Allianz Research These themes inform our global strategy. We expect Corporate credit – Optimizing the risk-return profile. fixed income, especially investment-grade corporate The extreme “macro-based” 2022 fixed income credit, to outperform equities in 2023, particularly underperformance has pushed corporate yields structurally towards year-end, but not at any cost. In 2024, higher with most of the move triggered by higher long- equities should slightly outperform fixed income, with term rates. In 2023 policy rate expectations will continue emerging markets outpacing both Europe and the US. to dominate corporate credit performance leaving micro Importantly, and due to the current high yields, high fundamentals out of scope and leading to exacerbated quality fixed income may already prove interesting for short-term volatility with a high probability of short- hold-to-maturity investors that can withstand short- lived spread widenings and price underperformance for term volatility (Table 5). In summary: both investment-grade and high-yield credit. However, corporate spreads are bound to compress due to recovering Sovereign rates – A bit too early to overweight fundamentals, relatively high cash positions, improving duration. We expect the prolonged hiking cycle to forward-looking economic sentiment during the second half fully dominate both ends of the sovereign curve next of next year. We expect spreads to remain close to current year leading to flattened yield curves. As market levels for the remainder of the year, with the possibility expectations are coincident with our economists’ policy of some widening waves in H1 2023 (~180bps for IG). path a long-duration overweight call is not warranted Afterwards we expect a structural compression of spreads, as there is still a high risk of markets readjusting for with both IG and HY credit slowly crawling towards long- higher short-term rates. In the Eurozone, this situation term averages (~160bps in 2023 and ~140bps in 2024). could lead to an increase in fragmentation risk which Within this camel-hump-shaped trajectory, we expect high- could keep sovereign spreads persistently higher in yield credit to underperform especially in H1 2023 and to the short run. Because of that, we expect US Treasury structurally compress in 2024 (~450bps by 2024). yields to move timidly lower over the next two years and especially in 2024 due to a decline in the short- Equities – Caution along the investment horizon. Equity end of the curve leading to a timid bull steepening. markets have come under pressure in 2022 due to mounting Numerically, we target a 3.6% 10y US Treasury yield stagflationary concerns weighing on market sentiment. The for 2023 and 3.5% for 2024. Moving across the Atlantic, market leaders of the past 10 years have quickly become we expect 10y Bunds to follow a similar pattern but the main drag to market performance (around -10 to -20% with a delay as the ECB policy turn will most probably ytd). However, and despite the increased recessionary take slightly longer than the US. In this environment, certainty, markets continue to refrain from crossing the we expect the 10y Bund to remain flat at 1.9% in 2023 bear market line and will probably finish the year with while decreasing 20bps to 1.7% in 2024. a low double-digit negative performance, probably underestimating this cycle’s implications on aggregate Emerging markets fixed income - Yields are high, demand. Because of this, it seems too early to call for an but pressures have not left. Rising yields and strong equity market trough and we believe that it is possible corrections over the last two years make EMs to see another sizeable market correction in the short- increasingly attractive later in the year. However, the run should markets readjust for a more aggressive policy risks coming from a weak macroeconomic outlook path or for a deeper recession. This downside pressure remain. Commodities exporters still have an edge in will continue to be exacerbated by the still-high earnings the short-run, but tailwinds from China’s reopening expectations, which will have to readjust in the next 12 and a potential Fed pivot would favor other Southeast months (especially in the US). Moving into late 2023, equity Asian countries. We expect a volatile first half of markets should regain some traction as the push coming the year for hard currency spreads, that could reach from declining short-term rates and the overall economic maximums close to 400, but that should compress recovery should aid risk appetite (~5% to 8% total return towards year end (below 350bps in 2023) and even both in 2023 and 2024). Regionally, we expect Europe and more in 2024 (below 300bps), owing to still high EMs to still post single-digit positive price returns in 2023 commodity prices and improving macro fundamentals. while the US will most likely remain flat. In 2024, we should Similarly, we think there will be interesting entry points see a reacceleration of equity returns, with broad markets through the year in the local currency environment performing just short of double-digit returns and with EM as EM central banks wait for the Fed to move and showing some growing momentum due to low valuations inflation to cool down. The GBI-EM div. will experience in some Asian markets, although with the important caveat sustained yields decreases (6.5% in 2023 and 6% in of important downside risks coming from China and 2024). geopolitics. 26