1. For fund distributors and institutional investors only.
Economic Cycle & Valuation
For fund distributors and institutional investors only.
June 2017

2. Active Asset Allocation – The economic cycle & valuation analysis Example: Economic Cycle & Valuation Score as of 26 June 2017
European equities
Gross domestic product in the Eurozone is on a stable path to growth.
Political uncertainties abated in the currency union following the French parliamentary elections, but increased at the same time following the elections in the UK and the looming Brexit.
Recent statistics for the UK indicate that consumers are starting to react to their lower disposable real incomes.
US equities
The falling yields that are accompanying the Fed’s (US Federal Reserve ) expansion of its balance sheet are causing US equity valuations to soar. Which, in turn, is reducing long-term return expectations in our view.
The tide could turn on valuations if the Fed really does start downsizing its balance sheet, as planned, in
From a general perspective, equities continue to benefit from strong economic data. A look at the surprise indices shows declining support in the US but continuing strong momentum in the Eurozone – for the time being.
Source: Allianz Global Investors, as at June All scores reflect performance in local currency. Yellow markers indicates direction of last change. This analysis contains the current opinions of Allianz Global Investors and its employees, and such opinions are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as an indicator of future results. This analysis has been distributed for informational purposes only, does not constitute investment advice and is not a recommendation or offer of any particular security, strategy or investment product. Past performance is not indicative of future results.

3. Active Asset Allocation – The economic cycle & valuation analysis Example: Economic Cycle & Valuation Score as of 26 June 2017
Japanese equities
Despite modest growth, the Japanese unemployment rate is trending lower. Over the medium term, this will probably lead to demands for wage rises and thus to higher inflation in our opinion.
As already hinted at in (“shunto”) wage talks, both wage and inflation pressure will in our view probably be subdued in spite of the generally weaker Yen and the rise in energy prices over past months.
Japanese equities remain in our opinion hostage to the Yen. The recent renewed weakening of the Yen is boosting earnings expectations again. The recent improvement in the global cyclical scenario should have a positive impact on Japanese equities as well from our point of view.
Emerging market equities
In our opinion, Emerging markets should benefit from occasional stimulus in China and a cyclical surge in world trade.
Since the start of the year, the outflows of capital from emerging markets have slowed down again.
The economic imbalances in China are increasing further.
Source: Allianz Global Investors, as at June All scores reflect performance in local currency. Yellow markers indicates direction of last change. This analysis contains the current opinions of Allianz Global Investors and its employees, and such opinions are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as an indicator of future results. This analysis has been distributed for informational purposes only, does not constitute investment advice and is not a recommendation or offer of any particular security, strategy or investment product. Past performance is not indicative of future results.

4. Active Asset Allocation – The economic cycle & valuation analysis Example: Economic Cycle & Valuation Score as of 26 June 2017
Euro bonds
While accommodating monetary policy and persisting political uncertainty are supporting German bunds, the existing fundamental overvaluation and fears of a gradual reduction in ECB bond purchases (“proper tapering”) could weigh increasingly heavily from the start of 2018 onwards in our view.
Expansive ECB monetary policy should in our opinion continue to support Euro peripheral sovereign markets, although they remain prone to political risks and vulnerable to growing signs of tapering, i.e. the gradual reduction of bond purchases.
International bonds
The US Federal Reserve is firming up its plans to wind down its bond purchases. Kansas Federal Reserve analyses indicate that taking 675 billion US Dollars’ worth of bonds off the balance sheet would be equivalent to raising the interest rate by 25 basis points over an extended period of two years.
Despite expectations of a cyclical increase, real interest rates remain low by historical comparison. The global effects of reflationing should in our view exert additional upward pressure on nominal yields over the medium term.
As the US economy continues to recover and with fiscal stimulus expected in the late phase of the cycle (“Trumponomics”), we should witness additional pressure on the Federal Reserve to continue returning its accommodating monetary policy to normal from our point of view.
Source: Allianz Global Investors, as at June All scores reflect performance in local currency. Yellow markers indicates direction of last change. This analysis contains the current opinions of Allianz Global Investors and its employees, and such opinions are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as an indicator of future results. This analysis has been distributed for informational purposes only, does not constitute investment advice and is not a recommendation or offer of any particular security, strategy or investment product. Past performance is not indicative of future results.

5. Active Asset Allocation – The economic cycle & valuation analysis Example: Economic Cycle & Valuation Score as of 26 June 2017
Emerging market bonds
Negative structural factors (e.g. high levels of debt and slower growth potential in numerous emerging markets, protectionist trends in the US) have clouded the secular outlook for EM government bonds.
In addition, expectations of a less expansionary monetary policy in the US over the medium term are weighing on this asset class.
In contrast, the cyclical economic environment has recently improved.
Corporate bonds
In our opinion, investment grade and high yield bonds should benefit from accommodating monetary policy and positive economic data.
Based on current fundamental and financial market data, the risk premiums on US corporate bonds (investment grade and high yield) are close to their cyclical fair value.
Our fundamental and market-based valuation models provide cyclical justification of the currently low spread levels for Euro high yield and investment grade corporate bonds.
Source: Allianz Global Investors, as at June All scores reflect performance in local currency. Yellow markers indicates direction of last change. This analysis contains the current opinions of Allianz Global Investors and its employees, and such opinions are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as an indicator of future results. This analysis has been distributed for informational purposes only, does not constitute investment advice and is not a recommendation or offer of any particular security, strategy or investment product. Past performance is not indicative of future results.

6. Active Asset Allocation – The economic cycle & valuation analysis Example: Economic Cycle & Valuation Score as of 26 June 2017
Currencies
Our shorter-term models point to continued sharp discrepancy in the valuation of the Euro versus the US Dollar. “Trumponomics” could cause further cyclical overshoot of the Dollar.
Our long-term exchange rate equilibrium model shows that the fundamental undervaluation of many (particularly emerging market) currencies versus the US Dollar remains significant.
Source: Allianz Global Investors, as at June All scores reflect performance in local currency. Yellow markers indicates direction of last change. This analysis contains the current opinions of Allianz Global Investors and its employees, and such opinions are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts are inherently limited and should not be relied upon as an indicator of future results. This analysis has been distributed for informational purposes only, does not constitute investment advice and is not a recommendation or offer of any particular security, strategy or investment product. Past performance is not indicative of future results.

7. Disclaimer
Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested.
Investing in fixed income instruments 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 of these instruments are generally expected to rise. Liquidity risk may possibly delay or prevent account withdrawals or redemptions. Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or willful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail.
This is a marketing communication issued by Allianz Global Investors GmbH, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by the Bundesanstalt für Finanzdienstleistungsaufsicht ( This communication has not been prepared in accordance with legal requirements designed to ensure the impartiality of investment (strategy) recommendations and is not subject to any prohibition on dealing before publication of such recommendations.