Country-specific risk factors increasingly more important in H2 2017: Allianz

COUNTRY-specific risk factors, rather than global macroeconomic news, will become more important to asset-allocation strategies for the rest of 2017.

In its midyear outlook report issued on Thursday, Allianz Global Investors says the global economy has been in a cyclical "sweet spot" for more than a year. But now, actively differentiating between regions and countries will become more important for investors.

"Investors can no longer rely on a rising tide of cyclical data to lift all boats," says Allianz, which has observed a rising tide of strong synchronised cyclical data lifting most asset classes the past year.

"We expect that to change: The EU and Japan should strengthen while the US, China and the UK slow or stall."

Allianz believes that Europe looks undervalued. It noted that many European corporations tend to be more long-term focused than their US counterparts, and have not re-levered in the same way in recent years.

"They are positioned to invest to improve innovation and productivity. This may translate into annual returns in the 8-10 per cent range in the coming years. Half of this may be dividend income that tends to be less volatile."

With many European corporations - particularly those in the financial, utility and telecoms sectors - trading at large discounts to their US competitors, European equities may present a contrarian opportunity, after six years of near-chronic underperformance.

Global investors are heavily underweight China, even though its equities have reasonable valuations and the longer-term outlook is positive. Allianz's optimism is underpinned by expectations that China's gross domestic product growth is set to stabilize at above 6.5 per cent for 2017; MSCI's decision to include China A-shares in its emerging market index and the re-accelerated corporate earnings growth since the third quarter of 2016.

Moving to the US, earnings growth has picked up after several dull years.

"Given this resurgence and recent lagging performance, investors should focus on value equities. Inexpensive, low-P/E stocks can be beneficial to portfolios when profit growth broadens and becomes more abundant."

As for the UK, the region seems set to endure a significant period of economic uncertainty and weakness now, which may weaken sterling further.

"Consider taking profits on highly priced overseas earners and look to reinvest into high-quality domestic earners if an economic slowdown creates opportunities,'' Allianz says.

On currencies, it believes the euro and sterling are undervalued against the US dollar.

"We expect the euro to strengthen from here, while sterling may have further to fall thanks to UK economic weakness and Brexit-related uncertainty. All eyes will be on how global monetary policy plays out in the remainder of the year.''

Ultimately, investors must take risk for the potential to earn a return.

"Brexit, President Trump and geopolitics remain some of the key risks on the horizon. But with yields globally still repressed, and central banks looking to taper or even raise interest rates, traditional low-risk investments may not protect one's wealth," says Allianz.