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Gradual or sharp slowdown? Inflation will decide


18 June 2018


House view





Investors are more risk conscious as signs point to slower growth, writes ANZ's chief investment office.

Risks to investment markets are rising, as major economies start to show signs of slowing and central banks are tightening policy.

While economic growth remains solid for now, divergences are building between solid US growth and slightly softer growth across other regions.

As the US increases interest rates, ANZ’s chief investment office continues to expect “the good times to fade”, with growth continuing to ease through 2019, while shares return in the mid-to-high single digits this year.

US economy powers ahead

In response to solid US growth, the nation’s central bank (the US Federal Reserve) has slowly been raising its federal funds rate. But while the US grows solidly, reinforced by recent positive company earnings, there are signs the European Union, Japan, China and other emerging nations are slowing.

Near-term prospects for emerging-market shares in particular are at greater risk from higher US rates and possibly a stronger US dollar. Recent troubles in Argentina and Turkey flag that risks are rising, though we don’t expect a sharp spill-over into other vulnerable markets in the region.

Looking toward 2019

As we approach the mid-year mark, we are now looking much more closely at what 2019 may bring. At this stage it appears next year is shaping up as a year of slower growth and higher uncertainty as central banks continue to tighten monetary policies further.

Exactly how this plays out depends on inflation:

  • If central banks can gradually raise rates, withdrawing economic stimulus, as inflation gradually lifts, then we’ll have a gradual slowdown and the current investment cycle would extend.
  • If inflation and policy rates were to rise more quickly, the investment cycle would tip to slowdown much more sharply.

To date, US wages and inflation have continued to rise slowly and this supports our “good times fade” baseline view. However, with the US unemployment rate at a historic low level, a more pronounced lift in wages is becoming much more likely.

Our investment positions

Given the current balance of strong growth and rising, although still relatively contained, risks, the chief investment office is retaining a “neutral” positioning to growth assets such as shares.

Investment positions
Asset class Preference level Reasoning

International equities


We expect global equities to perform relatively well, with good but easing economic and earnings momentum.

Australian, New Zealand equities


We expect New Zealand and (more so) Australian equities to perform well relative to bonds and offer an attractive yield.

Emerging markets


While global growth remains solid, momentum has eased and we consider the outlook will become more challenging.

Listed real assets1


Real estate markets and infrastructure have underperformed on the back of rising interest rates.




Low but positive returns as interest rates rise overseas.



Slowing growth and rising inflation mean yields will trade in a tight range.







Solid but easing global growth will remain supportive of the Aussie’s prospects for now.

Equities, fixed income and cash are relative to benchmark. Currencies are relative to an absolute return outlook (short term).

1. Comprises of 50/50 split between global real estate investment trusts and infrastructure securities.

2. Cash is the balancing asset class. Cash is a residual to portfolio manager’s overall implementation of other asset-class strategies. It continues to form part of the overall defensive asset allocation, with PMs having flexibility in terms of how to implement the stated defensive asset strategy across fixed income and cash. In the regional investment council model cash overweight to facilitate an underweight position we hold in international bonds and to manage overall fund duration.

As at June 2018.


Access the full June 2018 chief investment office House View (PDF 174kB)

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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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