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Opportunities for Value InvestorsJanuary 2016 B

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Giordano LombardoGroup CIO

Edited by Claudia BertinoHead of Financial Communication

Giordano Lombardo, Pioneer Investments Group CIO, gives his view on pressingquestions 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 areits 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 lowgrowth, high global debt, and very weak inflation expose the global economy tovulnerabilities and downside risks. Central banks, although remaining vigilant onfinancial stability, are progressively losing effectiveness, and may fail to effectivelycurb market volatility in the medium term, as they did after the Great FinancialCrisis. Financial markets have started to price in a very negative scenario with a re-rating of credit spreads and a deep correction of equity markets, down about 8% yearto date1. However, if our central case scenario materializes - i.e. China does not derailin its transition process towards more balanced growth, Developed Markets remainresilient and avoid deflationary spirals - we believe that the market overreaction canopen up value opportunities for long-term investors. We suggest keeping hedging inplace to help mitigate the impact of extreme volatility while building exposure onasset 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 believethis 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 in2008. The financial sector has gone through a deep deleveraging process in both theUS and the Eurozone. Institutions like Central Banks and regulators have played amajor role in creating a safety net for the financial sector, recapitalizing banks, andfocusing on the reduction of systemic risks. Therefore we attach a very lowprobability to a 2008-style crisis.Today market concerns are instead more related to China and to the spillovereffects of its transition process. Chinese rebalancing from manufacturing toservices, from export and investment to consumption is already having an impacton commodity prices and on economies which are part of China’s supply chain, inparticular Emerging Markets (EM). Any sharp deceleration of China would bedisruptive for world trade and for global growth, even in Developed Markets (DM),especially in the current scenario of sub-par growth, low inflation, low productivitygrowth and high debt. A fall in confidence in the success of the Chinese transitionalso represents a crucial ingredient for crisis. The perception of a mismanagementof the process, uncertainty in managing investors’ expectations, lack of clarity andpolicy inconsistencies have clearly emerged as material risks in the currentenvironment, capable of triggering capital outflows, disturbing foreign exchangemarkets and asset prices.

1 Source: Bloomberg, data as of January 25, 2016, MSCI World Index considered.2 Diversification does not guarantee a profit or protect against a loss.

We attach a very lowprobability to a 2008-style

crisis.

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Investment Talks | Opportunities for Value Investors January 2016

Talking about China, what is the probability of a hard landing for the Chineseeconomy driving deflationary trends around the world?At this stage, this is not our central case scenario. China’s economic transitiontowards a more balanced growth model will imply a lower growth rate in themedium term, but a more balanced and sustainable economy longer term. We don’tbelieve that the Chinese authorities will drive or even accept a massive Renminbidevaluation while they are trying to liberalize the capital markets and while there isa massive amount of corporate debt in US Dollars.We believe that the currency depreciation will be moderate and we observeincreasing evidence that People’s Bank of China is softly targeting the trade-weighted index away from the US dollar. They still have resources to intervene:considerable official reserves to cope with capital outflows and to limit the currencydevaluation and a good current account surplus. We acknowledge that theseresources are not always properly used and there is a lot of communication noise ina learning-by-doing process. This will bring lot of volatility, but we believepolicymakers are determined to successfully overcome this critical juncture of thetransition process.

Turning on Developed Economies, what is the current level of confidence on USeconomic outlook at this point?We continue to see decent growth in the US, especially on the domestic side of theeconomy. Manufacturing activity is slowing down, influenced by weaker externalconditions, but this is counterbalanced by sound service sector and domesticconsumption. Low oil prices are giving a positive contribution to householddisposable income, and the labor market is still strong. The Federal Reserve willlikely maintain an even more dovish stance than expected. So the short termoutlook has not dramatically worsened compared to a few months ago. From alonger-term perspective, the situation is more uncertain, as we are not seeingmaterial 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 progressivelylosing effectiveness and it is doubtful that the tools at their disposal are going to beas 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 todeal with this volatile market situation and be focused on value opportunities. If ourabove scenario is confirmed, we believe that periods of market overreaction, as wehave seen in the last few days, should be seen as opportunities for long-terminvestors. Adopting the appropriate risk management measures, we believe that theaccumulation of asset classes that are reaching valuations worthy of attention, orthat can add value in terms of income, can be an interesting investment strategygoing forward. We see, for example, some opportunities opening up in some areasof the credit space, such as short-term paper in EM – high quality names, in hardcurrency; or in the US where the credit market is discounting extremely highdefault rates, especially in the energy sector. In the equity space, we’re seeing widedivergences across sectors and regions and we favor a highly selective approachbased on valuations and fundamentals. Emerging Market equity valuations areextremely cheap compared to historic levels. This can represent a very attractivelong-term proposition, with a selective approach.

In China, we believe thatthe currency depreciationwill be moderate, and weobserve increasingevidence that People’sBank of China is softlytargeting the trade-weighted index away from

the US dollar.

The short-term outlook forUS economy has notdramatically worsenedcompared to a few monthsago. From a longer-termperspective, the situation

is more uncertain.

We believe that phases ofmarket overreaction as theones we have seen in thelast few days should beseen as opportunities for

long term investors.

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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 marketand 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, assecurities 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 orthat 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 couldresult 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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