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Markets continue to rally but concerns remain

 

29 July 2020

House view

 

 

 

 

 

Amid continuing rally in global share markets, ANZ’s Chief Investment Office expresses near-term concerns on valuations, a surge in COVID-19 cases and rising geopolitical tensions.

Global share markets continued to rally in June with the S&P500 index recording its largest quarterly gain in over a decade.

The impressive gains came amid rising geopolitical tension between the US and China and a surge in Covid-19 cases globally, including in some high-population states in the US.

Against this backdrop, the ANZ’s Chief Investment Office maintains its view that equities appear overvalued and susceptible to a risk-off event in the near-term.

One indication that supports this view is the price of gold which rose to US$1,800 in June. This price increase reflects investor concerns and market uncertainty.

Covid-19 impact on corporate earnings

The US reporting season is now underway and will show the impact of Covid-19 on corporate earnings and provide a profit outlook. Initial expectations are for weak results given the lockdowns for most of the last quarter.

However, despite the near-term uncertainties, the Chief Investment Office maintains a favourable view on equities for the long-term. This is due to the fiscal and monetary support provided by governments and central banks across the globe.

The base case – an expected recovery sometime in 2021 – is also maintained given the view that long-term recovery is reliant on continued containment of the virus and further re-openings of economies.

Despite encouraging results from various vaccine trials, an actual vaccine may not be available until next year or indeed beyond.

Investment outlook in brief

While there are risks and uncertainties ahead for equity markets, ANZ’s Chief Investment Office still prefers shares to bonds in the medium to long-term, due to relatively low bond yields.

The recent strong performance in shares has pushed portfolio allocations to risk assets to near benchmark levels. But growth assets remain underweight.

The strong appreciation of the Australian dollar in June has reduced the underweight position on the currency, which will be maintained as a hedge for risk-off events.

In the developed markets, European equities now look more favourable and relatively attractive with more upside potential. European markets may benefit from a rotation into Cyclicals and Value assets.

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ANZ investment strategy positions - July

Investment position
Asset class Reasoning
Growth Assets Our underweight position to growth assets was reduced further last month, owing to portfolio drift from the strong equity market performance. We see economic headwinds remaining with near-term risks – rising Covid-19 cases and geopolitical tensions – with the potential to escalate.
Developed equities Downside risks remain in the developed market equities. We have a slight preference for European equities over other developed markets due to their exposure to Cyclicals and Value assets, which have greater upside potential.
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. Second-wave  lockdowns in Victoria will stall the economic recovery further with the potential to weigh on the local share market.
Emerging-market equities We maintain a neutral position on emerging market equities despite the region’s relatively good valuation metrics. Covid-19 infection rates continue to rise in the region and remain a major headwind in the near-term.
Listed real assets1

A global recession is likely to put downward pressure on rents, with retail and offices expected to be hit harder than residential and industrial properties. REITS remain under pressure, with shopping centres challenged by e-commerce and office spaces suffering from the move to work from home for most businesses.

Without compelling reasons to shift our positioning we remain neutral, seeking to avoid unnecessary portfolio turnover. 

Alternative growth We maintain our benchmark position on alternative growth assets, advocating a long-term strategic allocation. This asset class is a valuable diversifier in periods of extreme market conditions.
 
Defensive Assets We retain our overweight position on global fixed interest rates and cash. While yields are low, this position will protect the downside in the event of further sell-off in equity markets. We see rates markets remaining supported as central banks continue their commitment to support economic growth while geopolitical risks gather momentum.
International fixed income We retain a slight overweight position on global bonds. Though yields remain low, they serve as a stable investment diversifier and protection for downside risk.
Australian fixed income We maintain a close to neutral position on domestic bonds as we prefer to stay overweight on defensive assets such as cash and global fixed income.
Cash We remain our minor overweight position on cash to reduce risk in our diversified portfolio.
Currency
Foreign currency hedge ratio2 The Australian dollar’s (AUD) rally in June pushed our hedging position further underweight and we maintain our conviction that this will provide downside protection in the near-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 21 July 2020.

Read the full Chief Investment Officer House View

 

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