4 October 2023 04 11

Sidestepping the recession but expect Capital Markets: A fierce fight between
below-trend growth in 2024-25 macro and micro dynamics

Allianz Research

Global Economic
Outlook 2023-25
The last hike?
Allianz Research

Executive
summary

Ludovic Subran, Recession (mostly) avoided. A trough in global economic activity is expected
Chief Economist
[email protected] at the turn of the year followed by below-trend growth in 2024-25. Consumer
demand will remain soft amid negative wealth effects and increasing
Ana Boata, precautionary savings. Global trade dropped to its lowest level in the last two
Head of Economic Research
[email protected] years amid the ongoing destocking process in the manufacturing sector and
we only project a timid exit from recession from -0.6% in 2023 to +3.3% in 2024.
Ano Kuhanathan, Overall, the US will see a mere +1.1% GDP growth in 2024, the slowest rate
Head of Corporate Research
[email protected] since 2009, followed by +1.7% in 2025. Both Germany and France will only grow
by +0.7%, followed by +1.6% in 2025. China’s growth is expected to slow down
Jordi Basco Carrera, to +4.7% and +4.2% in 2025. Emerging markets will face a growth deceleration
Lead Investment Strategist
[email protected] to +4% and +3.9% respectively, below pre-pandemic levels.

Maxime Darmet,
Inflation (mostly) circumscribed, leading to timid pivot in interest rates. We
Senior Economist for France & US expect global inflation to fall to 4.3% in 2024, -2pps from 2023 levels, but to
Pablo Espinosa-Uriel,
remain above 3% in 2025. In the short run, commodity prices, notably energy,
Investment Strategist will bring volatility. Moreover, a catch-up in wage growth will bite corporate
Jasmin Gröschl,
profitability, notably in Germany and the UK, but a spiral should be off the
Senior Economist for Europe cards, given the sluggishness in growth. Finally, the USD should remain strong
Bjoern Griesbach,
in the next six months, putting downside pressures on currencies. In this
Senior Investment Strategist context, pivots in key interest rates are likely to remain gradual and timid, led
Roberta Fortes,
by the Fed in summer 2024 (a total of -100bp over the year), after one last hike
Senior Economist for Latin America in November 2023 at 5.75%. The ECB and the BoE will pivot in September 2024,
Maxime Lemerle,
with 50bps in cuts over the year.
Lead Analyst for Insolvency Research
Toxic policy mix in a politically busy year. The monetary stance will maintain
Maria Latorre, real interest rates at their highest levels since 2006. In this context, fiscal
Sector Advisor B2B
consolidation will start but remain moderate compared to past austerity
Maddalena Martini, episodes, given the very politicized year ahead: countries representing 75% of
Senior Economist for Italy & Greece
global GDP are going to the polls (US, EU, Taiwan, UK, Mexico, South Africa,
Luca Moneta, Turkey just to name a few). Corporates are navigating through a period of
Senior Economist for Africa & Middle East
reducing demand and increasing costs with reduced pricing power, leading to
Manfred Stamer a squeeze in profitability. While corporates have been able to offset some of
Senior Economist for Emerging Europe & Middle
East their interest burden by investing in short term assets, their cash is now rapidly
depleting. Particularly in Europe, many corporates are bracing for significant
Nikhil Sebastian, post-Covid debt repayments due in late 2024-25. Business insolvencies are
Economist & Data Scientist
expected to rise by +11% in 2023 and at least +7% in 2024, with Western Europe
being a key contributor to the global trend.
With assistance from : Antonin Henriet, Congwei
Wang, Timothy Wraight, Samuele Girardelli,
Alberto Giuriato, Radha Gupta

2
 4 October 2023

Capital markets: caught between a micro rock and a macro hard

place. Capital markets continue to grapple with a tug-of-war between
macroeconomic and microeconomic forces. Investors remain vigilant on
the uncertainty surrounding the economic landing, policy decisions (higher
for longer) and the overall economic landscape. Despite the elevated
macroeconomic uncertainty, for the time being, investors continue to put their
money on the corporates’ balance sheet resilience narrative, with a strong
belief that companies’ fundamentals will remain positive until macroeconomic
momentum rebounds. On the long-end of the yield curve, with policy rates
peaking, there seems to be little upside left but with the supply-demand picture
looking less favorable in 2024, we do not expect big downward shifts to occur
either. As a result, we expect sideways trading until year-end, with a timid
downward trend in 2024 and 2025 (UST 10y at 3.6% by 2025). For equities,
we believe the narrative of fundamentals resilience will somehow pay out:
We expect positive total returns for the next three years at around ~7 to 10%
yearly. A similar story can be told for corporate credit: We expect credit risk
to remain tight despite some short-term volatility as both corporate balance
sheet resilience and the limited pass-through effect from higher financing costs
have not spooked investor appetite. For emerging market assets, we believe
the carry trade will remain strong and attractive, but country selectivity will
continue to be a key performance factor.

3
Allianz Research

Sidestepping the recession but

expect below-trend growth
in 2024-25
The global economy will continue to face challenges, Concerns about China’s capacity to boost its economy are
with lackluster growth from the cumulative impact of growing and we see a slow landing to +4.7% in 2024 and
monetary policy tightening by end-2024. The US will +4.2% in 2025. This will take a toll on emerging markets,
see a mere +1.1% GDP growth in 2024, the slowest rate where growth should decelerate to +4% and +3.9% in 2024
since 2009, followed by +1.7% in 2025. Both Germany and 2025, respectively, and remain below pre-pandemic
and France will only grow by +0.7%, followed by +1.6% in levels. Overall, global GDP growth is projected to slow to
2025. Overall, main markets in advanced economies will +2.7% in 2023 and +2.4% in 2024, below 2019 levels.
grow twice as slow as in 2022, and continue experiencing
pockets of recession as interest rates remain high.

Table 1: Global GDP growth forecasts

Growth (yearly %) 2021 2022 2023f 2024f 2025f
Global 6.1 3.0 2.7 2.4 2.7

USA 6.0 2.1 2.2 1.1 1.7

Latin America 6.8 3.6 2.1 1.7 2.1

Brazil 5.3 3.0 3.1 1.3 0.7

UK 7.6 4.1 0.3 0.6 1.5

Eurozone 5.4 3.4 0.6 0.9 1.7

Germany 3.1 1.9 -0.3 0.7 1.6
France 6.4 2.5 0.9 0.7 1.6
Italy 7.0 3.8 0.7 0.5 1.5
Spain 5.5 5.5 2.2 1.6 1.8

Russia 5.6 -2.1 2.1 1.9 1.5

Turkey 11.4 5.5 4.0 2.9 3.9

Central and Eastern Europe 5.9 0.8 0.7 2.8 3.2

Poland 6.9 5.1 -0.2 2.8 3.5

Asia-Pacific 6.4 3.2 4.4 4.1 3.9

China 8.5 3.0 5.3 4.7 4.2
Japan 2.3 1.0 2.3 1.3 1.2
India 8.9 6.7 6.5 6.1 6.2

Middle East 4.2 6.7 2.3 2.5 2.6

Saudi Arabia 3.9 8.7 1.5 1.8 3.0

Africa 5.7 3.7 3.2 3.6 4.1

South Africa 4.7 1.9 0.7 1.4 1.6

Source: Allianz Research

4
 4 October 2023

We are heading towards the end of the destocking should be more visible in 2024. Cumulative real wage
cycle and a bottom-out for the manufacturing sector at increases in 2024-25 will not be enough to offset 2022
the turn of the year, but soft demand will keep global losses, which should keep wage-price spiral worries under
trade growth at low levels. Supply-chain issues have control. Profitability is being squeezed while companies’
normalized, with sea freight rates back to pre-pandemic cash buffers reduce fast. The most fragile are feeling
levels and rapidly receding shortages (i.e. semiconductors) the pinch of higher interest rates and lower funding
on the back of oversupply since Q4 2022. Global services availability; more and more corporates, notably in Europe,
are still supported by strong tourism flows and a boost in will need to prepare for the wall of post-Covid debt
business services amid the ongoing selective supply-chain repayments coming in late 2024-25. The normalization in
diversification. However, the global trade outlook remains credit risk is on track as expected and should remain so as
weak. High global interest rates and fragile investor we would need to see growth figures almost double to see
sentiment will exert downward pressure on international a stabilization in insolvencies on both sides of the Atlantic.
trade flows. We only project a timid exit from recession, The rise in business insolvencies is broad-based across
with global trade growth moving from -0.6% in 2023 to sectors and countries – with few exceptions in emerging
+3.3% in 2024. markets (e.g. Russia, China). Conversely, most advanced
economies are already back to pre-pandemic levels.
Corporates are faced with declining demand and higher Western Europe remains a key contributor to the global
costs while pricing power is fading. Strong labor markets rebound, followed by North America, Central and Eastern
and household and corporate balance sheets support a Europe, Latin America and Asia. According to our Global
soft landing in advanced economies. But we have passed Insolvency Index, insolvencies are set to increase by +11%
the peak, with the labor-market rebalancing picking in 2023 and at least +7% in 2024.
up speed (with small increases in unemployment rates
expected). This should support wage deceleration, which

Figure 1: Real wage growth, y/y, % Figure 2: Expense momentum for corporates, q/q

5 Computers & Telecom

Energy
US
US UKUK Eurozone Germany
Eurozone
Chemicals
France
Germany Italy
France Spain
Italy Metals
6
Textiles
Spain Software & IT services
4
0 Pharmaceuticals
2 Automotive suppliers
Electronics
0 Automotive manufacturers
Agrifood
-2 Retail
-5 Hotels
-4 Machinery & Equipment
Construction & RE
-6 Household Equipment
Tourism
-8 Transport Equipment
-10 Transport
-10 Commodities
03/22
07/22
11/22
03/23
07/23
11/23
03/24
07/24
11/24
03/25
07/25
11/25
03/22
06/22
09/22
12/22
03/23
06/23
09/23
12/23
03/24
06/24
09/24
12/24
03/25
06/25
09/25
12/25

-30% -20% -10% 0% 10% 20% 30%

Q1 2023 Q2 2023

Sources: national sources, Allianz Research Sources: Refinitiv,Allianz Research

5
Allianz Research

Figure 3: Business insolvencies - Forecasts

Strongly South Korea Estonia Netherlands Ireland
increasing Italy US Poland
(+30% and more) Japan

Chile Brazil Australia Canada

Noticeably Lithuania Finland Hungary
increasing France UK
(+15% to +30%) Germany
Luxembourg
Cumulative New Zealand
change Norway
over 2023 Portugal
and 2024 Sweden
India Colombia Austria Denmark
Increasing Latvia Czechia Belgium Morocco
(0% to +15%) Slovakia Bulgaria Spain
Romania

China South Africa Switzerland Hong-Kong

Decreasing Russia Taiwan
Singapore

Very low level Low level High level Very high level
(more than -20%) (-20% to -5%) (-5% to +20%) (+20% and more)
2024 expected level compared to 2019

Source: Allianz Research

We expect moderate growth in emerging markets, with sensitivity to location risk, with a sharper slowdown in
several large economies returning to sluggishness. The exports in the regions bordering China and the EU, slowed
effect of lower international demand is felt particularly in investment in Sub-Saharan Africa as a result of political
the countries most exposed to China and the EU, where the instability and fiscal concerns in some Gulf and Central
contribution to GDP growth in 2024 is likely to be negative. Asian countries. Conversely, US nearshoring could support
In contrast, consumption will hold even though the credit the growth prospects of some Latin American countries.
impulse will be less sustained. Particularly striking is the

Figure 4: Contributions to real GDP growth in emerging markets, pp, 2024

Vietnam
India
Philippines
Kenya
Indonesia
Malaysia Domestic
Egypt demand
Romania
Thailand
Nigeria Net exports
Turkey
Morocco
Poland
Hungary
UAE
Peru
South Korea
Slovakia
Czechia
Colombia
Singapore
Russia
Saudi Arabia
Mexico
Chile
South Africa
Brazil

-2 -1 0 1 2 3 4 5 6 7 8
Sources: IMF, national sources, Allianz Research

6
 4 October 2023

Bumpy (dis)inflation ahead,

leading to timid pivot in interest rates.

Policy rates in advanced economies have either reached of the labor market. Meanwhile, corporate margins are
their peak or are about to in this cycle as central under increasing strain, having fallen for three consecutive
banks see increasing evidence that tighter financing quarters in dollar terms. The fall in the margin rate is the
conditions are starting to bite. In the US, we expect the steepest since 2007-08. In Europe we do not see any
Fed to press ahead with a final 25bps interest rate hike further rate hikes by the ECB, despite the recent uptick
in the November meeting as GDP growth momentum in oil prices. There is clear evidence that monetary policy
has firmed up through the summer months and inflation is restricting economic activity – most notably via falling
in core services (excluding housing) is weakening less credit demand. Given the lagged effect of monetary policy
than hoped. However, there is evidence that economic on the real economy, ongoing disinflation and a bleak
activity is heading for a sharp slowdown from end-2023. economic outlook, we think the ECB has reached the
Student-debt payments are resuming in October and cyclical peak in policy rate hikes.
could knock around 0.5pp off quarterly annualized
growth from Q4 2023. Another headwind to household
consumption will be the normalization of the savings rate
as households become more cautious amid a loosening

Table 2: Inflation forecasts, %

Inflation (yearly %) 2021 2022 2023f 2024f 2025f

Global 4.3 8.4 6.3 4.3 3.4

USA 4.7 8.0 4.2 2.3 2.2

Latin America 13.9 14.9 22.0 11.8 7.5

Brazil 8.3 9.3 5.1 4.2 3.5

UK 2.6 9.1 7.0 3.5 2.0

Eurozone 2.6 8.4 5.6 3.0 2.2

Germany 3.1 6.9 6.0 2.8 2.4
France 1.6 5.2 5.3 2.6 2.0
Italy 1.9 8.2 6.2 2.5 2.2
Spain 3.1 8.4 3.7 3.7 2.2

Russia 6.7 13.8 5.5 5.6 4.0

Turkey 19.6 72.3 54.0 38.5 17.4

Central and Eastern Europe 8.1 9.1 12.0 6.2 3.9

Poland 5.1 14.4 12.3 6.2 4.0

Asia-Pacific 1.7 3.7 2.6 2.6 2.4

China 0.9 2.0 0.4 1.7 1.9
Japan -0.2 2.5 3.1 1.8 1.0
India 5.1 6.7 6.4 5.3 4.5

Middle East 15.8 10.3 7.7 5.6 5.1

Saudi Arabia 3.1 2.5 2.8 2.8 2.0

Africa 12.4 16.1 19.7 14.6 9.7

South Africa 4.6 6.9 5.2 4.2 4.5

Sources: IMF, national sources, Allianz Research

7
Allianz Research

We expect central banks to pivot from July 2024, led by very weak growth, normalized wage growth and inflation
the Fed, amid underwhelming growth and normalizing and anchored inflation expectations will nudge FOMC
inflation. But rate cuts will be limited, keeping real members to ease the pressure a little bit. Nevertheless,
interest rates at their highest levels since 2006. In the with inflation and inflation expectations very close to the
US, underlying inflationary pressures are receding amid 2% target, the Fed’s real policy rate will remain largely in
a cooling labor market, lower corporate margins and a very restrictive territory. Tight monetary settings should
pick-up in productivity growth. Very low growth in 2024 be sufficient to further stress the FOMC’s undeterred
will take a further toll on price pressures. We expect commitment to low and stable inflation over the medium
headline CPI inflation to reach the Fed’s 2% target by term at the price of weaker short-term growth.
the summer of 2024. In Europe, core price pressures are
The ECB is likely to cut policy rates by 50bps to 3.5% in
easing more slowly amid elevated energy prices, still
the second half of 2024 as disinflation continues and
tight labor markets and lackluster productivity growth.
economic growth remains close to zero for an extended
As the ECB’s tight stance keeps the bloc’s growth weaker
period, leading to a negative output gap. Moreover,
for longer, we expect inflation to continue to pull back in
as inflation rates are expected to fall below 3% in the
2024. Nevertheless, it will remain higher than the pre-
second half of 2024, the real policy rate will continue to
pandemic norm as wage growth should remain dynamic.
rise to around 1% in mid-2024 from -1.2% currently, despite
In this environment, we expect central banks to deem it
the expected (nominal) rate cuts. Such a level would
appropriate to start cutting interest rates, but to proceed
be higher than the current estimate of the real neutral
slowly. Learning their lessons from the 1970s – when
policy rate of the Eurozone, according to the Laubach-
central banks were too quick to declare victory against
Williams approach. Even more so, ECB restrictiveness,
high inflation – we expect the Fed and the ECB to wait until
defined as the spread between the real policy rate and
H2 2024 before starting to cut rates, despite prolonged
the neutral real yield, would be around 2pps above the
weak growth and inflation at or close to target. Monetary
historic average in the next two years. This highlights the
settings will remain very tight as policy rates will remain
level of relative monetary restrictiveness ahead despite
above current and expected inflation.
the initial rate cuts that we expect. To sum up, the ECB will
In the US, we expect the Fed to start cutting rates in have to slowly take its foot off the brakes in the second
July, bringing them down to 4.75% by December 2024. half of 2024 to avoid a hard landing. This argument
The US labor market is cooling, with the quit rate and the becomes even more pronounced when taking the lagged
unemployment-to-vacancy rate close to or already back to effect of monetary policy into account. According to ECB
their 2019 levels. This suggests that downward pressures estimates, monetary policy now takes more than a year to
on wage growth will continue to build as the economy fully materialize. Our outlook also is broadly in line with a
loses steam. In this context, we expect the Fed to be ready simple inertia Taylor rule estimate that takes the negative
to start pivoting in the July meeting as the combination of output gap and ongoing disinflation into account.

Figure 5: Key interest rates forecasts, %

7 Fed Funds rate, high (%)

ECB deposit rate (%) 5.75%
6 BoE policy rate (%) 4.75%
4.75%
5 5.75% 4.25%
4
4% 3.75%
3 3.5%
2.75%
2
1
0
*Numbers refer-èto end of 2023, 2024 and 2025 forecasts
-1
2021 2022 2023 2024 2025
Source: LSEG Datastream; Allianz Research

Sources: LSEG Datastream, Bloomberg, Allianz Research.

Note: Numbers refer to end of 2023, 2024 and 2025 forecasts.

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 4 October 2023

Fiscal cliff to come in 2024, dragging

industrial policies across advanced economies

Fiscal policy will have to be calibrated carefully to avoid application of the EU fiscal framework, envisaged for 2024.
undoing current monetary policy efforts and to restore Negotiations are still ongoing but it is clear that some
public finances to sound and sustainable paths. If public form of discipline will be needed, also to not erode all the
debt ratios (especially in Europe) have benefited from the monetary policy efforts made so far. The negotiations have
high inflation environment via a higher denominator and focused on more flexible and tailored rules to avoid harming
a boost to government revenues, fiscal balances have countries’ economic growth and to avoid procyclical rules, as
not significantly improved since the massive stretch made well to stimulate green investment and the green transition.
during the pandemic and continued throughout the energy Though it is urgent, we expect a political agreement will
crisis. In the US, fiscal imbalances are growing rapidly. The be very challenging to reach. But we believe countries will
combination of loose fiscal policy and elevated interest make their best efforts in the coming months, a must to
rates are pushing federal fiscal deficits to very elevated ensure their debt-reduction paths will be sustainable and
levels. We estimate that net interest payments will reach credible in the medium term.
3.8% of GDP in 2023 and 4.2% in 2024 for the general
government (federal & local governments), after 3.4% In recent years, there has been a growing worry about
in 2022. However, amid the presidential election and a global economic and financial fragmentation due to
sharply slowing economy, we do not expect the Biden geopolitical tensions. Trade along value chains and cross-
administration to tighten fiscal policy much next year. We border investments are particularly sensitive to tensions
expect the general government public deficit to widen such as strained relations between the US and China or
to -8.4% of GDP in 2024, after -7.9% in 2023 amid a weak Russia’s invasion of Ukraine. Many governments thus turned
economy and continuously rising interest payments as the to subsidies as a new industrial policy to create investment
Fed keeps borrowing costs elevated. incentives. But subsidies are increasingly undermining the
rules-based trading system that has historically fostered
The Eurozone is heading into a challenging 2024 as the trade liberalization and global growth. Subsidies may
ECB’s policy rates will turn more restrictive in real terms provide temporary relief in times of economic shocks, such
at the same time as governments are tightening their as the pandemic, the Russian invasion of Ukraine and
belts. While we expect the ECB to start cutting rates in supply-chain disruptions, but they come with significant
mid-2024, the real policy rate, approximated as the policy costs in terms of public spending and distorted investment
rate minus inflation, will rise amid ongoing disinflation. and consumption incentives.
In fact, it will approach estimates of the neutral Laubach
Williams natural rate, which it has never even come close Industrial policy has gone from passé to fashionable
to in Eurozone history. Secondly, monetary policy impacts again. The resurgence of industrial policy is reshaping the
the real economy with a lag. Since the terminal nominal global economy as governments now actively compete to
rate has likely been reached only just now, and the real influence companies’ production and location decisions.
terminal rate will be reached in 2024, monetary policy Their efforts are already proving to be effective: UN
will have a highly restrictive impact for the foreseeable foreign direct investment (FDI) data for 2022 show that
future. Meanwhile, after large stimulus packages during approximately USD180bn of the USD1.2trn in greenfield FDI
the Covid-19 pandemic and the war in Ukraine, Eurozone was shifted across geopolitical blocs, reflecting countries’
countries are now turning towards fiscal consolidation stances on Russia’s invasion of Ukraine.
through more stringent budgetary measures. Fiscal
stimulus in the Eurozone is expected to drop by -0.8% in
2024, slightly more than the -0.5% drop in 2023. Moreover,
Eurozone governments and institutions have been working
on setting the ground rules to return to a more advisable

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Allianz Research

There is much more reshaping to come. The Too complicated and too late? The EU is working on its
implementation of the Inflation Reduction Act and the own plan for green manufacturing to avoid being left
Chips and Science Act by the Biden administration has behind, incorporating substantial subsidies and relaxing
sparked discontent among allies in Europe and Asia state-aid rules. In size the projected green subsidy levels
due to the magnitude of the subsidies provided. While are similar to the IRA. But their efforts have been criticized
the US views these subsidies as a means to address as too complicated and detail-oriented, while the US offer
deindustrialization in economically disadvantaged regions, of uncapped tax incentives targeted at manufacturers
allies perceive them as a form of disguised protectionism. has been praised for its simplicity. This highlights the
The reaction has shifted from anger to searching for challenges the EU faces in establishing a convincing green
ways to catch up. The EU, Japan and South Korea have industrial policy amid a patchy regulatory framework and
all introduced subsidies for their tech and clean energy complex processes for accessing funds.
sectors to attract new investment or prevent more
companies from shifting to the US. But China (the main Subsidies usually come with strings attached.
target of US industrial policy) and India have also put their Governments are using subsidies to achieve specific
own strategies in place to boost manufacturing. goals, but they come with risks and conflicting objectives.
The current US government wants to create high-paying
The outflow of investments in other regions is likely to manufacturing jobs while reducing emissions, but the
be accelerated by the IRA. Even before the IRA came into feasibility of restoring the sector is uncertain. China’s
force, Germany struggled to contain investments due to prioritization of state-owned enterprises and Japan’s
high energy costs and a shortage of skilled labor. The gap low-growth quagmires serve as warnings. The current
between outbound investments by German companies industrial policy race may lead to boom-and-bust cycles,
and business investment into the country in 2022 was the surpluses and bankruptcies. China’s slowing growth and
largest on record: More than EUR135bn of foreign direct protectionist threats may shift the focus of the debate.
investment flowed out of Germany and only EUR10.5bn However, significant spending on industrial policy will
came in. The IRA is likely to accelerate the trend, and not shape the business landscape, creating opportunities for
only in Europe. innovative industries but posing challenges for businesses
dealing with varying policies in different countries.

10
 4 October 2023

A packed political calendar

raises the risk of policy errors

The US presidential election will be heavily polarized. The last thing the EU needs are illusory solutions.
On the economic front, a Republican victory will mean The question is how the mainstream parties position
lower taxes but not necessarily lower spending. Incumbent themselves on several important topics, such as the war in
President Biden is likely to run the race against former Ukraine, climate change, the green transition, migration
President Trump, the current frontrunner in Republican and fiscal rules. The environment is propitious for populist
polls. D. Trump’s campaign pledges are not well defined parties with illegal immigration on the rise, economic
yet, but are likely to include corporate and personal upheaval with high inflation in Europe for the past two
income tax cuts. Some of Biden’s flagship industrial years and the growing cost of climate policy, namely
policies – such as the IRA – may be partly scrapped if a soaring energy prices, creating a potent new focus.
Republican wins the White House, but are more likely to Already attracting a big share of votes, populist parties
be watered down or revamped. Indeed, most of the IRA are skewing the debate, making it harder for national
and CHIPS funding benefits mostly Republican-leaning governments to adopt sensible politics on pressing
districts, and are protectionist-leaning policies, a stance issues. The worrying point is that the next majority in the
favored by Trump as well. Meanwhile, if Trump’s first term European parliament could be anti-environment, anti-
is anything to go by, social spending (Medicare, Medicaid immigration and against reinstating fiscal discipline – i.e.
and Social Security) – which forms the bulk of Federal Eurosceptic. To prevent Europe from falling behind –
spending – is not very likely to be reduced under a second economically and politically - the next Parliament faces
round. However, we would expect a deregulatory agenda crucial decisions on institutional reform, energy security,
to take center stage. While the overall size of the Federal climate action and support for Ukraine. If a significant
rulebook was little changed during his first tenure, there portion of its members fail to address these issues
was a clear drop-off in the flow of new regulations, and seriously, finding effective solutions will be very unlikely.
the share of firms reporting problems with red tape had
fallen steadily.

Across much of Europe, populism is again on the rise

due to soaring inflation over the past years, the war
and a surge in immigration. The trend towards a right-
wing swing is alarming as Europe heads for nation-wide
elections in 2024. European populist parties have more
than doubled their vote share in the last 30 years. This
reflects a broader tendency across national elections
where voters have rewarded parties that champion
hardline limits on asylum seekers and promote industry
over climate. The political spectrum is more fragmented
and center-right parties might have to adopt some
arguments to counter the shift towards populist and
hard-right parties – whether that will work is, however,
highly unclear. Embracing right-wing groups risks drawing
right-wing policies into the mainstream and moving EU
legislature into a populist direction.

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Allianz Research

Figure 6: Upcoming key elections in 2023-24

Europe‘s credibility and

unity tested

RU-UKR war likely

turning into frozen
conflict

Indo-Pacific / Taiwan
US-China strategic tensions increasing
competition to stay

Global South more

visible and influential

Sources: various, Allianz Research

12
 4 October 2023

Capital Markets:
A fierce fight between
macro and micro dynamics
Market sentiment remains heavily focused on whether Despite some positive news, mid- to late-cycle risks to
the global economy will indeed dodge a recession and growth, earnings and defaults remain very much in place.
the resulting implications for fiscal and monetary policy. As an example, and if historical relationships hold, current
Against this backdrop, investors appear to be placing movements in the long end of the US yield curve would
greater emphasis on better-than-expected balance sheet suggest that US PMIs should be around 55, which is more
resilience, as seen in earnings and profit margins, while consistent with the US economy growing at a +4-5% pace
recognizing the possibility that central banks may need – far from consensus, even considering the upper bound
to maintain higher interest rates for longer. Despite this of US economic estimates. This divergence suggests
implicit hawkish bias, market participants are buying into that either the US economy is bound to reaccelerate to
the idea that an extended period of elevated interest rates meet market positioning or aggregate demand should
will not disrupt overall demand and market momentum. decelerate with market expectations adjusting lower.
But this rather optimistic market positioning comes amid Another example can be found in the credit markets,
a context of heightened macroeconomic uncertainty; where credit risk appears to have decoupled from
ignoring this issue could pose risks in the short to medium macroeconomic conditions, with the recent acceleration in
term. US default rates doing little to alter the pricing of high-
yield corporate credit risk, even though bankruptcy data is
Unfortunately, the difficulty of the current market
consistent with a significant expansion in non-investment
conundrum is only increasing as the divergence between
grade credit risk and a significant wave of fallen angels.
valuations, fundamentals, economic conditions and the
overall market positioning is producing conflicting signals.

Figure 7: US Chapter 11 filings vs high yield spreads

100 Bankruptcy filings (y/y%) 1 500

% of fallen angels (6m lag -10x - y/y)
Lending tightness (y/y -10x - rhs) 1 000
50 High yield spread (y/y - rhs)
500

0 0

-500
-50
-1 000

-100 -1 500
2007 2010 2013 2016 2019 2022 2025

Sources: LSEG Datastream, Allianz Research.

Note: Lending tightness: C&I loans survey banks tightening credit; % of fallen
angels as a % of the total corporate market proxied by ICE BofA indices.

13
Allianz Research

Due to the continuous market conundrum our strategy being particularly concentrated among several tech
review revolves around five key topics. giants. In Europe, the linchpins are spread across three
to four sectors. Such narrow market leadership might
It is no longer about “how high” but “for how long”:
unsettle many investors, given that a mere one or two
As inflation proves more stubborn than previously
quarters of underwhelming earnings could significantly
anticipated, the focus has shifted from the extent of
impact indices. This concern is amplified by the fact that
rate hikes to their duration. Continued signs of inflation
the sectors driving the rally in risk assets are strongly tied
and robust, though weakening, labor metrics suggest a
to yield curve fluctuations, which is bound to experience
prolonged period of elevated central bank rates. While
elevated volatility in the short run. While there may still
both the US Federal Reserve and the European Central
be potential for growth within these key sectors and
Bank appear to be nearing their policy zenith, the central
companies, the inherent dangers of such concentrated
question is whether the expected rate cuts in the latter
risk – whether in earnings or valuations – cannot be
half of 2024 will materialize. While we recognize some
overlooked.
potential upside risk at the short end of the yield curve, we
believe the long end has limited scope for further ascent. Corporate credit risk remains high but no accident is in
This is particularly true, given the hazards of excessive sight. While the headwinds for corporate credit remain
tightening during declining inflation periods, with notable strong due to rapidly accelerating financing costs, we do
implications for riskier assets. not foresee any imminent financial calamities. Despite
the muted impact of rising financing costs to date, the
Can micro dynamics hold until macroeconomic
recurrent need for corporations to manage and refinance
momentum catches up? The central question is whether
their debt will likely lead to a gradual erosion of their
individual company performance can remain strong until
debt-servicing capabilities. Concurrently, the deceleration
broader economic forces gain traction. Corporate earnings
in earnings growth, spurred by tepid demand and overall
in both the US and Europe have consistently outperformed
muted growth, poses further hurdles. In the US context,
expectations, eclipsing broad cyclical economic trends.
large corporations have adeptly navigated heightened
While we have observed notable resilience at the micro
financing expenses, predominantly by investing in the
level, we foresee challenges arising from stringent
short end of the US yield curve. This approach leverages
monetary and fiscal policies, a dip in demand from China
robust interest income to offset interest expenditures.
and a general macroeconomic downturn, all potentially
Moreover, those entities looking to refinance are
impacting overall corporate growth trajectories. That
gravitating towards shorter-term maturities, anticipating
said, we do not expect these challenges to escalate to a
reductions in financing costs in the mid run and aiming
point where there will be a significant surge in defaults or
to benefit from the lower points of the inverted corporate
credit rating downgrades. In our assessment, company-
yield curve. Yet, within the high-yield and non-rated
specific dynamics will keep markets afloat through year-
segment, we are witnessing a surge in default rates as
end, keeping risky asset pricing at a decent level, with
companies grapple with the dual challenges of escalating
performance acquiring some traction as economic cyclical
financing costs and subdued demand. Europe presents
drivers accelerate in the second half of 2024 and into 2025.
a different dynamic. Given the predominant reliance on
This assessment applies to the broader market while firms
bank-based financing, the repercussions of rate hikes
with weaker financial foundations, particularly those more
and dampened earnings have been more immediate
vulnerable to fluctuating financing rates, are likely to face
and pronounced. Overall, and despite anticipating a
continued headwinds.
broader decline in debt-service capabilities, we do not
For how long can market leaders hold the pace? The expect an extensive revaluation of corporate risk. Instead,
buoyancy of risky assets in 2023 can be largely attributed we anticipate a period of range-bound trading for the
to a few sectors, with the US equity market’s performance remainder of this year, followed by a slight narrowing in

14
 4 October 2023

2024 and 2025 as economic momentum gathers pace. their supply chains for production, while simultaneously
Based on this outlook, our preference continues to lean recognizing the nation as a pivotal market for their goods
towards quality credit over high-yield options, even though and services, making their growth engines closely tied
the potential for timid spread widening persists in the to China’s economic “well-being”. Overall, and despite
short-run on both sides of the rating spectrum. the latest broad trends of reshoring and friend-shoring,
CAPEX repatriation to developed economies will have an
Can markets disregard the Chinese impact on global impact on mid- to long-run valuations while the decrease
demand? Many emerging markets stand first in the in Chinese global demand will have an immediate
firing line for potential repercussions of the Chinese impact on corporate balance sheets and consequently on
economic slowdown. But we should not underestimate developed market valuations.
China’s pivotal role in shaping global aggregate demand
and the complexity of its position on the global stage,
especially when it comes to financial markets in advanced
economies and multinational corporations. Indeed, many
of these corporations have deeply integrated China into

Table 3: Capital market 2023-2025 forecasts (year-end figures)

year-end figures Last Unit
EMU 2022 2023f 2024f 2025f
Government Debt
ECB deposit rate 4.00 % 2.0 4.00 3.50 2.75
10y yield (Bunds) 2.83 % 2.6 2.6 2.5 2.4
10y EUR swap rate 3.34 % 3.1 3.0 2.9 2.8
Italy 10y sovereign spread 195 bps 214 170 150 140
France 10y sovereign spread 57 bps 54 60 40 40
Spain 10y sovereign spread 110 bps 109 110 80 70
Corporate Debt
Investment grade credit spreads 150 bps 166 160 140 130
High-yield credit spreads 433 bps 494 475 425 375
Equity
Eurostoxx (total return p.a.) 9.6 ytd % -12 9 7 8

US 2022 2023f 2024f 2025f

Government Debt
Fed Funds rate (high) 5.50 % 4.5 5.75 4.75 3.75
10y yield (Treasuries) 4.61 % 3.8 4.2 3.9 3.6
Corporate Debt
Investment grade credit spreads 121 bps 138 130 120 110
High-yield credit spreads 403 bps 479 400 375 350
Equity
S&P 500 (total return p.a.) 12.7 ytd % -18 13 9 11

UK 2022 2023f 2024f 2025f

Government Debt
BoE rate 5.25 % 3.5 5.75 4.75 4.25
10y yield sovereign (Gilt) 4.36 % 3.7 4.4 4.2 4.0
Corporate Debt
Investment grade credit spreads 158 bps 192 170 150 140
High-yield credit spreads 578 bps 663 600 550 500
Equity
FTSE 100 (total return p.a.) 5.2 ytd % 4.7 3 7 7

Emerging Markets 2022 2023f 2024f 2025f

Government Debt
Hard currency spread (vs USD) 243 bps 273 275 270 260
Local currency yield 6.6 % 7 6.6 6.0 5.5
Equity
MSCI EM (total return p.a. in USD) 1.7 ytd % -20 2 5 12
Sources: LSEG Datastream, Allianz Research

15
Allianz Research

Moving into asset classes and starting with the long end of downward moves in rates. The Fed is currently reducing
the yield curve: its treasury holdings by around USD80bn per month and is
expected to continue to do so until the second half of 2024.
With the policy rate cycle close to its peak, there is
The ECB’s balance sheet is dropping even faster because
little upside left for long-term rates. But with the supply-
of maturing TLTROs and the increased speed of the
demand picture looking less favorable in 2024, we do
passive roll-off of its Asset Purchase Program (APP) since
not expect big downward shifts to occur either. Although
June 2023 (around EUR25bn) per month. The ECB has
approaching peak policy rates, the potential market
made it clear that interest rates will be the primary tool
expectation for an extended period of high central bank
for steering monetary policy for the foreseeable future. As
rates suggests that it might be premature to shift towards
a result, even when the ECB cuts policy rates in 2024, we
longer-duration strategies too soon. In the medium to
expect quantitative tightening to continue with ongoing
long term, however, our models maintain the view that the
passive roll-offs in the APP holdings and, starting in
longer end of yield curves in most developed markets is
2025, also in its Pandemic Emergency Purchase Program
slightly cheap, and we anticipate a downward trajectory
holdings (PEPP).
in long-term yields. This aligns with historical patterns and
our policy pivot scenario, wherein yields tend to decrease On both sides of the Atlantic, the “net-net supply” of
following a central bank pause, whether accompanied government bonds will be substantial as government
by actual rate cuts or the anticipation of accommodative deficits remain large even after fiscal consolidation.
policy. Moreover, as disinflation continues, so will inflation In the US, the amount outstanding of US treasuries is
expectations, which have a substantial influence on long- about to rise by close to USD2trn per year. But compared
term rates. to previous years, the Fed will not absorb part of this
increase. If we add QT instead of QE to the equation, so
Anticipated foreign demand for government bonds
called “net-net supply” will be substantially higher than
is expected to remain stable in the medium term, but
in previous years and private domestic investors will need
high hedging costs will dampen further demand for US
to step in. In fact, the share of outstanding treasuries held
treasuries. Global investors are expected to show robust
by private domestic investors is about to rise from 54%
demand for developed market bonds amid elevated rates
currently to 63% by the end of 2025. A similar picture will
while available. However, in the US, this only holds on an
emerge in Europe, where the German bund supply will
unhedged basis as insuring the currency risk against the
remain large. The ECB’s QT will particularly affect bunds
US dollar is currently very expensive, effectively erasing
for two reasons: first, flexible PEPP reinvestments to keep
the benefits of higher yields.
spreads stable in Europe will likely come at the expense
Meanwhile quantitative tightening by western central of German bunds. Second, the relative share of German
banks will continue, putting a floor below larger debt held by the ECB is larger compared to, for example,

Figure 8: US and German 10y government bond yield Figure 9: Fed quantitative tightening
Fed balance sheet
Treasury holdings overseas
US debt
40 000 Share of treasuries at Fed (RHS) 80%
Share of treasuries at Fed & overseas (RHS)
30 000 60%

20 000 40%

10 000 20%

0 0%
1995 1999 2003 2007 2011 2015 2019 2023

Sources: Allianz Research Sources: Refinitiv Datastream, Bloomberg, Allianz Research

16
 4 October 2023

that of Italy because of a higher capital key and a lower When it comes to foreign exchange, the story is one of
total outstanding amount. To sum up, unfavorable supply- resilience for the greenback over the year despite being
demand balances will limit rates from dropping too much extremely overvalued. Several elements can impact a
despite a policy pivot and falling inflation expectations. currency in the short term. In the last two years, the interest
rate differential has been a major factor for the USD.

Figure 10: FX over/undervaluation according to Allianz Research models*

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%
CZK

SGD

CNY
PLN

EUR

BRL
CLP

AUD

JPY

TRY
USD
NZD

HUF

PEN

INR

COP
PHP

HKD

IDR
CAD
THB

MXN

ILS
GBP

SEK
CHF

NOK
KRW

TWD

ZAR

RUB
MYR

Sources: Refinitiv Datastream, Allianz Research.

*Source:
Purchasing Power
Refinitiv, AllianzParity (PPP),
Research. Behavioral
For every currency,Equilibrium Exchange
models with larger Rate
errors are (BEER) and Fundamental Equilibrium Exchange Rate (FEER)
penalized.

models (trade-weighted based). For every currency, models with larger errors are penalized.

Figure 11: US Dollar Index (DXY) vs Major 2Y rates differential

120 3.5
DXY 3.0
115
DXY forecasts
2y rates differential 2.5
110
2.0
105
1.5
100
1.0
95
0.5
90
0.0
85
-0.5
80 -1.0
75 -1.5

70 -2.0
01/95
02/96
03/97
04/98
05/99
06/00
07/01
08/02
09/03
10/04
11/05
12/06
01/08
02/09
03/10
04/11
05/12
06/13
07/14
08/15
09/16
10/17
11/18
12/19
01/21
02/22
03/23
04/24

Sources: Bloomberg, Allianz Research.

Note: The DXY is measured as a weighted average of Major currencies (the Euro, Japanese Yen, Pound Sterling, Canadian Dollar, Swedish Krona
and Swiss Franc). 2y rates differential corresponds to the weighted average of US 2y rate – Major 2y rates.

17
Allianz Research

In 2023, the greenback has lost momentum from its peak Corporates have been able to withstand the increase
levels achieved last year, with Latin American currencies in financing costs but defaults are accelerating
performing best against the USD in the year. However, Corporate credit markets have remained complacent
since the summer, factors such as growing concerns over throughout 2023, disregarding the increasing burden
the outlook for China and the global economy, subdued of tighter financing conditions and overall erosion in
activity in the Eurozone and the resilience of the US cyclical demand indicators. However, as markets enter
economy have bolstered the USD. We anticipate these the higher- for- longer scenario, borrowers will continue
dynamics, particularly related to economic growth, to face challenges as demand slows and financing costs
continue underpinning the USD in the near term. However, remain high. We expect this to have limited impact on
we do not foresee any significant surges since most of higher-quality corporates as the lower but still positive
these influences are already factored into the market. Our earnings growth is likely to outpace the increase in
six-month outlook projects the EURUSD to be fairly range- interest expenses, thus leading to a positive effect on
bounded at 1.06-1.10. By the end of 2024, we expect the debt-servicing ratios, such as Interest Coverage Ratios.
EURUSD to reach 1.14, based on our forecasts for the However, this may not prove true for lower-rated
Eurozone’s economic recovery, especially from the second companies, especially within the high-yield space. With
half of 2024; anticipated interest rate reductions, notably financing costs around 8-9%, the needed earnings
by the Fed, and the soft landing in the US; some of the growth to compensate for the increase might be too high
factors slowing manufacturing – destocking and demand to accomplish, leading to a gradual erosion of debt-
from China – becoming more favourable next year servicing capacity. Additionally, a lot of such companies
and the absence of significant disruptions to the global have decided to take a passive approach to market
growth trajectory in 2025. However, the euro could face engagement, with issuance volumes being extremely low.
headwinds from the ongoing energy crisis. This passivity may not be sustainable in the event of a
continued economic and earnings decline, and the higher-
Given this scenario, we expect non-cyclical currencies
for-longer scenario will most likely imply a substantial
and those with a high yield to fare well. Notably, the
increase in interest expenses during refinancing. In this
Brazilian real (BRL) and Colombian peso (COP) stand
context, prolonging refinancing strategies may expose
out, appearing undervalued in our models. Meanwhile,
them to unfavorable outcomes. In fact, we are beginning
the Mexican peso (MXN), even if comparatively pricey
to witness such incidents manifesting in the floating
now, should benefit from elevated interest rates. We
borrowing sector, such as CLOs (Collateralized Loan
do not anticipate Banxico to initiate rate cuts until the
Obligations).
forthcoming year. Nevertheless, it is important to be wary
of potential volatility in the MXN, especially with the Regionally, Europe seems to be more exposed to the
looming Mexican presidential elections in mid-2024. current market environment since the financing mix
for corporates is heavily reliant on banks and banking
Figure 12: Transatlantic spreads vs. EURUSD institutions seem less inclined to replace market funding.
This is because despite the reduced systemic banking
6 Real 10y US-DE government bond spread 0.95 concerns, challenges such as capital cost, profitability and
Real FED-ECB policy rate spread
deposit outflows continue to weigh on lending intensions.
EURUSD (rhs, inverted scale)
4
1.00 As a result, bank lending should continue to slow,
making access to refinancing tougher for lower- rated
1.05
2
corporations. Nonetheless, private credit may emerge as a
1.08 potential savior, especially for robust businesses with weak
1.10
balance sheets facing refinancing needs.
0
1.13
1.15
1.16
Against this market conundrum, our valuation modelling
-2
1.20 suggest that spreads should widen in the short run while
allowing for some compression in the mid run. As a result,
-4 1.25 investment-grade credit remains our preferred choice, with
16 17 18 19 20 21 22 23 24 25
expectations of compressing spreads and positive excess
returns in 2024 and 2025. More so as despite anticipating
Sources: Refinitiv Datastream, Allianz Research some spread widening by the end of this year, IG credit’s
risk-reward proposition seems more attractive than high

18
 4 October 2023

yield. In numbers, our outlook for the end of 2023 remains experienced a remarkable double-digit rally despite the
that of a mild widening, larger in the Eurozone (160bps) heightened economic and geopolitical uncertainty. But this
than in the US (130bps). Afterwards, and despite the surge has been marked by significant disparities across
expected amplification of default rates in 2024 and 2025, the equity universe. Starting with the US, growth stocks
we still expect some structural compression (-20-30bps have soared by ~30 to 40%, while the rest of the index has
spread compression) as demand for credit remains strong remained relatively “flattish” over the year. The prevailing
and corporate fundamentals remain resilient. Within high hypothesis is that the robust performance has been
yield, we expect spreads to widen slightly in 2023, reaching primarily driven by bullish sentiment at the micro-level
400bps and 475bps for the US and Eurozone, respectively, – revolving around themes such as artificial intelligence,
with the latter experiencing elevated short-term volatility. the reshoring of businesses and the cushioning effect of
Afterwards, we expect a structural 25-50bps compression interest income on the rate cycle for large corporations
on the back of lower financing rates and a pick-up in – rather than overall optimism about the broader US
economic performance. economy.

Equities are buying the balance sheet resilience narrative

while downplaying the still high macroeconomic
uncertainty. In 2023, US and European equities have

Figure 13: US and Eurozone Interest Coverage Ratios (ICRs)

100 10

80
8
60

40 6
20

0 4

-20 US - EBIT (y/y%) 2

US - Interest expense (y/y%)
-40
US - Interest coverage ratio (rhs)
-60 EZ - ICR (rhs) 0
2007 2010 2013 2016 2019 2022 2025

Sources: LSEG Datastream, Allianz Research.

Note: Dotted lines represent simulations.

Figure 14: US EPS growth and earnings breadth

60

40

20

-20

-40
S&P 500 Tech EPS y/y%
S&P 500 EPS y/y%
-60
S&P 500 Tech - earnings breadth
S&P 500 - earnings breadth
-80
2009 2011 2013 2015 2017 2019 2021 2023 2025
Sources: LSEG Datastream, Allianz Research.
Note: Dots indicate analyst expectations; Earnings breadth = (# of earnings revisions up - # of earnings revisions down) / total # of earnings revisions.
19
Allianz Research

Along these lines, earnings narratives at the micro level present rate cycle. It is worth highlighting that US earnings
have been predominantly positive, with Q2 results are currently outpacing most global markets. Additionally,
generally outperforming expectations. This trend has the broader US economy is likely to be relatively sturdy.
prompted analysts to recalibrate their forward-looking Given these factors, we anticipate that the appeal of US
earnings estimates upward, reflecting a growing equities, even when considered pricey on a cross-asset
sentiment that corporate growth mechanisms might be basis, will persist in the immediate future limiting the
sturdier than earlier projections suggested. However, a possibility of a structural underperformance.
more refined perspective is needed, particularly when
examining US market indices. A salient contributor to Quantifying these insights and grounding them in
the favorable investment climate is the robust earnings our valuation frameworks, our macro-centric models
momentum exhibited by stocks in the technology sector, consistently indicate a potential equity market pullback
especially with an AI focus. In this regard, since the year’s of about 5%. This is primarily due to the misalignment
onset, there has been a consistent upward revision in between underlying economic signals and the ongoing
earnings projections for these entities. This has not only market surge. In contrast, our EPS-driven models project
led to a revaluation of individual stocks but has also that the US equity markets could rise approximately +10%
influenced a broader reassessment of the US technology in price terms this year, maintaining some steadiness
sector’s valuation. Another pivotal driver has been the through 2024 and 2025. For 2023, our conviction leans
influx of fiscal stimulus combined with the reshoring more towards our bottom-up modeling. However, as we
surge which has led to a reassessment of mid to long- progress into 2024 and 2025, we anticipate a gradual
term valuation for the industrial sector and may serve as pivot towards our macro-informed models given the fact
a buffer against potential market declines in the mid to that we expect macroeconomic volatility to diminish.
long-run. Overall, our projections anticipate total returns of roughly
+13% for 2023, and approximately +10% for both 2024 and
Our assessment of the current situation suggests that 2025.
the US equity market is poised to outperform during the
Briefly on European equities, these are grappling with
numerous challenges amid signs of stagnation, most
Figure 15: S&P 500 macro and micro based models notably with Germany entering a recession and with
cyclical activity indices remaining in the red. Additionally,
there are the looming threats of de-industrialization,
70
high energy costs and structural issues such as high
S&P 500 (y/y%) debt levels. Despite these economic hurdles, European
60
Macro based indices remain positive and into the double-digit territory.
50 Macro based - EPS As in the US, this resilience is attributed to better-than-
40 GDP based expected earnings. However, due to high European
EPS expectations based dependencies to the current business cycle, we expect
30
AZ Research forecasts bad economic data to have a stronger effect on overall
20 equity valuations than they would for US counterparts.
10 This conviction is even stronger when looking at single
0
countries as German equities typically flourish in a robust
economic environment. But with PMIs below 50, and the
-10
country’s energy-intensive nature, escalating oil prices
-20 could continue to be detrimental and the space for a
-30 sustained market recovery will depend on improvements
2019 2020 2021 2022 2023 2024 2025 on various fronts, such as a decrease in energy costs,
a favorable shift in China’s economic landscape and a
Sources:LSEG Datastream, Allianz Research.
global manufacturing and trade resurgence. Despite all
Note: Macro based depends on M2, real 10y yields, inflation and USD
the headwinds, European equities present an attractive
NEER; Macro based – EPS depends on ISM PMI, consumer confidence,
proposition, trading below their historical average. When
housing starts and IG spreads; GDP based depends on real GDP and EPS
juxtaposed with the US market, there is a considerable
expectations based depends on EPS growth consensus.

20
 4 October 2023

discount in European equities, even after sector rate cuts. Either way, this will create volatility in the local
adjustments. Our European forecast suggests a steady, bond market, and therefore we expect the downward
albeit modest, yearly return for this year (+9%), with below trend in yields to halt in the coming months. In fact, we
+10% total returns for both 2024 and 2025 as negative are forecasting a slight increase in yields until year- end,
macroeconomic effects continue to shave off some return followed by a gradual decrease next year once disinflation
potential. trends are confirmed. For our EM local bond benchmark,
that translates into a 6.6% yield and a decline towards
As the monetary policy tightening continues in
5.5% in 2025. In the particular case of China, where local
advanced economies, the pressure on emerging market
yields are depressed by the concurrence of disappointing
(EM) assets is being intensified by China’s structural
economic data, low inflation and persistent vulnerabilities
slowdown. The country’s influence remains a pivotal
in the real estate sector, we see the 10Y yields range-
factor for EMs, and both the weak economic momentum
bound around 2.5-2.75%, but not falling below 2.5%. For
(the reopening failed to provide the expected impulse)
2024 and 2025, the trend will be slightly upwards.
and the structural changes foreseen in the medium term –
that come on top of heightened geopolitical tensions – will EM equities are poised for a lackluster year in 2024 after
drag on performance. Growth forecasts are being revised trailing the US yet again in 2023. The drag from Chinese
down for the countries most exposed. equities on EM benchmarks has masked some good stories
elsewhere. While EMs as a whole have underperformed
EM hard currency bonds are exposed to a moderate
both the US and Europe, 2023 has seen the return of
correction. Selectivity has been the name of the game
markets closely related to the US and/or the tech sector.
since EM bonds started their recovery in late 2022
However, the same clouds gathering over the US market
following China’s reopening hopes. In fact, investor
that lead us to expect a correction until year- end apply
sentiment towards higher- and lower-rated countries
to EMs, too, with the additional fears that the USD could
diverged significantly and, although this will continue
slightly strengthen until year- end. The case of China, while
to be in focus, we think that it may have been overdone
pivotal, is harder to predict. Some fundamentals-based
for higher-rated countries. Acknowledging the resilience
assessments seem to depict Chinese equities as cheap –
shown so far to the effects of global tightening, we believe
even as China transitions to structurally lower growth rates
that the macroeconomic picture indicates a higher risk
– but the harder -to -integrate political component does
than what markets are pricing in, even for the major
not invite optimism, especially for foreign investors. On the
countries. On the other hand, the disinflationary pressures
former, it could be an entry point for local investors. On the
and expected Fed rate cuts may present interesting
latter, and if the outflows from Chinese assets continue,
opportunities to capitalize on capital appreciation, but the
we could see a country rebalancing in major benchmark
timing for the long-duration call is exposed to an inflation
indexes (the weight of Chinese equities still stood at 30%
rebound – though we do not expect this. Furthermore,
in the MSCI EM as of the end of August) to better reflect
a general interest rate moderation would also help in
the problems it is going through. That said, we expect a
reducing debt- sustainability concerns among these
correction towards year-end that would leave the 2023
markets. We expect the spreads of our benchmark index
performance at almost 0%, followed by two years of total
to widen to 275bps until year-end, and to go through a
returns at 5% and 12%, supported by a slight retreat of the
slow gradual improvement towards the 260bps level by
USD, a very low starting point for Chinese equities and the
2025.
continuation of good country stories beyond China.
Expect some volatility on EM local currency yields until
year- end before they continue their downward trajectory.
As some central banks that stepped in early in the cycle
start their policy rate cuts (Brazil, Chile, Poland), we
expect the uncertain inflation trend dynamics to make
this initial stage of the normalization bumpy. That could
translate into the need to either roll back some of the
cuts (more likely in Eastern Europe) or put the brake on

21
Allianz Research

Our
team

22 22
 4 October 2023
Chief Economist Head of Head of Insurance, Wealth
Allianz SE Economic Research & Trend Research
Allianz Trade Allianz SE

Ludovic Subran Ana Boata

Arne Holzhausen
[email protected] [email protected]
[email protected]

Macroeconomic Research

Maxime Darmet Cucchiarini Roberta Fortes Jasmin Gröschl Françoise Huang

Senior Economist for US & France Senior Economist for Ibero-Latam Senior Economist for Europe Senior Economist for Asia Pacific
[email protected] [email protected] [email protected] [email protected]

Maddalena Martini Luca Moneta Manfred Stamer

Senior Economist for Italy & Greece Senior Economist for Africa & Middle East Senior Economist for Middle East &
[email protected] [email protected] Emerging Europe
[email protected]

Corporate Research

Ano Kuhanathan Aurélien Duthoit Maria Latorre Maxime Lemerle

Head of Corporate Research Senior Sector Advisor, B2C Sector Advisor, B2B Lead Advisor, Insolvency Research
[email protected] [email protected] [email protected] [email protected]

Capital Markets Research

Jordi Basco Carrera Bjoern Griesbach Pablo Espinosa Uriel

Lead Investment Strategist Senior Investment Strategist Investment Strategist, Emerging
[email protected] [email protected] Markets & Alternative Assets
[email protected]

Insurance, Wealth and Trends Research

Michaela Grimm Patricia Pelayo-Romero Kathrin Stoffel Markus Zimmer

Senior Economist, Economist, Insurance & ESG Economist, Insurance & Wealth Senior Economist, ESG
Demography & Social Protection [email protected] [email protected] [email protected]
[email protected]

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Recent Publications
26/09/2023 | Allianz Global Wealth Report 2023: The next chapter
25/09/2023 | Climate tech- the missing piece in the net zero puzzle
21/09/2023 | All eyes on fiscal in the Eurozone
14/09/2023 | Germany needs more than a plan
12/09/2023 | Sector Atlas: Assessing non-payment risk across global sectors
07/09/2023 | A slow landing for china
05/09/2023 | Is diversification dead?
04/08/2023 | Global boiling: Heatwave may have cost 0.6pp of GDP
01/08/2023 | Critical raw materiels- Is Europe ready to go back to the future?
28/07/2023 | US & Eurozone growth defying gravity
27/07/2023 | Playing with a squared ball: the financal literacy gender gap
21/07/2023 | US immaculate disinflation: How much should we thank the Fed for?
20/07/2023 | Back to the beach: Tourism rebound in Southern Europe?
13/07/2023 | A new Eurozone doom loop?
12/07/2023 | European Retail: a cocktail of lower spending and tighter funding
06/07/2023 | Eurozone convergenve: two steps foward, one step back
04/07/2023 | More emission, than meet the eye: Decorbonizing the ICT sector
29/06/2023 | De-dollarization? No so fast …
27/06/2023 | Toasted, roasted and grilled? Walking the talk on green monetary policy
20/06/2023 | Climbing the wall of worries
16/06/2023 | Automotive industry unplugged?
14/06/2023 | Biodiversity loss part II: portfolio impacts and abatement measures
09/06/2023 | Past the peak – European corporate margins down again?
07/06/2023 | The right to work versus the right to retire
02/06/2023 | Sector vulnerability to rising financing costs
01/06/2023 | Allianz Trade Global Survey 2023: Testing resilience
25/05/2023 | European commercial real estate – selectivity matters!
17/05/2023 | Allianz Global Insurance Report 2023: Anchor in turbulent times
17/05/2023 | G7 summit in Japan could trigger new protectionism phase
11/05/2023 | Bank of England: First to hike, last to pause and pivot
09/05/2023 | The Chinese challenge to the European automotive industry

Discover all our publications on our websites: Allianz Research and Allianz Trade Economic Research

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Director of Publications
Ludovic Subran, Chief Economist
Allianz Research
Phone +49 89 3800 7859

Allianz Group Economic Research

https://www.allianz.com/en/economic_research
http://www.allianz-trade.com/economic-research
Königinstraße 28 | 80802 Munich | Germany
[email protected]
@allianz
allianz

Allianz Trade Economic Research

http://www.allianz-trade.com/economic-research
1 Place des Saisons | 92048 Paris-La-Défense Cedex | France
[email protected]
@allianz-trade
allianz-trade

About Allianz Research

Allianz Research encompasses Allianz Group Economic Research
and the Economic Research department of Allianz Trade.

Forward looking statements

The statements contained herein may include prospects, statements of future expectations and other
forward-looking statements that are based on management’s current views and assumptions and
involve known and unknown risks and uncertainties. Actual results, performance or events may differ
materially from those expressed or implied in such forward-looking statements.
Such deviations may arise due to, without limitation, (i) changes of the general economic conditions
and competitive situation, particularly in the Allianz Group’s core business and core markets,
(ii) performance of financial markets (particularly market volatility, liquidity and credit events),
(iii) frequency and severity of insured loss events, including from natural catastrophes, and the
development of loss expenses, (iv) mortality and morbidity levels and trends, (v) per-sistency
levels, (vi) particularly in the banking business, the extent of credit defaults, (vii) interest rate levels,
(viii) currency exchange rates including the EUR/USD exchange rate, (ix) changes in laws and
regulations, including tax regulations, (x) the impact of acquisitions, including related integration
issues, and reorganization measures, and (xi) general compet-itive factors, in each case on a local,
regional, national and/or global basis. Many of these factors

No duty to update

The company assumes no obligation to update any information or forward-looking statement

contained herein, save for any information required to be disclosed by law. may be more
likely to occur, or more pronounced, as a result of terrorist activities and their consequences.

Allianz Trade is the trademark used to designate a range of services provided by Euler Hermes.
Allianz X invests in digital frontrunners in ecosystems relevant to insurance and asset management. In just
a few years, it has grown to a portfolio of almost 30 companies and AuM of approximately 2 billion euros.
Allianz X has counted 11 unicorns among its portfolio so far. The heart and brains behind it all is a talented
team of around 40 people. As one of the pillars of the Allianz Group’s digital transformation strategy, Allianz
X provides an interface between Allianz Operating Entities and the broader digital ecosystem, enabling
collaborative partnerships in insurtech, fintech, and beyond. As an investor, Allianz X supports mature digital
growth companies to take the next bold leap and realize their full potential. Keep up with the latest at Allianz
X on Medium, LinkedIn, and X (formerly Twitter).
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