There are limits to growth...

Allianz Global Investors | Frankfurt | Sep 02, 2011

... declared the Club of Rome at the beginning of the 1970s. Their analysis could hardly have been more off target. But there is once again talk of limits to growth, though this has to do with the state of the economy and thus takes much shorter view of the matter. Read more in our new Capital Market Monthly and learn about our assessment of the actual market situation.

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AllianzGI Capital Markets Monthly, September 2011 (pdf, 213 KB)

Capital Market Presentation September 2011 (ppt, 2.1 MB)

However, the data in recent weeks have been unsatisfactory: virtually every economic indicator has come in weaker, lagging behind even prevailing moderate expectations. In addition, signs of nervousness remain, as can be seen, for example, in the renewed rise of risk premiums on US mortgage bonds. The iTraxx Europe for the financial sector has hit new highs for a crisis, exceeding even the peak reached during the crisis in the first quarter of 2008. At the same time, CDS premiums on German government bonds continue to rise significantly¹. This is a warning signal regarding the market’s expectations on creditworthiness. The EU debt crisis demands its tribute.

It is true that risks have risen, but it remains highly likely that this is just a temporary phase and does not signal an economic crash: the strong growth of the emerging markets and loose interest-rate policies with historically low real interest rates are two reasons to take this view; in addition, the falling oil price is reducing pressure, and solid cash flows and low corporate debt ratios continue to support investment.

The current drop in the economic sentiment indicators may be nothing more than a reaction to the strong correction on the equity markets, and it seems to exaggerate the actual economic slowdown. The "hard" activity data, such as new orders, do not reflect the rising fear of recession. The "surprise indicators" for the US and Japan have also begun to turn around. These reflect the discrepancy between actual developments and analysts’ expectations. The limits to growth are likely to be reached more quickly as the industrial countries reduce their debt, but growth can still be expected.

1 "CDS" stands for "credit default swaps". These instruments reflect the hedging costs of their underlying securities. "iTraxx" represents a family of indices that reflects the development of the CDS markets.