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China re-emerges as risk to world economy


25 July 2018

House view





ANZ's chief investment office explains why the current optimistic Australian environment could be changing next year.

Australia’s apparent economic strength, while pleasing, is shadowed by the faster-than-expected slowdown in China and raising interest rates in the US – very real concerns given how dependent we are on the US and Sino economies.

Add the risk of a trade war and the outlook is much more challenging.

As China’s growth starts to ebb, that could easily spill to other regions, such as ours. It is a factor now returning as one of the key risks to world economic growth.

It also highlights a clear, emerging trend: major economies such as China, Japan and Europe are softening, as the United States’ grows in strength. This divergence in growth is a new trend (as last year major economies tended to grow in sync) and creates more room for upset particularly as the US raises rates and threatens a trade war.

Emerging markets are already responding badly. As the US, with strong earnings, more confidence and a rising dollar, is managing its economy by increasing interest rates, which has led to tightened financial conditions and resulted in a sharp correction across most emerging markets.

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Four clear risks for the world economy

As we’ve written previously, indicators show a sharp slowing in growth in 2019. China, as mentioned, and the slowing local housing sector, are two areas to be keenly watched.

In brief, the four main world economic risks are:

  1. a global trade war, which would likely inhibit economic growth
  2. China’s economic growth slumping causing a chain reaction among other regional economies (for perspective, if China’s gross domestic product drops 1 per cent then the entire world’s falls nearly half a per cent)
  3. the US Federal Reserve lifting interest rates quickly, meaning consumers face debt problems and company earnings drop
  4. low wage growth, high debt and weaker property markets in Australia, making consumers hold back from spending.

Keep in mind that for now, the picture for Australia isn’t so gloomy as it first may appear. Locally, consumers and businesses are confident. We believe this is justified, and have cautious optimism that a local recovery is under way. ANZ’s chief investment office sees global economic growth to remain strong for developed economies this year, although the outlook for 2019 is much more challenging.

For investors, shares should continue to outperform bonds and cash in 2018.

ANZ investment strategy − July 2018

Investment strategy
Asset class Preference level Reasoning
Growth assets
Australian equities Neutral We expect relatively good performance, with solid but easing economic and earnings momentum.
International equities Neutral Fairly valued, and companies’ earnings should support that. (Financial services is a concern.)
Emerging markets Neutral While global growth remains solid, momentum has eased and we consider the outlook will become more challenging.
Listed real assets1 Neutral Real estate markets and infrastructure have underperformed on the back of rising interest rates.
Defensive assets
Australia Neutral Low but positive returns as interest rates rise overseas.
International Underweight Bond yields haven’t peaked yet, and as they rise, return on bond investments is low.
Cash2 Neutral  
AUD Neutral Solid but easing global growth will remain supportive of the Aussie’s prospects for now.


Equities, fixed income and cash are relative to benchmark. Currencies are relative to an absolute return outlook (short term).

1. Comprises of 50/50 split between global real estate investment trusts and infrastructure securities.

2. Cash is the balancing asset class. 

As at July 2018.

Read the full Chief Investment Office House View (PDF 146kB)


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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