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Coronavirus dampens global sentiment

 

28 February 2020

House view

 

 

 

 

Mark Rider explains the potential implications of the coronavirus outbreak for the investment landscape.

The outbreak of the coronavirus has been a key focus for financial markets in the past month. Equity markets initially fell as did bond yields and the Australian dollar, before staging some recovery as the rate of infections in China peaked and began to fall. However, in recent days equity markets have given up these gains as rising infections outside of China grabbed headlines.

Any market rebound in the coming quarters will depend on:

  • if the spread of the disease is contained/controlled
  • further easing in financial conditions
  • additional stimulus measures from China

The history of previous outbreaks of infectious diseases points to short-term economic weakness which is then largely reversed.

But we are cautious about the limits of historical comparison given the increased size of the Chinese economy and Australia’s dependency. In our view, there’s no doubt that growth data will be affected in the March quarter.

Our chief investment office continues to expect our base case to play out – moderate economic growth, restrained inflation, accommodative central banks and range trading bond markets. Therefore, we retain a constructive outlook for equity markets for the year ahead.

Investment outlook – in brief

We have moved back to benchmark position on growth assets, raising global equities back to a small overweight.

We switched to ‘overweight’ (from benchmark) in Emerging Markets (EM) equities as we see them with more attractive valuation levels and will benefit from a pick-up in growth. Medium term, we believe EM have the opportunity to outperform Developed Markets (DM).

For the Dynamic 30 and 50 portfolios with no EM equity exposure, we moved back to benchmark by going overweight Europe and Japan which we perceive can provide cyclical exposure at a better relative valuation than the S&P 500 in the US.

We have reduced the ‘overweight’ position in global fixed-income assets due to lower bond yields. Tactically, we see yields remaining range-bound.

We have also modestly increased the hedge ratio following a weakening in the Australian dollar. This move is in line with the change within our regional equity exposure. We are still below benchmark on the hedge ratio which provides a more defensive positioning for our international equity exposure.

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ANZ investment strategy positions - February

Investment position
Asset class Reasoning
Growth Assets We moved back to benchmark on growth assets. There is no doubt that the timing of the coronavirus outbreak poses risks to the investment cycle, but we retain a constructive outlook for equity markets in the year ahead.
Developed market equities DM equity markets are fully priced particularly in the US. We have reduced the overweight to the US back close to benchmark position.
Australian equities Domestic indicators have improved but still point to relatively modest growth. Valuations remain stretched and are now above our fair value range.
Emerging-market equities We believe EM equities have more attractive valuations and have medium-term catch-up potential versus developed markets.
Listed real assets1 Valuations of global listed property and infrastructure relative to bonds are in line with history. Real assets generally do well in periods of uncertainty.
Alternative growth We hold a benchmark position in alternative growth assets as they can add to diversification and should provide protection if volatility in risk assets increases in the months ahead.
Defensive: fixed income
International We have reduced, but still maintain, an overweight position in international fixed income as we hold a strong structural low for longer world view. 
Australia Domestic fixed income has rallied strongly and signals remain ‘neutral’ on expectation of low inflation and likely RBA rate cuts.
Cash We have a mild preference for fixed income over cash at the moment.
Currency: Neutral
Foreign currency hedge ratio2 We have increased the hedge ratio following a weakening in the Australian dollar. We remain below benchmark on the hedge ratio which provides a more defensive positioning for international equity exposure. We see the weakness in the domestic economy provides downside risk to the currency at its current level.

Notes:

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

2. Percentage of developed-market and emerging-market equities hedged from foreign currency into Australian dollars. Representative diversified portfolio with 70/30 growth/defensive assets.

As at February 2020.

Read the full Chief Investment Officer House View (PDF 994kB)

 

Mark Rider, Chief Investment Officer

Mark is responsible for the overarching investment philosophy, investment strategy and asset allocation of ANZ Private Banking and Advice model portfolios and approved product list. Mark has been at ANZ for the past seven years and has over 30 years of investment market experience having previously worked at UBS and the Reserve Bank of Australia.

 

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