You say US interest rates will remain negative in real terms. That must apply to Europe as well?
Even more so; the current stance of monetary policy is insufficient. Growth is anaemic, inflation is very low. The European Central Bank has been unwilling to buy government bonds and the market does not expect it to do so, but we think it will.
That might give European equities an upward surprise. We’ve been long for two years but it’s become a crowded space. For us to have faith in Europe’s recovery requires the ECB surprising the market with action, not just rhetoric.
Are you long any European fixed income?
There is very little value left in either government or high-grade bonds. The good news has already been discounted and the growth path is not convincing. While there’s no sign of a bear market in European bonds, we are taking profits and for now remain on the sidelines.
We continue to be long credit, particularly bank corporate credit, but if the ECB fails to support the market, you’ll see some profit taking. Overall, Bunds and Swiss government bonds remind me of Japan for the past 20 years.
Speaking of Japan, are you a believer in Abenomics?
We see a lot of determination. Inflation numbers are headed in the right direction. I’m pretty optimistic. The Bank of Japan is changing sentiment. The other famous arrows of Abenomics require more time for evaluation. The weaker yen has improved corporate margins and competitiveness.
The question is whether this can be sustained when every other country is trying to devalue their currencies, a trend that is creating instability in global financial flows. For Japan, though, I think it will take three or four years before we know whether industrial restructuring really works.
You say you are selective toward emerging markets. What’s the biggest factor for investors: the Fed, China, or local conditions?
Mainly local conditions: the 2013 sell-off after the Fed first said it would taper its asset purchases was a wake-up call, and emerging markets responded differently. But if you want to speak generically, the main factor is China, not the Fed. It now accounts for 50% of global economic growth.
Investors who get the China story right can get the entire emerging-market investment story right. Market views are polarised between China bulls and bears. Both sides have convincing arguments. Bears see a hard landing coming because of the build up of debt by local governments and state-owned enterprises and the cooling of the housing market. Doves see this as a healthy slowdown and, thanks to internal migration to the cities, not a case of oversupply.
So which are you: a bull or a bear?
We’re on the positive side. Policymakers have plenty of tools to ensure a soft landing in the property sector. China today is not like the US pre-2008, when anyone could get a mortgage. China is building mortgage standards. We do expect growth to slow, however. Authorities in Beijing are likely to let the renminbi weaken further, which is yet another reason to increase pressure on global yields. Chinese authorities can act in many ways and we see strong signs of partial privatisations and [the] fostering [of] a market environment.
What does that mean for Chinese equities?
The various China equity markets together are cheap at just seven times forward earning multiples and on average one times book. We have been adding H shares. All of those negative views by China bears are helping us.
Pioneer Investments, a storied US fund house with roots that go back to 1928, was acquired in 2000 by Italian lender UniCredit. In 2001 Giordano Lombardo, a long-serving UniCredit portfolio manager, became group chief investment officer. Since then Pioneer’s assets under management have grown from around $100 billion to $249 billion today. Lombardo runs the team from Milan.
