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Fiscal support and low rates point to gradual economic recovery


10 February 2021

House view





Joe Biden’s inauguration as the 46th President of the United States provides markets with a clearer and more predictable administration.

A tumultuous start to the new year with riots in Washington DC and tightly contested US Senate run-off, gave way to a peaceful start of the new Biden administration at the White House.

However, the Democrats’ mandate is among the narrowest in 60 years. Biden won the presidency with a 51% majority compared to Obama’s 53% in 2008.

The ANZ Chief Investment Office (CIO) believes that despite the narrow Democratic majority, the proposed fiscal stimulus package will be passed by the US Congress, albeit possibly in a watered-down version. Fears about major tax or regulatory changes may also be overstated from the investment office’s view.

Reflecting the upbeat and welcoming mood for the Biden administration, markets reached all-time highs in early January before some sell-off toward the end of the month.

From the ANZ CIO’s perspective, there are still conflicting factors at play weighing on investor sentiment, namely:

  • Positive prospect for the US stimulus package
  • Vaccine-driven momentum supportive of the markets
  • Ongoing Covid-19 cases in some countries

While vaccination has started in several countries, new cases continue to be reported in key cities forcing governments to enforce full or partial lockdowns.

This push and pull factors remain a big consideration for ANZ’s investment office which maintains that any downside disappointments – due to slow vaccine roll-out or less stimulus package – may cause short-term volatility in the markets.

Overall, the investment office expects a gradual re-opening of economies over the next six months. Though the speed of re-opening may vary from country to country, the long-term outlook remains upbeat.

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Investment outlook in brief

Markets still appear somewhat stretched at the moment and volatility is likely to persist for at least the early part of 2021.

Despite talks of inflation prospects and some concerns over the vaccine roll-out, additional fiscal stimulus, liquidity and ‘TINA’ (there is no alternative to equities) should support the risk-on market sentiment. Given these supportive factors, we have maintained our overweight position on growth assets.

The possibility of minor corrections may provide an opportunity to add to existing growth positions.

ANZ investment strategy positions - January

Investment position
Asset class Reasoning
Growth Assets

We maintain a mild overweight position on growth assets via our position in global developed markets, Australian shares and listed real assets.

The portfolio continues to hold an overweight position on GREITs, which have significantly underperformed global shares during the pandemic but are expected to benefit from the re-opening trade.

We are closely monitoring emerging markets (EM) equities for better entry points.

Developed market equities

We expect equities to significantly outperform cash and fixed income in 2021, though we anticipate a volatile ride for investors. Within the major developed markets, we believe the US is the most likely to outperform.

We expect ex-US markets to continue trading at high valuation discounts to the US due to the lower relative weight of high-growth stocks.

We have downgraded both Japan and European markets in the short-term.

Australian equities

We retain a mild overweight position to this asset class. Given the highly cyclical nature of Australian equities, this segment is expected to outperform in the short-to-medium-term.

In the long-term, we see more favourable opportunities in other developed markets.

Emerging-market equities

This segment provides portfolios with cyclical exposure as economies recover further. It also offers favourable sector-specific exposure to Technology and Consumer Services.

Within Emerging Markets, we expect the Asian region to see the most upside, especially China, Korea and Taiwan.

Listed real assets1

We have a mild overweight exposure to real assets via our positioning in GREITs. While grinding higher in absolute basis, GREITs continued to underperform global equity markets due to lockdowns and high US Treasury yields.

However, we keep an active overweight call due to high cash returns, cheap valuations and expected re-opening of economies.

If inflation picks up in 2021, this sector will provide some protection for portfolios.

We continue to see strategic opportunities in listed infrastructure due to the ‘lower for longer’ rate environment. There is also an increased potential for fiscal support via infrastructure spending that a Biden administration brings.

Alternative growth

We maintain our benchmark position as we continue to advocate a long-term strategic allocation to alternative risk and return drivers to provide diversification.

This asset class typically has less volatility than listed real assets (which has continued to play out) and is, therefore, a valuable diversifier in periods of extreme markets conditions.

Defensive Assets

We retain a mild underweight to defensive assets, expressed via our underweight position in cash. We continue to favour global and Australian fixed income.

While moderately higher yields cannot be ruled out in the short-term, we believe that vaccine-driven market dynamics, economic expectations and more fiscal stimulus will more likely keep yields capped and low in general.

International fixed income

Given the patchy economic data and weakness in labour markets in some countries, our view is that inflation risks will remain limited in the near-term.

With central banks committed to keeping interest rates low, this should keep nominal yields low and real rates in negative territory.

We maintain an overweight position on international fixed income. We also retain our preference for US Treasuries due to their stability and diversification benefit.

Australian fixed income We are overweight Australian fixed income as  ‘Aussie’ rates look attractive on many metrics.

We are underweight cash as we prefer the relatively low-risk yield pick-up from fixed income assets at the moment.

The portfolio continues to hold cash for liquidity and favourable risk-reducing benefits.

Foreign currency hedge ratio2

We maintain a benchmark position on the Australian dollar (AUD).

We believe that despite its strong appreciation in 2020, there is still some upside potential later in the year.

However, given that the AUD is a risk currency, we prefer to remain on benchmark as a defensive hedge.


1. Comprises of 50/50 split between GREITs 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 1 February 2021.


Read the full Chief Investment Officer House View (PDF)



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