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Recent rally stretches value of shares


22 July 2019

House view






ANZ's chief investment office outlines what has caused markets to jump, and what it means.

The May sharemarket correction rapidly reversed in June because the US central bank surprised markets by signalling a possible interest rate cut as economic growth weakens.

While recent events have seen markets rally, our key indicators have failed to keep pace, which means all may not be what it seems and we are cautious of what could unfold in the near term.

The June rally has spilled over into July after a meeting at the G20 between US President Donald Trump and President of China, Xi Jinping, resulted in the two countries getting back to work on smoothing trade relations.

To that end, Trump lifted the Huawei ban we referred to last month, and China agreed to buy more US agricultural goods. For the moment, the trade war has entered a ceasefire period once again. But in our view it is unlikely to be permanent.

The strong sharemarket rally has seen the valuation of shares move back above our estimate of fair value, particularly Australian shares which look more stretched in price now than their global counterparts. By some measures, local stocks are at their most expensive in more than a decade.

The recent rally in shares is based upon an expectation of better growth ahead. However, our indicators of global activity have only recently started to stabilise, and have not kept up with the recent rally. In our view, it is still very early days and while we believe recession is unlikely, we remain cautious of the near-term growth outlook.

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ANZ investment strategy positions - July

Reflecting our current caution, we are now slightly “underweight” in Australian, developed market and emerging-market equities. More defensive listed real assets and alternatives are at “benchmark” levels.

International fixed income is now only a small “underweight” within our “benchmark” range while Australian fixed income is at “benchmark”. Cash is “overweight”.


Investment position
Asset class Reasoning
Developed equities Indicators point to slightly below-trend global earnings growth. Valuations in the US are now a little expensive; however, Europe is fair value and Japan and the UK relatively cheap. 
Australian equities Australian macro lead indicators have improved after weakening throughout 2018 with the domestic outlook a little better than it was at the end of last year.
Emerging-market equities Valuations remain generally more attractive than developed markets. However, trade tariffs leave downside risks to near-term earnings growth.
Listed real assets1 Valuations in global listed property are now relatively expensive. This asset class generally does well in periods of uncertainty, while bonds yields are low. 
Alternative growth The asset class adds to diversification and it has less volatility than listed real assets. It should provide protection if volatility in risk assets accelerates in the months ahead. 
Defensive: fixed income
International The slowdown in global growth and subdued inflation has ignited a solid rally in fixed income. 
Australia Valuations are moderately expensive reflecting markets shifting the subdued growth and inflation outlook.
Cash We prefer cash over global fixed income in our defensive asset positioning, given investors are not compensated for holding duration.
Foreign currency hedge ratio2 While our commodity price-based fair value estimate of the currency is at US78¢, slower global growth and the prospect of more Australian interest rate cuts keep our positioning close to neutral.


Equities, fixed income, cash and currency are relative to benchmark.

1. Comprises of 50/50 split between global real estate investment trusts and infrastructure securities.

2. Percentage of developed market and emerging market equities hedged from foreign currency into Australian dollar.


Representative diversified portfolio with 70/30 growth/defensive assets.

As at June 2019.

Read the full Chief Investment Officer House View (PDF 149kB)


Mark Rider, former Chief Investment Officer

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.


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