Insider Q&A: Allianz strategist on how to navigate market turmoil

WASHINGTON -- Last year was the stock market's first down year since 2008, and this year has opened with a thud.

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The market is down 8 per cent in the first two weeks of trading, the worst start to a year ever.

Kristina Hooper, head of U.S. capital markets research and strategy for Allianz Global Investors, says investors shouldn't panic, but they can take steps to navigate the market's perils. Her answers have been edited for clarity and length.

Q: Given the turbulence in the stock market, should investors be worried?

A: The quick answer is they should be cautious, but they shouldn't be worried.

Q: Did the Federal Reserve's decision in December to raise its benchmark rate for the first time in nearly a decade play a part in the market's volatility?

A: Absolutely. We are living through monetary policy history being made. What we are seeing now is an unwinding of incredible conditions in monetary policy in the United States. So it stands to reason that we are going to see a lot more volatility as the Fed normalizes.

Q: What headwinds do you see facing the economy?

A: The Fed tightening is one. Historically, stocks are hurt out of the gate with Fed tightening. But typically, stocks are able to recover and post more positive gains over the longer term because tightening usually coincides with an improving economy, which is normally a good thing for stocks.

But we do have other headwinds such as geopolitical risks. We have seen signs of that with a flare-up in the Middle East with Iran, Saudi Arabia and other countries. Our view is what is going on with China is not cause for panic, but it certainly is a cause for caution.

Q: What stock-market sectors do you think will do well this year?

A: We would focus on those sectors that look attractive from a valuation perspective and earnings and, even more important, from a revenue-growth standpoint. Certainly, the technology sector has been able to deliver in terms of revenue growth. Health care could be another area. The aging population is a great secular trend.

Q: What about the energy sector, which had the biggest drop in 2015?

A: Energy company stock valuations look attractive. But until we get greater visibility over what the catalyst might be to drive oil prices higher and sustain them, we need to be cautious.

Q: Do you see investment opportunities overseas?

A: Yes. One important playbook to think about is the accommodative central bank playbook. It certainly benefited the United States, and it is currently benefiting European stocks and Japanese stocks. And valuations look attractive in Europe.

Q: Should investors think about dividends?

A: Absolutely, particularly given our view that volatility will be increasing. Dividend-paying stocks have historically offered significantly lower volatility than the overall market. In an environment of muted returns, dividends will play a very important role. Dividends can make the difference between a negative or flat return and a slightly up return.



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