Signs of stabilisation and possible recovery from declining economic growth has led the ANZ chief investment office to view developed and emerging-market sharemarkets more favourably.
We have moved from our slightly ‘underweight’ position on these assets up to benchmark level, though we note that the values of Australian shares are looking stretched and we remain modestly ‘underweight’.
This is our first change in strategy for a few months, and stems from several optimistic developments in the global economy recently:
- It looks like we’ve reached the lowest point in the industrial cycle, which means the industrial sector will next enter an upswing. And even though that is likely to be modest, it’s led us to further downgrade the risk of recession in 2020
- Central banks continue to cut rates. On October 30 the US Federal Reserve cut its funds rate by 0.25 per cent
(We believe this is the last of the cuts for 2019 as central banks monitor the impact of rate cuts to date)
- Trade relations between the US and China appear to be easing, which is of great relief to investors the world over
- There’s less risk of a large drop in company earnings, which support sharemarket performance, though downgrades will likely continue across most markets and sectors.
In response to these developments, shares performed well. In October they surpassed ‘safe’ assets such as government bonds. They’re also valued quite fairly, with European and Japanese shares looking better value than those in the USA, while in Australia they’re becoming expensive.
And it’s not just the sharemarket. The household and services sector in the major economies remains firm, supported by rate cuts. US jobless claims are also stable, showing no signs of a sharp rise, which they always do before recession.
All this means the risks building up through 2019 now look to be easing, making an economic recovery, instead of a recession, more likely as we progress into 2020. And that’s why we’re looking more favourably (at least ‘neutral’) on growth assets such as shares.
We note one area of ongoing risk to this nascent picture of recovery: the US-China trade standoff. While the two parties seem to be working toward resolution, further conflict between them can’t be ruled out.