January 2016

Giordano Lombardo
Group CIO
Edited by Claudia Bertino
Head of Financial Communication

We attach a very low

probability to a 2008-style
crisis.

Giordano Lombardo, Pioneer Investments Group CIO, gives his view on pressing
questions for investors after the recent risk asset correction:
What are the risks that a new 2008-style financial crisis will occur?
What is the probability of a hard landing for the Chinese economy and what are
its consequences on deflationary trends around the world?
What is the current level of confidence on the US economy?
Is the current market turmoil opening-up opportunities for long-term investors?
Current market and economic conditions are extremely complex. Structurally low
growth, high global debt, and very weak inflation expose the global economy to
vulnerabilities and downside risks. Central banks, although remaining vigilant on
financial stability, are progressively losing effectiveness, and may fail to effectively
curb market volatility in the medium term, as they did after the Great Financial
Crisis. Financial markets have started to price in a very negative scenario with a rerating of credit spreads and a deep correction of equity markets, down about 8% year
to date1. However, if our central case scenario materializes - i.e. China does not derail
in its transition process towards more balanced growth, Developed Markets remain
resilient and avoid deflationary spirals - we believe that the market overreaction can
open up value opportunities for long-term investors. We suggest keeping hedging in
place to help mitigate the impact of extreme volatility while building exposure on
asset classes which have been oversold or which could add income to a diversified2
portfolio - such as selected Emerging Markets and oversold US credit as we believe
this can pay in the long term.
What are the risks that a new 2008-style financial crisis will occur?
We believe that today we are experiencing different market conditions to those in
2008. The financial sector has gone through a deep deleveraging process in both the
US and the Eurozone. Institutions like Central Banks and regulators have played a
major role in creating a safety net for the financial sector, recapitalizing banks, and
focusing on the reduction of systemic risks. Therefore we attach a very low
probability to a 2008-style crisis.
Today market concerns are instead more related to China and to the spillover
effects of its transition process. Chinese rebalancing from manufacturing to
services, from export and investment to consumption is already having an impact
on commodity prices and on economies which are part of Chinas supply chain, in
particular Emerging Markets (EM). Any sharp deceleration of China would be
disruptive for world trade and for global growth, even in Developed Markets (DM),
especially in the current scenario of sub-par growth, low inflation, low productivity
growth and high debt. A fall in confidence in the success of the Chinese transition
also represents a crucial ingredient for crisis. The perception of a mismanagement
of the process, uncertainty in managing investors expectations, lack of clarity and
policy inconsistencies have clearly emerged as material risks in the current
environment, capable of triggering capital outflows, disturbing foreign exchange
markets and asset prices.
1
2

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Source: Bloomberg, data as of January 25, 2016, MSCI World Index considered.
Diversification does not guarantee a profit or protect against a loss.

Investment Talks | Opportunities for Value Investors

In China, we believe that

the currency depreciation
will be moderate, and we
observe increasing
evidence that Peoples
Bank of China is softly
targeting the tradeweighted index away from
the US dollar.

The short-term outlook for

US economy has not
dramatically worsened
compared to a few months
ago. From a longer-term
perspective, the situation
is more uncertain.

We believe that phases of

market overreaction as the
ones we have seen in the
last few days should be
seen as opportunities for
long term investors.

January 2016

Talking about China, what is the probability of a hard landing for the Chinese
economy driving deflationary trends around the world?
At this stage, this is not our central case scenario. Chinas economic transition
towards a more balanced growth model will imply a lower growth rate in the
medium term, but a more balanced and sustainable economy longer term. We dont
believe that the Chinese authorities will drive or even accept a massive Renminbi
devaluation while they are trying to liberalize the capital markets and while there is
a massive amount of corporate debt in US Dollars.
We believe that the currency depreciation will be moderate and we observe
increasing evidence that Peoples Bank of China is softly targeting the tradeweighted index away from the US dollar. They still have resources to intervene:
considerable official reserves to cope with capital outflows and to limit the currency
devaluation and a good current account surplus. We acknowledge that these
resources are not always properly used and there is a lot of communication noise in
a learning-by-doing process. This will bring lot of volatility, but we believe
policymakers are determined to successfully overcome this critical juncture of the
transition process.
Turning on Developed Economies, what is the current level of confidence on US
economic outlook at this point?
We continue to see decent growth in the US, especially on the domestic side of the
economy. Manufacturing activity is slowing down, influenced by weaker external
conditions, but this is counterbalanced by sound service sector and domestic
consumption. Low oil prices are giving a positive contribution to household
disposable income, and the labor market is still strong. The Federal Reserve will
likely maintain an even more dovish stance than expected. So the short term
outlook has not dramatically worsened compared to a few months ago. From a
longer-term perspective, the situation is more uncertain, as we are not seeing
material improvement in productivity growth.
Is the current market turmoil opening-up opportunities for long-term investors?
Central Banks, while remaining vigilant on financial stability, are progressively
losing effectiveness and it is doubtful that the tools at their disposal are going to be
as effective in curbing excess volatility as they were over the past five years.
Therefore, we believe that it will be crucial to take a longer investment horizon to
deal with this volatile market situation and be focused on value opportunities. If our
above scenario is confirmed, we believe that periods of market overreaction, as we
have seen in the last few days, should be seen as opportunities for long-term
investors. Adopting the appropriate risk management measures, we believe that the
accumulation of asset classes that are reaching valuations worthy of attention, or
that can add value in terms of income, can be an interesting investment strategy
going forward. We see, for example, some opportunities opening up in some areas
of the credit space, such as short-term paper in EM high quality names, in hard
currency; or in the US where the credit market is discounting extremely high
default rates, especially in the energy sector. In the equity space, were seeing wide
divergences across sectors and regions and we favor a highly selective approach
based on valuations and fundamentals. Emerging Market equity valuations are
extremely cheap compared to historic levels. This can represent a very attractive
long-term proposition, with a selective approach.

Investment Talks | Opportunities for Value Investors

January 2016

Important Information
Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of January 25, 2016.
The views expressed regarding market and economic trends are those of the author and not necessarily Pioneer Investments, and are subject to change at any time based on market
and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, as
securities recommendations, or as an indication of trading on behalf of any Pioneer Investments product. There is no guarantee that market forecasts discussed will be realized or
that these trends will continue. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could
result in the loss of all capital invested.
This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any services.
All investments involve risks. You should consider your financial needs, goals, and risk tolerance before making any investment decisions
Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies.
Date of First Use: January 26, 2016.

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