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Gradual economic recovery looks more likely

17 April 2019

House view

 

 

 

 

 

We need clearer signs to be certain, but we’re forming a warmer outlook for growth assets, says Mark Rider.

Market indicators suggest support for the sharemarket rebound of 2019 is firming.

The main anchors for this view are signs that the large downgrade to earnings through 2018 is starting to stabilise – with green shoots appearing across an array of Chinese, and to a lesser extent European, indicators.

However, this more upbeat view is not shared by global sovereign markets where yields have rallied strongly and yield curves have flattened or in some cases inverted.

While ANZ’s chief investment office does not expect a spike in yields it does expect moderate upward pressure on yields in the near term as the global slowdown stabilises and likely improves.

Are we in a U-shaped recovery?

It is our opinion that this means we could be nearing the bottom of a global U-shaped recovery – where economies gradually recover and capacity constraints emerge slowly.

This is quite different from a V-shaped recovery where economies rapidly recover often resulting in central banks needing to quickly tighten policy (raise rates) as capacity constraints emerge in economies.

Supporting factors for a U-shaped recovery include:

  • neutral or modestly high (rather than very low) levels of stockpiled goods
  • US fiscal stimulus now fading while the US dollar is steady
  • the Chinese government continuing to moderately stimulate its economy
  • signs US companies have already slowed their capital expenditure
  • Japan and the euro zone’s level of potential growth being much lower than past decades
  • likely slower longer term growth in the US and Chinese economies.

A U-shaped path makes it more likely the current growth phase of the investment cycle would extend. Such a gradual rise in economic growth would mean central banks, most importantly the US Federal Reserve, would be less likely to tighten policy (raise rates) and could even stay on hold for quite a while.

Currently, we expect the Fed to hold rates until 2020 with inflation relatively subdued.

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ANZ investment strategy positions - April

If it becomes clear that we’re hitting the low point in global growth, and we’re in for a U-shaped recovery from then on, then we would look more favourably towards growth assets such as shares.

But for now we remain cautious. The major world sharemarkets are fairly valued and economic growth is weak. In this scenario we consider the sharemarket rally of the past few months to remain vulnerable until clear signs develop that an upgrade in companies’ earnings is under way.

So we remain ‘neutral’ on growth assets, with a slight preference for global shares over Australian shares, given risks that still surround the local unwinding of the house price and construction cycles.

 

Investment strategy
Asset class Preference Reasoning
Growth assets
Global equities Neutral Valuations across most markets are at fair value although the US is on the expensive side.
Australian equities Neutral We expect equities to perform well given attractive yields and rates holding steady.
Emerging markets Neutral Despite the rally, valuations remain on the cheap side of fair value.
Listed real assets1 Neutral Valuations in global listed property are now at the expensive end of fair value.
Defensive: fixed income
International Underweight Fixed income has been supported by slowing global growth and the oil price fall.
Australian Neutral Valuations are moderately expensive possibly reflecting markets shifting to a rate cut
Cash Neutral  
Currency
AUD Neutral Slow global growth and the headwinds from the housing markets are headwinds to our fair value estimate.

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.

As at April 2019.

Read the full Chief Investment Office House View (PDF 135kB)

 

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.

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