19 October 2018
House view
In 12 months we’ll be hearing the word “slowdown” much more frequently in commentary on markets as economic forces converge to move the investment cycle into a new phase, says ANZ’s chief investment office.
Currently, the two principal forces leading the world to greater risk of recession next year are China’s sliding growth and rising interest rates in the United States.
These risks will rise as wages and inflation gradually increase, and, in response, the US Federal Reserve continues to lift interest rates. This will create ‘tighter’ financial conditions and yield curves will further flatten.
For now, growth remains solid. But there are clear challenges as volatility increases (for investors) due to central banks continuing to move away from stimulus to gradual tightening and US trade wars are also working against growth and adding to inflation pressures.
As I’ve said, the chief investment office holds to the view that the goods times will continue to gradually fade into next year with the risk of a more meaningful slowdown rising. As alluded to above, there are two factors that could accelerate this sooner than we expect.
If US wages grow as fast as our indicators suggest they will – to 3.5 per cent growth by year’s end, and more than 4 per cent by the middle of next year – then that will add further fuel to the already hot US economy.
In this scenario, I’d expect one key measure of US inflation, the personal consumption expenditure index, to jump by more than 2 per cent over the next few quarters, pushing the US central bank to tighten its policies more rapidly than currently anticipated by markets.
The second factor is China, which remains a meaningful threat to global growth. As the world’s second-largest economy, it is crucial to the stability and growth prospects of the world economy. But the Sino economy is slowing and all signs indicate that will continue. While China is attempting to implement policies to moderate that decline, its slowdown is already working against global growth.
While these forces are not yet powerful enough to push the global economy out of its growth phase, which is already in an extended late cycle, stresses are beginning to emerge.
Balancing these forces, ANZ’s chief investment office is holding its ‘neutral’ position on most classes of assets. Although the likelihood is that a more defensive position will need to be adopted.
| Asset class | Preference level | Reasoning |
|---|---|---|
| Growth assets | ||
| Australian equities | Neutral | Now above fair value. We continue to expect good performance relative to bonds and an attractive yield. |
| International equities | Neutral | Valuations are moderately expensive. US is leading earnings; the EU has stabilised and Japan is improving. |
| Emerging markets equities | Neutral | Valuation is fair, but the stronger US dollar and China’s policy changes are key risk factors. |
| Listed real assets1 | Neutral | Valuations in global listed property have come down. Listed infrastructure has recovered solidly. |
| Defensive assets | ||
| Australia | Neutral | Moderately expensive in value. Subdued inflation expectations keeps yields down. |
| International | Underweight | European bond yields could rise modestly and US bonds are fairly valued. |
| Cash2 | Neutral | |
| Currency | ||
| AUD | Neutral | At its current level, the Aussie is below fair value, which is about US80¢. |
Notes:
Equities, fixed income and cash are relative to benchmark. Currencies are relative to an absolute return outlook (short term).
1. Comprises of 50/50 split between global real estate investment trusts and infrastructure securities.
2. Cash is the balancing asset class.
As at 5 October 2018.
Read the full Chief Investment Office House View (PDF 145kB)
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.
To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below.
28 August 2018
INVESTMENT
China’s huge build up of debt after the global financial crisis was the locomotive that drove global growth. We explore what happens when China dials back.
22 August 2018
INVESTMENT
ANZ's chief investment office explains why we may already be past the peak of global growth.
25 July 2018
INVESTMENT
Australia’s economic strength, while pleasing, is shadowed by the faster-than-expected slowdown in China and rising rates in the US.
To find out more about how to become a Private Client, share your details here.
Speak to the ANZ Private team directly
We're available weekdays 9:00am to 6:00pm AEST
ANZ Private Bankers are representatives of Australia and New Zealand Banking Group Limited ABN 11 005 357 522 (ANZ), the holder of Australian Financial Services Licence number 234527. This document ("document") is distributed to you by ANZ and may not be reproduced, distributed or published by any recipient for any purpose.
The information provided is general in nature only and does not take into account your personal objectives, financial situation or needs. Please consider its appropriateness to you before making any investment decisions. It should not be relied upon as a substitute for professional advice. For any product referred to above, ANZ recommends that you read any relevant offer document or product disclosure statement and consider if the product is appropriate for you. For products issued by ANZ, these documents are available at www.anz.com. This document is current as at the date of this publication but is subject to change. The document is provided and issued by ANZ unless another author is specified in the document, in which case it is provided and issued by that author. The views expressed are those of the authors only and do not necessarily reflect the opinions or views of ANZ, its employees or directors. Whilst care has been taken in preparing this document, ANZ and its related entities do not warrant or represent that the document is accurate or complete. To the extent permitted by law, ANZ and its related entities do not accept any responsibility or liability from the use of the information. Past performance is not indicative of future performance and any case study shown is for illustrative purposes only. Neither are a prediction of the actual outcome which will be achieved. Some of this information may have tax implications. We recommend that you seek specialist tax advice on how it may impact your tax obligations, liabilities or entitlements.
