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 is responsible for the overarching investment philosophy, investment strategy and asset allocation of ANZ Private Banking and Advice model portfolios and approved product list. Mark has been at ANZ for the past seven years and has over 30 years of investment market experience having previously worked at UBS and the Reserve Bank of Australia.
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