Allianz expects interest rate recovery in the medium term
• Maximilian Zimmerer: artificially low interest rates harbor the risk of asset-price bubbles without enabling further growth impetus.
The ongoing low interest rate environment continues to be the main challenge for savers and investors. In view of the European Central Bank’s surprising step to cut the key interest rate to a historic low of 0.25 percent, and given the continued cheap money policy in the US and Japan, the pressure on yields is likely to persist.
“We are observing rising valuations for different types of investments,” said Maximilian Zimmerer, Allianz SE Board of Management member responsible for the Group’s investments, on the occasion of the Capital Markets Roundtable that takes place annually in Frankfurt. “There is a risk of a bubble if interest rates do not gradually move away from their artificially low level.”
Pressure on yields is bound to persist
Allianz expects the US to gradually exit its extremely loose monetary policy in the medium term, as soon as the US Federal Reserve detects sufficient signs for accelerated economic growth. Even if this does not necessarily mean that key interest rates will increase, the announced tapering of the expansionary monetary policy could result in a slight increase of the interest rate level in the short term. However, pressure on yields is bound to persist.
As soon as the first signs of an interest rate turnaround manifest themselves in the US, this will have an immediate impact on interest rates in the euro zone as well. “Historically, European interest rates have at least partially imitated the development in the US,” said Maximilian Zimmerer. “This is also what we are likely to see in the coming months – in spite of the European Central Bank’s interest rate cut.”
The economy in the eurozone has come out of its recession this summer and Allianz is counting on a moderate upward trend for the coming months. “For this reason we believe that a renewed lowering of the interest rate by the ECB wasn’t necessary,” said Zimmerer. “The question is: Who stands to benefit from the new interest rate cut? Artificially low interest rates per se are not sufficient to escape from the financial crisis. The interest rate cut will hardly be able to trigger additional stimulating effects.”
The low interest rate environment entails special challenges for investment activities. Ongoing low interest rates will inevitably be reflected in the valuation level of other asset classes as well. In individual segments this may lead to excessive valuations that are not sustainable in the long term, i.e., to an asset-price bubble.
„Long term ventures“
“Identifying such exaggerations has become one of our most important tasks these days,” said Zimmerer. “On the one hand, the long-term nature of our obligations constitutes a natural challenge for us in our capacity as investors, but it is also a big advantage that needs to be exploited.”
For this reason illiquid investments such as real estate, secured loans or alternative investments such as infrastructure, that are not equally available in the same form to short-term oriented investors, are of interest to Allianz. However, these types of investments are long-term ventures and require appropriate management capacity to build up necessary competencies and to obtain direct market access, said Zimmerer.
“Long-term investments in illiquid asset classes can provide two types of benefits: Allianz and its customers benefit from attractive yields coupled with an acceptable risk and, at the same time, we function as a permanently engaged provider, to industry, of capital for long-term projects,” said Maximilian Zimmerer.
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