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Investor vigilance required

 

23 June 2020

House view

 

 

 

 

 

Despite the recent market recovery on the back of economies reopening, ANZ’s Chief Investment Office believes investors need to stay cautious.

Global sharemarkets rallied in May as investors found confidence with more economies reopening and central banks remaining committed to support economic recovery.

However, the rally which almost pushed global share indices to their pre-COVID-19 highs came to a sudden halt with a big sell-off in the second week of June following increased concerns of a secondary wave of COVID-19 infections.

If the near-term scenario unfolds as ANZ’s Chief Investment Office expects – with global economic data still looking bleak, and markets susceptible to falls and rallies – then investors need to remain vigilant. Concerns remain about weak economic indicators such as employment, inflation and recovery in the corporate sector

Further, while consumers are eager to get out of lockdowns and businesses just as keen to resume their operations, our investment office identifies two major risk factors which could drive down markets in the near-term:

  • A secondary wave of infections, which is almost unavoidable. How will governments respond – will there be another series of lockdowns; how will the second wave of infections be contained?
  • The US-China trade tensions which have begun to gather steam. This is expected to escalate into year-end depending on the political posturing in the US as the election nears.

The medium to long-term scenario remains favourable to sharemarkets however.

ANZ’s Chief Investment Office anticipates a recovery in 2021 — subject to the outcomes of the two key risks identified above.

Investment outlook in brief

Our concern is that market optimism has been pushed too quickly and too far ahead of fundamentals. Against this backdrop, our investment team maintain a cautious underweight position on growth assets as well as the Australian dollar.

In terms of our hedging position, we remain in favour of foreign currency given the Australian dollar’s sensitivity to risk. This should provide some downside protection in a market sell-off.

Given recent market movements, we retain a small underweight position in growth assets and continue to prefer developed market equities, in particular the US, due to the quality and growth prospects, compared to emerging markets.

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ANZ investment strategy positions - June

Investment position
Asset class Reasoning
Growth Assets We maintain our small underweight position to growth assets. We see economic headwinds remaining due to near-term risks of second-wave infections and the US-China trade tensions.
Developed equities We retain our preference for developed market equities versus emerging markets. We believe the US still has a quality and growth bias compared to other regions.
Australian equities We remain underweight Australian equities due to relative valuations and a subdued outlook for the market’s key sectors including Financials and Resources. We expect the recent cyclical rally to be a temporary one.
Emerging-market equities We have reduced our overweight position in emerging markets due to the fall in valuation and low growth prospects. The rise of Covid-19 cases in EM regions also pose additional risks in these markets.
Listed real assets1

Global REITS remain under pressure with shopping centres challenged by online shopping and offices suffering due to the work from home movement.

We see strategic opportunities in listed infrastructure given the lower for longer interest rate scenario and potential support for infrastructure projects. We maintain our neutral position.

Alternative growth We maintain our benchmark position on alternative growth assets as they provide diversification. Given their lower volatility (vs listed real assets), they’re an effective diversifier during extreme market conditions.
 
Defensive Assets We retain our overweight position in global fixed interest and cash. While yields are low, this should protect the downside in the event of a further sell-off in equity markets. We see rates markets remaining supported as central banks continue their commitment to support economic growth.
International fixed income We retain a slight overweight position in global bonds, though yields remain low, they serve as a stable investment diversifier and provide protection for downside risk.
Australian fixed income We have a close to neutral position to domestic bonds as we prefer to be overweight defensive assets such as cash and global fixed income.
Cash We retain our minor overweight position to cash to reduce risk in our diversified portfolio.
Currency
Foreign currency hedge ratio2 We maintain our underweight Australian dollar (AUD) hedge ratio for global equities given the AUD is a risk currency and risk appears skewed toward the downside in the short-term.

 

Notes:

1. Comprises of 50/50 split between GREITs 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 June 2020.

Read the full Chief Investment Officer House View (PDF 483kB)

 

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