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Despite rising risks, gradual slowdown most likely


13 December 2018

House view






As the US economy slows, the possibility of a recession increases but remains some way off, explains ANZ's chief investment office.

All year, ANZ’s chief investment office has held to its forecast that the good times would fade for the global economy (and financial markets) as the year progressed and particularly into 2019.

This is what we have seen unfold and it remains the most likely continuing scenario.

But most recently the world’s outstanding economic performer, the US, has begun to fade also, and this is now creating a stronger possibility that the fading markets could descend into a market sell off due to recession.

Since October there have been indications that the US economy is slowing to match the growth rate of the rest of the world. This is ‘complemented’ by the decline in the oil price. It also looks like the US dollar may have hit its peak.

All these factors mean there’s less inflation pressure in the US economy, and the central bank may pause its rate increases in 2019. That said, we expect that wage pressures may continue to build, placing some pressure on margins and possibly forcing the US Federal Reserve to continue to tighten.

The slowing pace of growth in the US isn’t the only sign of the ‘good times fading’:

  • Companies across most regions and sectors have downgraded expectations of their earnings. (This is a central reason for the sharemarket correction.)
  • There is a clear, steady loss of global economic momentum, worldwide.
  • Tight labour markets pose some risk to inflation, which could force central bank action.
  • The slowing of China’s economy in particular poses risks.

Australia is somewhat more positive. The central risk here is falling house prices, which could metastasize risk in the domestic economy, such as increasing consumer caution (e.g. lowering spending). But so far there are few signs of stress from the property price fall. We’d only expect that to happen if it gets much harder for borrowers to access credit possibly due to a sharp tightening in global credit conditions.

Putting all these factors together, the possibility of a global recession in 2020 accompanied by a substantial sharemarket drawdown has increased, although we consider this risk is still moderate and some way from our more constructive base case of good times continuing to fade.

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ANZ investment strategy positions

Sharemarkets (other than the US) are now at fair value, following the drop in stock prices since October. So we are holding ‘neutral’ on most asset classes, waiting for clearer signs that the loss of global economic momentum has stabilised.


Investment position
Asset class Preference level Reasoning
Global equities Neutral Following the correction valuations across most markets except the US are near fair value.
Australian equities Neutral Valuations have returned to fair value. We expect Australian equities to be relatively resilient given attractive yields.
Emerging-market equities Neutral Valuations are now the cheap side of fair value. The stronger US dollar and China’s policy easing are key factors that need to be watched.
Listed real assets1 Neutral Valuations in global listed property have come down due to the recent correction.
Defensive: fixed income
International Underweight Fixed income has rallied due to slowing global growth and oil-price collapse. 
Australia Neutral Moderately expensive in value. Subdued inflation expectations and improved fiscal outlook keep yields down.
Cash2 Neutral  
AUD Neutral At its current level, the Aussie is below fair value but the headwinds from softer global growth weigh.


Equities, fixed income, cash and currency are relative to benchmark.

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

2. Cash is the balancing asset class.


As at December 2018.

Read the full Chief Investment Officer House View (PDF 197kB)


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.


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