skip to log on skip to main content

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 Mark Rider.

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.

Access our dedicated ANZ Global Markets specialists

Find out more

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
Growth
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  
Currency
AUD Neutral At its current level, the Aussie is below fair value but the headwinds from softer global growth weigh.

Notes:

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, 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

Global correction returns markets to ‘fair value’

23 November 2018

INVESTMENT

The global sharemarket correction has erased returns across most classes in 2018. And a number of powerful factors continue to weigh on performance.

Read more

Don’t get defensive over sharemarket pullback

19 October 2018

INVESTMENT

Volatility struck the sharemarket in October, but fears of a major fall are unfounded, explains ANZ’s chief investment office.

Read more

One year until recession risks dominate

19 October 2018

INVESTMENT

In 12 months we’ll be hearing the word “slowdown” much more frequently in commentary on market, says ANZ’s chief investment office.

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

Email us with your query and we'll reply to you directly.

Send an email

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.