Globally, share markets rallied to record highs in the third week of the new year as investors found reassurance in an initial US-China trade deal, more certainty over Brexit, a bottoming in the decline in the industrial cycle, and as their concern faded over escalation of US-Iran conflict.
If 2020 unfolds as ANZ’s chief investment office expects, with moderate economic growth, restrained inflation, low interest rates and a limited range of trading in the bond market – then the return outlook is moderately tilted in favour of equity markets.
Investors shouldn’t expect a further weakening in economic growth this year but there’s considerable doubt over how fast and how long any economic recovery will be, as we explained in our recent 2020 global outlook.
The share market had stellar returns in 2019, typically between 20 per cent and 30 per cent, rallying on expectations of better economic growth, which began to appear at the end of the year and has continued into early 2020. The share market continues to rise, with both the Australian and US markets hitting record highs in January.
Whilst we remain constructive on equities for the year ahead, last year’s high returns are unlikely to be matched this year. For the moment we see that share markets have moved ahead of the fundamentals – economic growth and valuations - and that equities are exposed to some downside risks in the short term.
Investment outlook – in brief
And so this month we switch to a minor “underweight” in growth assets such as shares, from our previous “benchmark” position. This is a short term tactical move reflecting the near term risks we have identified.
This change in position has been concentrated in developed market equities where the removal of tail risks regarding trade and Brexit seem to be fully reflected in markets at current levels. Emerging markets do look attractive, but we’re holding a benchmark position in line with our mild dislike towards overall risk.
Australian equities remain an area of concern. The most important domestic sectors – financial and resource stocks – having a fairly subdued outlook while the rest of the market has a range of overvalued stocks.
With the reduction in growth assets, our allocation to defensive assets has been adjusted accordingly — where we are now “overweight”. Within this allocation, international fixed income is our preferred asset class, having shifted from “neutral” to “overweight”. Fixed income investments continue to be a sound tactical lever to manage portfolio risk, notwithstanding the low level of yields. We remain at “benchmark” for Australian fixed income.
This month we are “underweight” the Australian dollar. This provides a more defensive positioning for our international equity exposure, consistent with downside risks we see in the short term for growth assets. Weakness in the domestic economy provides another downside risk to the currency from its current levels.