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Global correction returns markets to ‘fair value’


23 November 2018

House view





ANZ's chief investment office explores why sharemarkets have dived, and why investors should hold steady.

The global sharemarket correction has erased returns across most classes in 2018.

While it’s difficult to attribute the correction to any one factor, the following issues are weighing on the outlook:

  • rising interest rates in the US (which could inhibit growth there)
  • signs that global growth peaked early this year and is continuing to moderate
  • rising wages across most markets
  • the unknown duration, possible escalation and ultimate impact of US-instigated trade wars, which is adding to companies’ costs.

The result, in October, was significant decline in sharemarket indices around the world: US shares fell almost 7 per cent, Hong Kong’s Hang Seng was down almost 10 per cent, sharemarkets in Europe didn’t fare much better with the FTSE 100 lower by 5.1 per cent, and locally the ASX 300 fell 6.2 per cent.


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Data source: FactSet


Corrections of the magnitude that occurred in October are not unusual. The timing of corrections are hard to forecast but for some time ANZ’s Chief Investment Office has been holding “neutral” position to shares in recognition that growth was slowing and, prior to the October correction, valuations were at the high end of fair value.

The US market remains in that position, despite the downswing, while valuations across most other markets have now at least returned to fair value.

In the US, unemployment is at its lowest in 50 years as the economy remains solid, although wage costs are now rising. While added costs from the trade war is a concern, US companies’ earnings outlook remains fairly well supported in high single digits into 2019, though it eased from 25 per cent this year. With that setting, the US central bank is almost certain to keep raising rates, which will add to downward pressure through 2019.

In Australia the outlook remains solid, although clearly the housing market correction continues to build. Business confidence remains optimistic, likely supported by the decline in the Australian dollar and continuing low interest rates.

There are weaker spots, as mentioned above. Europe is currently generating the biggest headlines in this regard, with the tussle between the Italian and European governments over the former’s budget plans. And Brexit remains a persistent cloud over economic forecasts. Moreover, Europe is more leveraged to the slowdown in Chinese growth.

As we’ve been mentioning for some time now, the slowing Chinese economy remains the key risk to global growth. It accounts for about 15 per cent of the world economy, and is particularly important to Australia. While China’s recent policy easing is trying to support its economy, we consider that will only ease the pace of slowdown rather than lift growth.

ANZ investment strategy positions

Pulling these strands together we remain “neutral” on growth assets. The pace of the gradual slowdown already under way in global economic growth looks set to continue. A new concern is that costs and wages are now tracking higher, flagging that a combination of softer growth and somewhat higher inflation could unfold by 2020.


Investment position
Asset class Preference level Reasoning
Global equities Neutral Following the October correction valuations across most markets except the US are now hovering around fair value.
Australian equities Neutral Valuations have returned to fair value. Australian equities are expected to perform well compared to bonds.
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.
Listed real assets2 Neutral Valuations in global listed property have come down. Listed infrastructure has recovered solidly.
Defensive: fixed income
International Underweight European bond yields could rise modestly and US rates are likely to rise. Valuations for US 10-year bonds have returned to our fair value.
Australia Neutral Moderately expensive in value. Subdued inflation expectations keeps yields down.
Cash3 Neutral  
AUD Neutral At its current level, the Aussie is below fair value.


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 November 12, 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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