With the battle against inflation still not won, central banks may have to raise rates further – even after a pause – before they “pivot” to lower levels, the investment manager said in a statement.

“Turning points may arrive as economic growth slows, and central banks re-evaluate interest rate paths – at which point investors might adapt their risk to suit market conditions,” the firm continued.

With the right timing, potential entry points could surface in equities, high-yield bonds, and commodities. The firm believes that investors should look for companies with pricing power and those anchored to reasonable valuations and structural trends.

Resilience will be important, the firm continued, both for investors and corporates, as high rates may trigger further financial instability. Allianz Global Investors believes that investors should be watchful and ready for any opportunities.

Focus on multi-asset strategy 
“In 2023, global equity and fixed income markets have made gains, and balanced multi-asset portfolios have performed positively in absolute terms,” Gregor M A Hirt, global CIO of multi asset, said. So where should investors position for the second half of the year?

Of the main asset classes, Hirt is most constructive about equities in the firm's multi-asset portfolios. After a weak year-to-date performance, emerging markets is one of his preferred relative value picks among global stocks in the multi-asset portfolios. He sees emerging markets benefiting from attractive valuations and a weaker US dollar. “China’s reopening after Covid-19 lockdowns and government support for the world’s second-largest economy should help broader emerging market sentiment,” he said.

“Earnings' trends also suggest European companies are showing resilience in the face of a stagnating economy,” Hirt continued. “The outlook also hinges on the steepness of interest rate rises by the European Central Bank. More increases than markets anticipate could bring fresh headwinds.” 

“The Bank of Japan’s ultra-easy monetary policy has also provided a brisk tailwind for one of the recent best-performing equity markets, which still profits from attractive valuations and supportive flows from overseas,” he said.

“In the US, lingering recession fears and rich valuations are weighing on part of the markets. Equities will be sensitive to signs of fresh stress in the banking sector but fears over the health of US regional banks have receded for now,” he continued.

Hirt believes that large US tech stocks have been buoyed by significantly enhanced revenue projections for artificial intelligence applications and related components: “The actual impact of AI on revenues is still to play out, but we should not underestimate the power of emerging trends on equity markets.” 

Fixed income – rate pivots in play
Within a balanced multi-asset portfolio, Hirt sees the potential to become more constructive on fixed income in the months ahead. “Once central banks approach the end of their monetary tightening cycles, sovereign fixed income may become more compelling as yield picks up. We are seeing this phenomenon in US Treasuries, as short-term rates surge in anticipation that the US Federal Reserve is near the end of its interest rate increases,” he said. 

Hirt is slightly defensive on European government bonds given the likelihood of further monetary policy tightening by the ECB. “Investors might consider emerging market sovereign bonds as a diversifier aided by the US dollar’s consolidation and China’s growth prospects. Growth in China should also help some global commodities, compensating for lower demand due to the weaker growth environment elsewhere,” he continued.

With copper being essential for everything from electric vehicle charging stations to oil drilling platforms, researchers have forecast a lack of future supply. In the coming months, however, he thinks there may be room for some further downside. Lower real yields and a stocking up in gold reserves by central banks have also underpinned gold prices, he added. Precious metals may remain attractive in an environment of still-elevated inflation and geopolitical risks, but he would consider holding fire for a better entry point for gold.

US dollar path is key to many investments
“An important factor for the months ahead will be the path of the US dollar,” Hirt said. “The currency has retreated after scaling a 20-year high against a basket of currencies last year. Investors think the Fed has raised interest rates as much as they plan to, whereas in Europe there will likely be further increases. Valuations support other major currencies such as the euro. But the US dollar could retain its safe-haven status as global recession fears come to the fore.” 

Hirt has been positive on the Japanese yen given its valuation and the risk-averse environment. He expects the currency to receive a boost in the event of the BOJ ending its yield curve controls. Overall, his multi-asset outlook favors flexibility to benefit from opportunities in risk assets while managing looming recession risks and higher interest rates.