16 March 2018
A major change in market sentiment over recent weeks has been an acceptance that the US central bank will raise rates possibly four times in 2018, while Europe will gradually reduce its economic support measures.
This is of critical concern to investors, as rates have been so low for so long, stimulating the economy, that fears are now building over the effect of gradually reversing that policy. This fear has been escalated by the prospect of much larger US fiscal deficits (despite the US economy growing well above potential) that have to be funded.
While the correction has eased valuation concerns, it hasn’t been enough to really correct growing risk in the market. Three key issues weighing on markets are that:
And these risks are adding to inflation pressures. Strong global economic growth is already leading the world’s central banks to possibly more rapidly reduce economic stimulatory measures and recent policy moves are adding impetus to this trend.
It’s from the view outlined above that we form our investment strategy, which is underpinned this month by two central observations, that:
| Asset class | Position relative to benchmark/outlook1 | Reasoning |
|---|---|---|
| Growth assets: Neutral | ||
| Australian equities | Neutral | Expected to continue to deliver reasonable single-digit returns. Share valuations are at upper end of fair-value range. |
| International equities | Neutral | Returns will ease as rates rise and be a headwind to solid earnings growth. Most markets are above our fair-value range. |
| United States | Neutral | |
| Europe | Neutral | |
| Japan | Neutral | |
| Emerging markets | Neutral | This asset class has delivered strong returns, but concerns that slower growth in the Chinese industrial sector in conjunction with gradual Fed tightening will become headwinds in the year ahead. |
| Listed real assets2 | Neutral | Real estate markets and infrastructure have corrected lower as yields have risen. Values are fair. Earnings consistent. |
| Defensive assets: Neutral | ||
| Fixed income | Underweight | |
| Australia | Neutral | Inflation pressures have remained subdued with little pressure to tighten policy. Given high quality of markets and yields being above most markets we expect markets will be supported. |
| New Zealand | Neutral | |
| International | Underweight | Inflation pressures are building and we expect rates to steadily track higher. |
| Cash3 | Overweight | |
| Currency | ||
| AUD/USD | Neutral | The Australian dollar is currently around fair value and supported by a synchronised lift in global growth. We expect that growth will ease, and with the RBA only tightening slowly yield support could erode. |
| NZD/USD | Neutral | |
| USD TWI | Neutral | |
"We have entered a period where rates can be expected to rise"
1. Equities, fixed income and cash are relative to benchmark. Currencies are relative to an absolute return outlook (short term).
2. Comprises of 50/50 split between GREITs and infrastructure securities.
3. Cash is the balancing asset class. Cash is a residual to portfolio manager’s overall implementation of other asset class strategies. It continues to form part of the overall defensive asset allocation, with PMs having flexibility in terms of how to implement the stated defensive asset strategy across fixed income and cash. In the RIC model cash overweight to facilitate an underweight position we hold in international bonds and to manage overall fund duration.
Read the full Chief Investment Office House View (pdf)
Mark is responsible for delivering an overarching investment strategy, including asset allocation, investment themes, investment manager and product selection and monitoring for ANZ Wealth in Australia. Before joining ANZ in 2013, Mark spent 15 years at UBS and 10 years at the Reserve Bank of Australia, making him a well-recognised and respected member of the Australian investment community.
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