26 March 2019
House view
But it will take a spike in companies’ earnings to keep it going, explains Mark Rider.
The bull sharemarket has just turned 10. That’s a decade of solid, barely interrupted growth in equities across major world markets since the global financial crisis. That is an extraordinarily long time for the upswing phase for the US investment cycle.
Most investment cycles do not die of old age but are usually ended by a central bank tightening policy to restrictive levels.
The most recent extended late-cycle that was supported by the US central bank (Federal Reserve or Fed) pausing its tightening policy, and even cutting rates stretched from 1995 to 2000, ultimately bursting the tech bubble.
The current Fed pause will likely extend the cycle, but for how long?
An investment cycle is simple to describe: there is a growth phase through which rates are steadily lifted; it then peaks as policy turns restrictive to levels that leads to recession, and bottoms out with the cutting of rates.
We are now late in the investment cycle, meaning we are due to head down as higher rates start to dent growth. However, the Fed has now paused as subdued inflation and a more recent sharp slowing in global growth have reduced the need to shift policy to restrictive levels.
Nevertheless, we are late in the investment cycle and as we saw at the end of last year, any whiff that the Fed would lift rates could generate large corrections across sharemarkets.
Therefore, the biggest force that could tip markets over and send them down is inflation. If inflation started to alarm central banks then they’d likely lift rates to restrictive levels which would dampen growth, lower expected earnings and likely drive sharemarkets sharply lower.
Data source: FactSet
On an economic front, the Fed pause and signs that China is modestly adding stimulus have eased financial conditions and will likely support recovery in growth momentum through the latter half of 2019.
We have a less confident outlook for Europe and Japan as any potential growth in these regions remains low and fragile, and possibly requires further policy support from their governments and central banks.
Australia is subject to the softer growth worldwide and declining house prices. But countering these negative forces are the lower value Australian dollar, steady and low interest rates, and government measures to stimulate the economy. In our view, the risk is that due to credit rationing, Australia could soften more than the global outlook through 2019.
Taking all these factors into account the slide in global growth is likely to be arrested around mid-year. Markets seem to be already valued with this in mind.
As for a more sustained equity market rally, this would take some lift in growth and expected earnings, with the Fed staying on hold into 2020. If this happens the question will then be how sustainable such a rally would be given that this environment would likely see the Fed recommence tightening and possibly shifting rates into the restrictive zone that would end the cycle.
Uncertainty over how much longer the late phase of the investment cycle can be extended is the reason we are somewhat cautious about growth assets such as shares. As you can read in the table below, we’re holding to a benchmark (neutral) position.
| Asset class | Preference | Reasoning |
|---|---|---|
| Growth assets | ||
| Global equities | Neutral | Following the recent correction, valuations have moved back to ‘fair value’. |
| Australian equities | Neutral | Valuations are fair. We expect Australian equities to perform well given attractive yields. |
| Emerging markets | Neutral | Valuations are on the cheap side of fair value. A possibly weaker US dollar and rates on hold there should assist these markets. |
| Listed real assets1 | Neutral | Valuations in global listed property have recovered from the recent correction. |
| Defensive: fixed income | ||
| International | Underweight | Fixed income has rallied due to slowing global growth and oil price fall. |
| Australian | Neutral | Moderately expensive in value. Inflation expectations are subdued compared to the rest of the world. |
| Cash | Neutral | |
| Currency | ||
| AUD | Neutral | At its current level, the Aussie is below fair value. |
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 March 2019.
Read the full Chief Investment Office House View (PDF 139kB)
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.
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