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A soft landing key to sharemarket resilience

14 November 2019






If companies’ earnings hold up so will the market, explains ANZ's chief investment office.

With a recovery streak longer than 10 years since the global financial crisis, investors are questioning how much longer the world economy can continue expanding.

Since early 2018 there’s been a broad-based slowdown across the world economy:

  • business confidence at home and abroad has dropped from highs
  • the global forecast for economic growth in 2019 is now downgraded to 3 per cent—its slowest pace since the GFC—from 3.8 per cent in 2017
  • profit growth has declined sharply—in the United States, rolling earnings for the preceding 12 months for the 500-largest listed US companies slowed from a 30 per cent pace early last year to 0 per cent by October

Real, lasting damage flows from recession

Whether the current economic slowdown lands softly or crash lands in recession is pivotal for market health and performance. From a sharemarket perspective, real, lasting damage flows from recession.

During recession in the US, earnings fall sharply. In softer landings, when profit growth stalls, there may be some short-term earnings weakness, but this tends to be short lived.

Companies’ earnings underpin sharemarket performance. Both have been strong in the US in the past decade, while slower growth in Australian companies’ earnings since the GFC has translated to a weaker sharemarket performance (the decline in earnings that we see in a recession has a devastating effect on the sharemarket in turn).


Data source: S&P Dow Jones Indices LLC 

Looking like a soft landing

Our view is that the declining growth we see in the economic cycle will end in a soft landing and not a fall into recession. The following factors help explain why.

  • Businesses are well advanced in cutting back on excess inventories, and with orders starting to pick up, a recovery may be in prospect
  • US jobless claims moved higher before all recessions over the past 50 years. They are not doing that now. In fact, after falling for a while, jobless claims are now flattening out, with no signs of a sharp move higher (consistent with an approaching recession)
  • Credit typically leads economic developments and indicators suggests the current low level of spreads is underpinned by a strong US economy
  • When we look at the pattern of slowdown in US manufacturing activity, the economy appears to be tracking closely to similar historical periods—when rates were cut—where no recession was experienced

We still face numerous risks

While the current pace of economic growth is the weakest since the GFC, we believe that the global economy is in the process of softly landing at its nadir and the risk of recession in the next 12 months is modest.

While the pace of any recovery may not be robust, avoiding a sharp decline in companies’ earnings that always accompanies a recession suggests the sharemarket has a good chance of avoiding a significant retreat. It’s early days and the year ahead still faces numerous risks, such as trade wars. However, with central banks back into easing mode, the current expansion still looks to have a while to run.

As always, your Private Banker is well placed to guide you on the investment strategy that suits your personal situation.


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Mark Rider, former Chief Investment Officer

Mark brought over 30 years of investment market experience to ANZ, having previously worked at UBS and the Reserve Bank of Australia. During his seven-year tenure at ANZ Mark was responsible for and contributed to the overarching investment philosophy, investment strategy and asset allocation of ANZ Private Banking.


To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below.

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