RACE TO THE POST COVID-19 RECOVERY: 7 OBSTACLES TO OVERCOME - Allianz Research 1 April 2021
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©Mārtiņš Zemlickis RACE TO THE POST COVID-19 RECOVERY: 7 OBSTACLES TO OVERCOME Allianz Research 1 April 2021 © Copyright Allianz
GLOBAL: K-SKAPE RECOVERY PREVAILS
Eurozone gross value added by sector, Manufacturing production, Index: Residential investment, Index:
Index: 100 = Q4 2019 100 = pre-crisis output level (in months) 100 = pre-crisis output level (in quarters)
105
100
95
Manufacturing
90
Construction
85 Arts & entertainment 20% of
total GVA
Total
80
Financial & insurance activities
75 Information & communication
Real estate activities
70
Wholesale & retail, transport, accommodation & food
65
Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020
Notes: GFC (Global Financial Crisis 2007-09); GVA (Gross value added). Notes: GFC (Global Financial Crisis 2007-09); GVA (Gross value added).
Sources: Refinitiv, Allianz Research
Sources: Eurostat, Allianz Research Sources: Eurostat, Allianz Research
80% of the economy is growing at The manufacturing recovery has Savings have been directed into the
a reasonably good speed while been V-shaped but shows signs residential housing market. The boom
Covid-sensitive sectors remain in the of weakness due to should remain strong in the US.
doldrums. growing supply chain tensions.
© Copyright Allianz 2GLOBAL: MULTI-SPEED BUMPY RECOVERY
Real GDP, Q4 2019 = 100, pre and post Covid-19
120
115
110
105
100
US
95 US pre-Covid
Eurozone
90 Eurozone pre-Covid
China
China pre-Covid
85
2019-10 2020-04 2020-10 2021-04 2021-10 2022-04 2022-10
Sources: national statistics, Allianz Research
© Copyright Allianz Sources: national, Allianz Research 3OBSTACLE 1: FORMULA 1 RACE ON VACCINATION
Expected date of herd immunity Estimate growth output gap vs. vaccination speed
(at current vaccination speed)
Today 0 0
1.5
0.1
Chile Serbia France Argentina South Africa
-2
70% of adult
1
population
0.2
Israel Germany Brazil
UK USA EU -4 0.3
0.5 Morocco
0.4
-6
0.5
0
-8 0.6
Brazil
-0.5 France 0.7
Serbia
EU -10
Israel USA
Vulnerable Germany 0.8
-1
population
(+65y) Argentina -12 0.9
UK UK Eurozone US
Chile
-1.5
09-20 04-21 10-21 05-22 Beyond 2022
12-22 Output gap (in % potential GDP) Vaccination speed (daily vaccination in % of population, rhs)
Sources: Our World in Data, Duke University, Allianz Research Sources: Our World in Data, Allianz Research
© Copyright Allianz 4OBSTACLE 2: EXCESS SAVINGS AT AROUND 40%
ABOVE PRE-CRISIS LEVELS AT END-2021
European & US household savings, % of GDP, usage 2021 Excess savings in Europe, bn EUR
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Belgium
France
Norway
Portugal
Austria
Denmark
US
Germany
UK
Italy
Poland
Spain
Czechia
Sweden
Netherlands
Eurozone
Finland
EU
Remaining HH excess savings potentially unleashed for investment or
consumption purposes (% of GDP)
HH excess savings likely to flow into consumption (minimum, % of GDP)
Sources: Fred, Eurostat, Allianz Research Sources: Eurostat, Allianz Research
In the US, we expect the savings rate to normalize at around 7% (compared with 20.5% in January 2021) of gross
disposable income at the horizon of end-2022. In 2020, Eurozone household savings increased by EUR530bn or +40%
compared to pre-pandemic levels. Out of this, we expect EUR180bn to be unleashed in 2021 in the Eurozone or 1.5% of
GDP. Overall, at end-2021, we expect Eurozone savings to remain 37% still above pre-pandemic levels (or close to
EUR350bn,
© Copyright Allianz 2.9% of GDP). 5OBSTACLE 3: HIGH RISK OF POLICY MISTAKES WHEN
PHASING-OUT ASSISTANCE MECHANISMS
Global speed of money circulation Central banks' balance sheets ECB: Weekly PEPP purchases
(Index Jan 2005 = 100) (EUR bn)
Forecast
Sources: various, Allianz Research Sources: Refinitiv, Allianz Research Sources: Refinitiv, ECB, Allianz Research
The propensity to hold idle money The Fed will start to gradually taper the pace of asset purchases as early as
balances has increased with the H2 2022. Meanwhile the ECB remains committed to preserving favorable
pandemic. Private agents have hoarded financial conditions. Implicit yield curve control will however require stepped-
money rather than spent it, similarly to up PEPP purchases in Q2&Q3 when US-EZ economic divergence may be
2008-09.
© Copyright Allianz
most pronounced, fueling calls for another PEPP increase. 6CHINA’S POLICY TIGHTENING: FIRST TO NORMALIZE?
Fiscal stimulus (% of GDP) Proprietary credit impulse index Comparison of monetary easing episodes
in China, based on our proprietary credit
Government bonds impulse index
8 Latest forecasts (following 2021 'Two Sessions') 20 Corporate bonds and stocks
Shadow banking 2008-09 2012 2015-16 2020
Previous forecast Great Eurozone China stock Covid-19
7 15 Bank loans
7.2 Credit impulse Financial sovereign market crisis
Crisis (GFC) debt & China collapse &
5.6 real estate RMB scares
6 10
cooling
Date of September January
May 2012 June 2015
5 5 shock 2008 2020
Date of start
January January
4.8 of monetary May 2012 June 2015
3.7 2009 2020
4 0 easing
Date of peak
January October
of monetary May 2013 May 2016
2010 2020
3 3.3 3.4 -5 easing
Duration of
m onetary 12 m onths 12 m onths 11 m onths 9 m onths
2 2.4 -10 easing
Intensity of
m onetary
1 -15 easing, 100% 100% 72% 41%
com pared
to GFC
0 -20
2018 2019 2020 2021E 2022E 09 10 11 12 13 14 15 16 17 18 19 20 21
Sources: national statistics, Allianz Research Sources: national statistics, Allianz Research Sources: national statistics, Allianz Research
© Copyright Allianz 7CHINA’S TIGHTENING: NOT BE A WALK IN THE PARK
Real estate sector: prices and inventories By province: 2019 provincial debt-to-GDP USDCNY and Government yield spread
(right-hand scale inverted) ratio vs. Corporate bond default ratio
Housing price, %y/y 18 500 5.5
25 -10
Ratio of defaulted bond issuers to total issuers
Housing inventories estimate:
16 400
months of sale, y/y change (rhs rev) -8
20 6.0
14 300
-6
15 12
200 6.5
-4
10
10 -2 100
8 7.0
0 0
5
6
2 -100 7.5
0 4
4 -200 China-U.S. 2y government
2 8.0
-5 yield spread (bp)
6 -300 USDCNY rate (rhs, inv)
0
0 20 40 60 80 100
-10 8 -400 8.5
Local government debt as % of local GDP
11 12 13 14 15 16 17 18 19 20 21 06 08 10 12 14 16 18 20
Sources: national statistics, Allianz Research Sources: Wind, Allianz Research Sources: Refinitiv, Allianz Research
© Copyright Allianz 8US: THE FED WILL KEEP A COOL HEAD
US: Fed Funds target rate (%) EURUSD vs Interest rate differential
1.6 500
1.5 400
1.4 300
200
1.3
100
1.2
0
1.1
-100
1 -200
0.9 -300
0.8 -400
2000 2004 2008 2012 2016 2020 2024
EURUSD (lhs)
Net speculative EUR positioning proxy (neutral = ~1.2) (lhs)
Short-term interest rate differential EMU vs US (rhs)
Futures market short-term interest rate differential EMU vs US forecast (rhs)
Sources: CFTC, Refinitiv, Allianz Research
Sources: Refinitiv, Allianz Research.
When considering the level of the natural level of interest Speculative positioning show that, tactically, investors are
(below which the FFR becomes inflationary inflationary), betting on the dollar. Looking at the market implied interest rate
the US monetary policy can be deemed as being only differential it is quite revealing that money markets have yet to
moderately accommodative, allowing the Fed to wait and buy the USD appreciating story as they still price in a flat
see before really considering the case of tapering interest rate differential until 2024. We still believe in a range
(starting in H2 2022) and a rate hike (H2 2023) trading EURUSD for 2021 (1.22 with upside volatility pockets)
© Copyright Allianz
with a mild structural appreciation of the USD in 2022 to 2024. 9US YIELDS: WHAT IS REALLY PRICED IN?
US Inflation curve strongly inverted Uncertainty not expectations are repriced
(10y breakeven – 5y breakeven, in bp) (US 5Y breakeven rates, in %)
80
3.0
60 2.5
40 2.0
1.5
20
1.0
0
0.5
-20
0.0
05-20 07-20 09-20 11-20 01-21
-40
2011 2013 2015 2017 2019 2021 5Y US Breakeven 5y US Breakeven risk adjusted
Sources: Refinitiv, Allianz Research Sources: Refinitiv, Allianz Research
US 5y breakeven trade 30bp over US 10y When adjusting breakeven rates for the uncertainty
breakeven. Markets thus price no new inflation component (term premium) one sees that inflation
regime but temporary effects. expectation peaked in February. Recent rise in
breakeven is due to a repricing of uncertainty mainly
© Copyright Allianz about Fed policy timeline (tapering). 10OBSTACLE 4: CROWDING-IN VS. CROWDING-OUT
EFFECTS ON INVESTMENT ARE NOT YET RESOLVED
Fiscal deficit, % of GDP Central government deposits Infrastructure spending vs estimated gap
(bn, national currency)
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
USA China Eurozone UK
2020 2021 2022
Sources: various, Allianz Research Sources: Eurostat, Allianz Research Sources: various, Allianz Research
Most countries have adopted record high fiscal stimuli which are expected to The US will spend the double compared to
continue into 2021-22. As significant funds remain unspent - Eurozone their infrastructure needs (i.e. USD2tn).
governments have amassed excess deposits of 3% of GDP – these could Europe allocates 1.7% of GDP for
provide additional stimulus in 2021. infrastructure spending, less than one third
© Copyright Allianz compared to the estimated gap. 11CORPORATE SAVINGS: UNEVENLY DISTRIBUTED
AMONG COUNTRIES AND SECTORS
Increase of working capital requirements and tax deferrals Expected investment recovery due to cyclical
vs. NFC “excess cash”, bn LCU, as of Feb 2021 demand recovery
Germany France Italy UK USA
Capacity utilization
gap to normal end -5.0 -7.5 -3.6 -9.4 -2.4
2020 (pp)
Average capacity
utilization 2008- 77% 84% 75% 80% 77%
2019
Business
investment to 0.006 0.008 0.012 0.017 0.010
demand elasticity
Business investment gains from demand normalization
% 3.1% 6.0% 4.4% 17.2% 2.5%
bn LCU 1.5 2.4 1.1 1.9 272
Sources: various, Euler Hermes, Allianz Research Sources: various, Euler Hermes, Allianz Research
© Copyright Allianz 12CORPORATE DEBT: REDEMPTIONS & HIGHER
INTEREST CHARGES TO REDUCE CASH FLOW IN 2022
Redemptions of corporate bonds issued by NFC Increase in NFC interest payments,
(in USD bn) impact on margins, pp
1400 0.0
-0.5
1200
-1.0
1000
-1.5
Eurozone
800 -2.0
Japan
-2.5
600 China
-3.0
USA
400 -3.5
France
Belgium
Netherlands
Germany
Spain
Italy
Eurozone
200
0
2021 2022
+50bp +100bp
Sources: Refinitiv, Allianz Research Sources: ECB, Allianz Research
Corporate bonds redemptions will increase by A rise of at least +50bp per year in bank interest rates would
more than 70% in 2022 – and double in the be equivalent to an increase of EUR15bn in the Eurozone or
US. +0.8pp of the operating surplus to close to 4%. In terms of
© Copyright Allianz
impact on margins, it would go to -2pp in 2023. 13CORPORATE CREDIT: QE DEPENDENT
IG & HY corporate spreads (in bps) US yoy change in IG corporate spreads decomposition (in bps)
500 1200 200 S&P500 volatility contribution
US - Investment grade (lhs)
EUR - Investment grade (lhs) Consumer Confidence contribution
150 FED Balance Sheet Contribution
EUR - High yield (rhs) 1000
400
US IG Spread
US - High yield (rhs) 100
800 5y Rolling Estimate
300
50
600
200 0
400
-50
100
200
-100
Jun-18
Jun-19
Jun-20
Jun-21
Dec-19
Dec-20
Dec-17
Dec-18
0 0
Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21
Sources: BofA, Refinitiv, Allianz Research
Sources: BofA, Refinitiv, Allianz Research, computed using 5y rolling coefficients
Due to historically tight valuations, the probability of With central banks keeping an anchor on spreads, we expect
experiencing higher spreads in the near future far outpaces investment grade spreads to timidly widen due to a
the probability of experiencing tighter spreads. With that in deteriorated economic outlook but to remain close to current
mind, we still expect central banks to be unable to withdraw levels with QE compensating for extra volatility and sentiment
their current support should widening pressures come into deterioration. The same logic applies to EUR IG corporates,
place dueAllianz
© Copyright to spikes in market volatility. which currently depict a similar pattern. 14OBSTACLE 5: BOTTLENECKS IN THE GLOBAL
SUPPLY CHAIN BACK TO PANDEMIC PEAKS (I)
Suppliers’ delivery times (below 50 = disruption) Manufacturing sector – input vs output
price index (above 50 = rising)
Sources: Markit, Allianz Research Sources: Markit, Allianz Research
© Copyright Allianz 15OBSTACLE 5: BOTTLENECKS IN THE GLOBAL
SUPPLY CHAIN BACK TO PANDEMIC PEAKS (II)
Global trade growth, goods and services, %y/y 2021 global trade growth forecast, %y/y
Asia Pacific North America
Western Europe Central and Eastern Europe
Latin America Middle East and Africa
World (volume) World (value)
15% 14.2%
10.2% 9.8%
10% 8.6%
7.9%
6.0%
5% 5.3%
4.7%
3.9%
3.1% 2.8%
1.9% 0.9%
0%
-1.9% -1.6%
-5%
-8.1%
-10%
-10.8% -10.8%
-15%
14 15 16 17 18 19 20 21 22
Sources: IHS Markit, Euler Hermes, Allianz Research Sources: IHS Markit, Euler Hermes, Allianz Research
© Copyright Allianz 16OBSTACLE 6: TEMPORARY OVERSHOOT OF
INFLATION (I)
3.0
US 10y breakeven inflation rate (in %) 3.0
EUR 10y breakeven inflation rate (in %)
2.0 2.0
1.0 1.0
10y US TIPS breakeven inflation rate 10y EUR Swap breakeven inflation rate
In-sample estimation In-sample estimation
Out-of-sample estimation Out-of-sample estimation
+/- 1 std. deviation +/- 1 std. deviation
0.0 0.0
2003 2006 2009 2012 2015 2018 2021 2007 2009 2011 2013 2015 2017 2019 2021
Sources: Refinitiv, Allianz Research Sources: Refinitiv, Allianz Research
US long-term market-based inflation expectations remain In the case of the Eurozone, our proprietary model shows
above the +1 standard deviation level inferred by our valuation that long-term market-based inflation expectations have re-
model. This substantial deviation from fair value (~1.6%) is to converged towards fair value (1.3%). With the upper bound
be expected as the Federal Reserve remains committed to the of our model at ~1.8%, we still believe that 10y EUR inflation
average inflation targeting strategy allowing for a temporary breakeven rates can rise by 20 to 30bps allowing the current
inflation overshoot. Nonetheless, we remain skeptical when it reflationary rotation a little more room to maneuver and
comes to the underlying structural nature of this inflation facilitating the continuation of the recent over performance
repricing. Consequently, we believe US long-term inflation
© Copyright Allianz
of EUR equity vs US equity. 17
expectations to have little upside potential left.OBSTACLE 6: TEMPORARY OVERSHOOT OF
INFLATION (II)
US vs. Eurozone headline inflation (%)
Reflation Stagflation
(temporary, relative) (structural, generalized)
Demand: Pent up demand but Fast riding demand creates
uncertainty (and demographics) pervasive price acceleration,
keep precautionary savings high and negative real growth shock
Supply: Higher commodity prices
Supply side shock becomes
Lockdown / transportation costs are
structural on the back of
temporary and indenting firms'
economics profitability with limited pass-
protectionism 2.0. or exogenous
CO2 price shock
through to household inflation
Wage increase subdued by high
Political rise in (minimum) wage
unemployment, firms’ search for
for essential workers
productivity
Fiscal: Impulse support closing Debt monetization become
large output gaps (income permanent, with risks of high
support, firms’ liquidity bridge, debt burden-low productivity
long-term investments) trap
Monetary: tamed inflation
expectations, lower interest rates, Prevailing zombification,
liquidity injections to preserve overheating on the mortgage
Stimuli
Sources: Refinitiv, Allianz Research monetary and financial conditions market, monetary inflation
and support credit increase
Markets: Asset price reflation
Inflation will temporarily overshoot in 2021 – reaching 3.5%y/y in includes steeper yield curve &
Central Banks deemed
impotent, behind the curve,
the US and rising close to 2%y/y in the Eurozone – propped up by bond volatility, strong equity
markets. Time to normalize, no
unable to tighten because of
financial instability
the input price bonanza and the reopening of the economy. But credit crisis
we forecast Eurozone inflation to stabilize with 1.2% in 2022 after
Sources: various, Allianz Research
1.3% in 2021. In the US we expect inflation to moderate to 2% in
18
2022 after 2.5% in 2021.
© Copyright AllianzOBSTACLE 7: NOT PUTTING AN END TO THE SWEET
MUSIC OF MARKET’S REFLATION
S&P500 EPS growth consensus (in %) Long-term EPS growth expectations (in %)
40 30
2021 MSCI USA
30 25 MSCI EMU
20 2022 MSCI EM
2017 20
10
2023 15
0 2018
2015 2016 2019 2020 10
-10
-20 5
-30 0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021
Sources: IBES, Refinitiv, Allianz Research Sources: IBES, Refinitiv, Allianz Research
Some equity markets remain extremely optimistic (i.e. U.S. From a long-term EPS growth perspective, the U.S. and EMs
and EMs). In this regard, Q4 earnings showed a mixed bag of are on the extremely expensive side (even taking into
outcomes with some of the equity rally leaders (Facebook, account the latest US revision), with the market consensus
Google, etc), showing that their underlying growth engines aiming for earnings growth rates last seen in 2000 for the
are losing some steam. This has led market participants to U.S. and close to all-time highs for EMs. On the other hand,
front load the initial optimism in 2021 but to reprice worse the Eurozone does not look overbought in terms of earnings
than initially expected 2022 earnings growth. expectations but rather cheap adding to the premise that
© Copyright Allianz
EUR equity markets look relatively cheap both from19 a
fundamental and market composition perspective.OBSTACLE 7: NOT PUTTING AN END TO THE SWEET
MUSIC OF MARKET’S REFLATION
Global equity markets (100 = 31.12.2019) US & Eurozone equity rotation (100 = 31.12.2019)
130 105 101
120
100
110 95
100 99
85
90 98
80 World ($) 75
US
97
70
Eurozone
60 UK 65 96
Japan 12-19 04-20 08-20 12-20 04-21
50 S&P500 Equally-Weighted vs S&P500 Composite (lhs)
Emerging Markets ($)
40 S&P500 Growth vs S&P500 Value (lhs)
MSCI EMU Growth vs MSCI EMU Value (lhs)
Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21
MSCI EMU Equally-Weighted vs MSCI EMU Composite (rhs)
Sources: Refinitiv, Allianz Research Sources: Refinitiv, Allianz Research
The combination of extremely accommodative monetary and At the beginning of the rally, “stay at home” friendly sectors
fiscal policy paired with renewed investor and economic (e.g. technology and telecommunications) were in the driving
sentiment was and remains to be blamed for the persisting seat. Later in the year and due to a combination of the US
equity rally. With these two equity market tailwinds still in elections result and the rollout of the first Covid19 vaccines,
place, equity markets continue their climb towards new all- the “back to normal / reflation” friendly sectors like energy
time highs, leaving behind the “V” part of the market recovery and financials took the baton and led the rally. This sector
story. Nonetheless, it is worth noting, that despite equity rebalancing becomes obvious when looking at the growth vs
markets climbing in a linear fashion, the underlying sectors value relative performance and at the equally weighted vs
© Copyright Allianz 20
driving the rally have been changing along the journey. market value weighted indices.EMERGING MARKETS: NEXT CRISIS HOTSPOT?
MSCI $ Indexes Top performers since 2010
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021(YTD)
ARG IDN TUR ARG IDN HUN BRA ARG PER RUS KOR CHL
70,1% 4,% 60,5% 63,7% 24,1% 33,1% 61,3% 72,3% -0,3% 41,% 42,6% 13,7% China, Taiwan & S. Korea – The trend was
THA MYS PHL TWN PHL RUS PER POL BRA TWN TWN TWN
50,8%
PER
-2,9%
PHL
43,9%
POL
6,6%
MYS
23,7%
IND
0,%
ARG
53,8%
RUS
52,2%
CHN
-3,9%
RUS
31,5%
COL
37,2%
CHN
9,8%
ZAF
broken in February. Chinese equities are in a
49,2%
CHL
-3,2%
THA
32,1%
COL
4,2%
KOR
21,9%
ARG
-1,2%
IND
48,9%
HUN
51,1%
KOR
-5,3%
THA
25,9%
BRA
27,3%
EM
9,4%
IND
downwards trend, the YTD in some in the CSI 300
41,8%
COL
-5,6%
COL
31,6%
THA
3,1%
CHN
17,3%
TUR
-7,4%
KOR
32,3%
COL
45,5%
CHL
-8,%
CZE
22,1%
CHN
15,8%
IND
6,9%
CZE
is negative (more financial weighted). Taiwanese
40,8%
MYS
-7,1%
CZE
30,9%
MEX
0,4%
POL
16,7%
THA
-7,9%
PHL
23,9%
THA
39,8%
HUN
-8,4%
HUN
20,9%
HUN
14,1%
ARG
4,7%
THA
equities continue the rally.
32,5% -11,3% 27,1% -1,7% 13,3% -8,1% 23,% 36,9% -8,5% 16,3% 12,3% 2,8%
IDN KOR IND MEX PER CHN ZAF IND IND EM MYS EM
31,2% -12,8% 23,9% -2,% 9,2% -10,% 15,1% 36,8% -8,8% 15,4% 0,% 2,5%
ZAF
30,7%
MEX
-13,5%
KOR
20,2%
RUS
-2,6%
TWN
6,9%
TWN
-14,4%
IDN
14,8%
EM
34,3%
MYS
-8,9%
KOR
10,4%
MEX
-4,%
CHN
1,9%
Rest of APAC – Especially good performance of
PHL
30,3%
ZAF
-17,3%
CHN
19,%
PHL
-4,3%
CHN
4,7%
MEX
-16,%
TWN
14,8%
TUR
34,3%
IDN
-11,2%
PHL
9,2%
PHL
-4,7%
RUS
1,9%
India.
MEX CHN HUN EM ZAF EM CHL PER TWN MEX ZAF MEX
26,% -20,3% 18,7% -5,% 2,5% -17,% 13,2% 33,5% -11,8% 8,% -5,7% 1,7%
KOR EM PER IND EM CHL EM ZAF COL ZAF CZE KOR
25,3%
IND
-20,4%
RUS
15,5%
EM
-5,3%
ZAF
-4,6%
CZE
-18,9%
IDN
8,6%
KOR
33,1%
THA
-13,9%
POL
7,4%
TUR
-6,2%
CHL
-0,2%
HUN
LatAm – Chile is the exception in a so far negative
19,4%
TUR
-20,9%
CHL
15,1%
ZAF
-8,8%
HUN
-7,9%
MEX
-21,%
CZE
7,%
ARG
30,9%
CZE
-14,5%
EM
7,3%
IDN
-8,3%
PER
-0,7%
ARG
year. There is room for improvement, as the
18,4%
TWN
-22,1%
TWN
14,8%
TWN
-9,%
CZE
-10,2%
KOR
-21,9%
MYS
3,9%
CHN
29,4%
TWN
-16,6%
MEX
6,7%
THA
-9,5%
TUR
-2,8%
IDN
current standpoint is low, but the risks are still high
18,3%
RUS
-23,3%
PER
13,4%
MYS
-14,9%
THA
-12,6%
MYS
-22,4%
THA
-1,4%
POL
23,8%
PHL
-17,4%
PHL
6,6%
IND
-9,9%
IDN
-3,%
MYS
(political, medical, financial).
17,2% -23,9% 10,8% -16,9% -13,4% -25,5% -2,2% 23,3% -17,4% 6,1% -10,6% -5,2%
EM BRA RUS BRA CHL POL IND IDN CHN PER POL POL
16,4% -24,9% 9,6% -18,7% -14,5% -27,2% -2,8% 22,% -20,4% 1,1% -11,8% -7,%
POL
12,6%
POL
-32,6%
CHL
5,6%
CHL
-23,%
POL
-16,8%
ZAF
-27,2%
MYS
-6,7%
MYS
21,1%
CHL
-21,%
CZE
-0,1%
HUN
-11,8%
PER
-8,8%
Turkey – The latest developments in the Central
BRA
3,8%
HUN
-34,7%
IDN
2,4%
COL
-23,7%
BRA
-17,4%
PER
-32,5%
PHL
-7,7%
BRA
21,%
KOR
-22,6%
MYS
-5,2%
THA
-13,9%
BRA
-10,9%
Bank had huge impact in equities as well - besides
CHN
2,3%
TUR
-36,8%
CZE
-3,1%
IDN
-25,%
COL
-22,3%
TUR
-33,6%
CZE
-9,6%
COL
13,8%
ZAF
-26,5%
POL
-8,2%
RUS
-17,1%
PHL
-11,1%
the currency losses. Especially hit was the financial
CZE IND BRA TUR HUN BRA TUR MEX TUR CHL BRA COL
-7,4% -38,% -3,5% -28,1% -29,6% -43,4% -10,5% 13,6% -43,6% -18,6% -20,9% -14,6%
sector. Companies elsewhere with interests in
HUN ARG ARG PER RUS COL MEX RUS ARG ARG COL TUR
-10,7% -42,6% -38,9% -31,% -48,5% -43,9% -10,7% 0,3% -51,7% -22,6% -22,9% -17,% Turkey have also felt the impact.
© Copyright Allianz Sources:Refinitiv, Allianz Research 21EMERGING MARKETS: HIGH CURRENCY VOLATILITY
IN 2021-2022
Currencies and volatility EMs at risk of Taper Tantrum 2.0
0
24 +2
TRY +1 10
Volatility as of 22.03.2021
Nigeria
x=y
18 20
BRL
Cyclical risk (0=highest risk, 100=lowest risk)
Brazil Ukraine
30 Kenya
12 MXN Russia Argentina Turkey
NOK 40 South Africa
6 Colombia
50 Mexico
Chile
ARS
PHPGBP
60 Peru
0 CNY Indonesia
0 6 12 18 24 Saudi Arabia
70 Croatia Hungary
Volatility in Feb 2019 India
Philippines Morocco Poland Romania
Sources: Refinitiv, Allianz Research; Largest moves from a selection of currencies Czechia
80 Malaysia UAE
Thailand
Comparing FX market volatility across currencies, it is easily China
observable that the initial Covid19 instability has yet to fully 90
South Korea Vietnam
disappear with most currencies currently experiencing higher
100
volatility than in 2019. Some APAC currencies are the exceptions to 100 90 80 70 60 50 40 30 20 10 0
the norm showing slightly lower volatility levels. From a valuation Liquidity risk (0=highest risk, 100=lowest risk)
perspective and except some APAC currencies, EM currencies Sources: Allianz Research
remain fairly attractive but are bound to high volatility episodes.
© Copyright Allianz 22EMERGING MARKETS: SOVEREIGN SPREADS
EM Hard Currency ASW spreads (bps) EM Local Yield Bonds – Changes (bps) since 01.02.2021
Argentina
Ukraine* Turkey
Turkey Philippines
Egypt Nigeria
Nigeria Mexico
Kenya Brazil
South Africa
Colombia
Brazil
Colombia Russia
Mexico Malaysia 10Y 1Y
Russia South Africa
Romania* Czechia
Morocco* Change since Feb CS Current Indonesia
Indonesia
Romania
Philippines
Chile
Chile
Hungary* Kenya
Croatia* Thailand
Malaysia Hungary
-100 0 100 200 300 400 500 600 700 800 900 1000 -100 0 100 200 300 400 500 600
Sources: Refinitiv, BofA, Allianz Research; Hard Currency for the * is calculated with Sources: Refinitiv, BofA, Allianz Research; UKR is calculated with the 3Y instead of the
Euro denominated Bonds. 10Y; ARG with the 7Y.
The recent developments in US sovereign debt market, the The Local Currency Environment has experienced an
EM have experienced interest rates increases but the spread increase in interest rates that, in some cases, are higher
has not widened much – yet. Although EM bond indexes than a year ago. Following developments on Turkey
display historically low spreads, the particular situation in Central Bank, the LC curve has shifted abruptly. Taking
each of the countries is different. On the worrying side, - and into account the short-maturity of its local currency debt,
besides Argentina – African countries, Turkey and Malaysia instability and sudden monetary policy movements could
are above the 400 bps barrier, with Brazil spreads widening. endanger its debt sustainability.
© Copyright Allianz 23EMERGING MARKETS: TOUGH DEBT SCHEDULE
Debt Redemptions (USD bn) Debt: Currency composition (bar, LHS) & Avg. Coupon (dot, RHS)
LC USD EUR Other Avg. Coup. LC Avg. Coup. USD
1200
100% 12%
1000
META 75% 9%
800 CEE
50% 6%
Rest LatAm
600 25% 3%
Brazil
Rest APac
400 0% 0%
Colombia
India
Poland
Thailand
Chile
Peru
Russia
Mexico
Czechia
Hungary
Romania
China
Brazil
Malaysia
S. Africa
Philippines
Nigeria
Turkey
Indonesia
Argentina*
India
200 China
0
LatAm CEE Asia-Pac META
2021 2022
Sources: Refinitiv, Allianz Research. Argentina* defaulted ~50bn USD outstanding bonds in 2020. Sources: Refinitiv, Allianz Research. Argentina* defaulted ~50bn USD outstanding bonds in
The countries covered and regional aggrupation is the same as in the RHS graph. 2020.
The burden of sovereign debt redemptions in the coming When taking into account the high interests currently paid,
years for EM will be considerable. Brazil is both by size and the high share of foreign currency debt, and the volatility in
short maturity one of the key countries to look at. Around the currency, Turkey may face some risks during the
1000bn (USD) of Chinese bonds will mature between 2021 coming two years. However, its position in terms of debt to
and 2022. Apart from Brazil; the short maturities for Turkey, tax revenue is relatively good. If they are able to control
Romania and Poland could bring some stress. the currency risk, they could manage to refinance
© Copyright Allianz themselves and extend the maturity. 24EMERGING MARKETS: CORPORATE DEBT ALSO
POSE RISKS IN 2022
Foreign exchange-denominated sovereign and NFC debt Currency breakdown of NFC debt (% of GDP),
(% of GDP), Q4 2020, selected EM Q4 2020, selected EM
90 FX-denominated NFC debt 120 LCU Other EUR USD
80
FX-denominated public debt 100
70
60 80
50
60
40
30 40
20
20
10
0 0
Turkey
Russia
Saudi Arabia
Indonesia
India
Mexico
Brazil
Poland
Ukraine
Hungary
South Africa
Chile
Thailand
Czechia
Colombia
South Korea
Argentina
Malaysia
Turkey
Russia
Czech
Indonesia
Ukraine
Mexico
India
Poland
Brazil
Saudi Arabia
Hungary
South Africa
Chile
Thailand
China
Colombia
Korea
Argentina
Malaysia
Sources: National statistics, IIF, Allianz Research Sources: National statistics, IIF, Allianz Research
Argentina has the highest share of FX-denominated Chile has the highest FX-denominated debt of NFCs
debt to GDP (81%). And most of that is sovereign in relation to GDP (43%).
debt.
© Copyright Allianz 25GLOBAL: OUR KEY MAIN TAKEAWAYS FOR 2021-22 Recovery obstacle 1: Formula 1 race on vaccination. Herd immunity as soon as May in the US, while Europe will need till fall. Vaccination remains slow in the emerging markets with only 20% of the total population expected to be vaccinated in 2021. Reopening will remain heterogeneous. Recovery obstacle 2: Excess savings will still hover around 40% above pre-crisis levels at end-2021. Fading fear factor is a positive for future consumer spending: we expect +1.5% of GDP in Europe and more than +3% in the US in 2021 by end-2021. Recovery obstacle 3: Phasing out assistance mechanisms is not a zero-sum game and the risk of policy mistakes remains high. Compared to the US super stimulus (USD1.9tn, 9% of GDP), Europe's fiscal response should prove moderate and delayed, given its focus on the supply side. In China, fiscal targets imply a clear withdrawal of policy support in 2021. Recovery obstacle 4: Crowding-in vs. crowding-out effects on investment are not yet resolved. The success of massive public investment programs, mainly in the US depend on reducing execution risks, on tax policies and on whether governments can channel excess savings to productive projects and boost private sector investment. Recovery obstacle 5: Bottlenecks in the global supply chain are as high as during the peak of the pandemic and should push global trade into a borderline recession in Q2 with the global supply chain disruptions to cut global trade growth in volume by -1.7pp in 2021 (vs. +0.7pp from the Biden super stimulus). Recovery obstacle 6: Temporary overshoot of inflation. This is likely to be driven by temporary base effects (e.g. reopening of the services sector, rising commodity prices, supply shortages). We don’t expect central banks to stage a policy U-turn as a reaction to inflation temporarily overshooting in the US at 3.5% by mid-2021 and hitting the 2% target for a few months in the Eurozone. Recovery obstacle 7: Not putting an end to the sweet music of market’s reflation. We see a widening divergence between asset prices and their underlying value. Amplified by various investment management techniques (ETFs, risk-parity) that put asset allocation on automatic pilot, this divergence is a vulnerability. Risks for capital markets remain on the downside. © Copyright Allianz 26
©Mārtiņš Zemlickis
THANK YOU
Allianz Research
1 April 2021
© Ekaterina Pokrovsky - stock.adobe.com
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