets donesia currently have the highest stance we expect for 2021 is still large –
that are subject to negative political amounts of maturing debt by the end as a comparison, we estimate that the
risk events (e.g. Hong Kong, Russia) or of 2022. support in 2018 and 2019 stood at 2.4%
pursue unsustainable monetary policies and 3.3% respectively.
(e.g. Turkey) or, more generally, have In China, policy easing is likely to peak
overall weak macroeconomic funda- earlier than in other economies. This is
mentals. The latter includes Argentina, because the economic recovery is now
Turkey, Brazil and South Africa, whose well on track (although not broad-
currencies have already depreciated based yet), and policymakers could
substantially in 2020 are expected to gradually turn their focus to structural
continue facing downward pressures, concerns in 2021. Indeed, from c.260%
with Turkey already at the brink of its of GDP worth of total debt at the end
next balance of payments crisis. We of 2019, the ratio is likely to near 300%
project a more visible rise in inflation in by the end of this year. Based on past
H2 2021, especially for economies with credit cycles and policymakers’ recent
weaker currencies and those that have announcements, we expect our credit
embarked on significant QE-like mo- impulse index to peak in the coming
netary stimulus in the wake of the Co- months. It should then gradually de-
vid-19 crisis. The latter include Turkey cline, and turn negative in Q4 2021.
and several Central European econo- This means that in the coming year, the
mies, as well as India and Chile, which PBOC could refrain from further high-
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