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 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.
To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below.
January 2018
INVESTMENT
In this, our annual look at the global market, investors take note: the double-digit sharemarket returns of 2017 will moderate this year, explains Mark Rider.
August 2017
INVESTMENT
Investment diversification is the golden rule of managing risk, which is more real today than ever, writes Alan Hartstein.
June 2016
INVESTMENT
We focus on the long-term but take full advantage of the short term. Here’s how ANZ Wealth’s chief investment office manages the bank’s investment portfolios.
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.
