skip to log on skip to main content

China re-emerges as risk to world economy

 

25 July 2018

House view

 

 

 

 

Mark Rider 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.

Personalised wealth strategies

Contact us

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  
Currency
AUD Neutral Solid but easing global growth will remain supportive of the Aussie’s prospects for now.

Notes:

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, Chief Investment Officer

Mark is responsible for delivering an overarching investment strategy, including asset allocation, investment themes, investment manager and product selection and monitoring for ANZ Wealth in Australia. Before joining ANZ in 2013, Mark spent 15 years at UBS and 10 years at the Reserve Bank of Australia, making him a well-recognised and respected member of the Australian investment community.

 

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

You might also like

The curve that tells us when recession will hit

INVESTMENT

28 June 2018

Read more

Gradual or sharp slowdown? Inflation will decide

INVESTMENT

18 June 2018

Read more

Sydney, Melbourne among top cities for luxury real estate

INVESTMENT

13 June 2018

Read more

Contact us

Request a call back

Provide your details and we'll call when it suits you

Request a call back

   

Email us

Send us an email directly

contact_anzprivate@anz.com

Call us

Speak to the ANZ Private team directly

1800 316 926

We're available weekdays 9:00am to 6:00pm AEST

Find an ANZ Private office

Our locations across Australia

Find an office

ANZ Private Bankers are representatives of Australia and New Zealand Banking Group Limited ABN 11 005 357 522 (ANZ), the holder of Australian Financial Services Licence number 234527. This document ("document") is distributed to you by ANZ and may not be reproduced, distributed or published by any recipient for any purpose.

The information provided is general in nature only and does not take into account your personal objectives, financial situation or needs. Please consider its appropriateness to you before making any investment decisions. It should not be relied upon as a substitute for professional advice. For any product referred to above, ANZ recommends that you read any relevant offer document or product disclosure statement and consider if the product is appropriate for you. For products issued by ANZ, these documents are available at www.anz.com. This document is current as at the date of this publication but is subject to change. The document is provided and issued by ANZ unless another author is specified in the document, in which case it is provided and issued by that author. The views expressed are those of the authors only and do not necessarily reflect the opinions or views of ANZ, its employees or directors. Whilst care has been taken in preparing this document, ANZ and its related entities do not warrant or represent that the document is accurate or complete. To the extent permitted by law, ANZ and its related entities do not accept any responsibility or liability from the use of the information. Past performance is not indicative of future performance and any case study shown is for illustrative purposes only. Neither are a prediction of the actual outcome which will be achieved. Some of this information may have tax implications. We recommend that you seek specialist tax advice on how it may impact your tax obligations, liabilities or entitlements.