17 April 2019
House view
We need clearer signs to be certain, but we’re forming a warmer outlook for growth assets, says ANZ's chief investment office.
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.
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:
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.
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.
| 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 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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