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Need for caution following new year record rally

24 January 2020

House View








While short terms risks are present, we maintain a constructive 12-month view on equities, explains ANZ's chief investment office.

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.

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ANZ investment strategy positions – January

Investment position
Asset class Assessment
Growth assets
Developed equities Underweight: We prefer to take a more cautious stance tactically in the short term as strong share price gains have outpaced fundamentals, leaving equities exposed to some downside risks.
Australian equities Underweight: Valuations are stretched and are now above the top of our fair value range, with the market already factoring in supportive measures such as lower interest rates.
Emerging-market equities Benchmark: Valuations are more attractive than developed markets. More sustained outperformance depends on the US dollar weakening.
Listed real assets1 Benchmark: Valuations are expensive relative to equities but fair relative to bond yields. Real assets generally do well in periods of uncertainty.
Alternative growth Benchmark: This asset class should provide protection if volatility in risk assets increases in the months ahead.
Defensive assets (fixed income and cash)
International Overweight: Fixed income remains one of our preferred diversifiers in a potential risk-off environment.  Rates markets remain supported by modest growth and easy central bank policy.
Australia Benchmark:  Fixed income has rallied strongly and signals remain "neutral". The RBA has indicated a willingness to cut the cash rate by a further 0.50% if required.
Cash Underweight: We prefer to focus our defensive positioning in fixed income.
Foreign currency hedge ratio2 Underweight:  Provides defensive portfolio positioning. Risks still from weak domestic economy


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 January 2020.


Read the full Chief Investment Officer House View (PDF 1019kB)


Mark Rider, former Chief Investment Officer

Mark brought over 30 years of investment market experience to ANZ, having previously worked at UBS and the Reserve Bank of Australia. During his seven-year tenure at ANZ Mark was responsible for and contributed to the overarching investment philosophy, investment strategy and asset allocation of ANZ Private Banking.

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