9 October 2019
House view
Fully recognising the dangerous slowing in the global economy, central banks around the world continue in their attempts to stabilise it and encourage growth.
Last month the US Federal Reserve and the European Central Bank cut interest rates. They were followed early this month by the Reserve Bank of Australia, slashing its cash rate to the historic low of 0.75 per cent, with more likely to come.
Even though some banks, such as Australia’s big four, do not pass on full rate cuts in their own interest rates, ANZ’s chief investment office expects what they do cut should provide some financial relief to households and boost the services sector, which is the dominant economic sector in the developed world. This will counter damage caused by global trade tension, at least to some extent.
What is less clear at this stage —and this is the key risk we see in the short term—is whether we have further to go in the downward leg of the traditional industrial cycle.
If this cycle weakens further it would likely erode consumers’ confidence and their willingness or ability to spend, and lower employment, which would seriously discourage economic activity, countering the stimulus effect of interest-rate cuts. (This situation would also see the Australian dollar drop further in value.)
We expect this slowing cycle will level out next year but this stasis could easily be rocked by escalation of the US-China trade war and such factors as rising labour costs in the US, which could reduce companies’ profitability.
Following the recent sharemarket rally, share valuations have moved above our estimate of fair value in both Australia and the US. As we continue to invest for an economic slowdown, but not for a recession, the diversified portfolios have a small underweight in Australian, developed market and emerging-market equities.
The more defensive listed real assets and alternatives are at benchmark levels. International and Australian fixed income are also at benchmark, with the defensive overweight in cash.
| Asset class | Reasoning |
|---|---|
| Growth | |
| Developed equities | Valuations have firmed with the US at the upper band of fair value; Europe is fair value; while Japan is on the cheap side of fair value. |
| Australian equities | Valuations are now expensive as the market has factored in policy support from tax cuts, lower rates and some easing in lending restrictions. |
| Emerging-market equities | Valuations remain generally more attractive than developed markets. They should benefit from any pick-up in the global industrial cycle. |
| Listed real assets1 | While valuations in global listed property are now expensive, this asset class generally does well in periods of uncertainty while bond yields are low. |
| Alternative growth | This asset class adds to diversification and it typically has less volatility than listed real assets. |
| Defensive: fixed income | |
| International | Fixed income has rallied and slower global growth in the period ahead should anchor yields lower for longer. However, a base in growth could exert upward pressure in 2020. |
| Australia | Fixed income has rallied strongly, and signals remain neutral on subdued inflation and expectation of further rate cuts. |
| Cash | Our cash position reflects our slightly defensive stance to growth assets. |
| Currency: Neutral | |
| Foreign currency hedge ratio2 | Our fair-value estimate for the Australian dollar has fallen from around US80¢ to US77¢. |
Notes:
1. Comprises of 50/50 split between global real estate investment trusts 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 October 2019.
Read the full Chief Investment Officer House View (PDF 196kB)
Mark is responsible for the overarching investment philosophy, investment strategy and asset allocation of ANZ Private Banking and Advice model portfolios and approved product list. Mark has been at ANZ for the past seven years and has over 30 years of investment market experience having previously worked at UBS and the Reserve Bank of Australia.
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