12 November 2020
Investment
Markets sold-off in late October as investor concerns increased due to the spread of COVID-19 in parts of Europe, the impasse on fiscal stimulus and uncertainty in the lead up to the U.S. election.
The ANZ Chief Investment Office believes the outcome of the U.S. election will set the near-term direction for equities, however the uncertainty around the potential make-up of congress is too great to be taking significant off-benchmark positions.
Despite Biden being declared as President-elect, Trump is yet to concede defeat and with counts in several states headed for court there is still risks in the near-term, including what actions President Trump may take between now and January – when Biden is sworn in.
With a “Blue Wave” now unlikely, Joe Biden’s promises of increased regulations and corporate taxes - which would be negative for equities - now appear less probable.
We believe that relations with China will likely remain strained, however Biden is expected to bring an improvement in trade relations with traditional U.S. allies and has already floated significant domestic infrastructure spends – which should be positive for the share market — provided they can pass congress.
Whilst fundamental factors suggest now is not the appropriate time to be adding further risk to portfolios, we expect the macro-economic environment to improve in Q1 2021 if vaccine trials and production continue to gather momentum.
We also expect monetary and fiscal stimulus - the current U.S. predicament aside - to continue to support markets in the short-to-medium term.
We shifted to neutral ahead of the U.S. election given the probability of increased volatility and uncertainty of the result’s impact on markets, regardless of who wins.
We also returned the hedging ratio for the AUD to just below benchmark to mitigate downside risk. We remain slightly underweight Australian equities but kept a marginal overweight to global equities.
We will wait for the dust to settle on the election news before considering future tactical positioning and potential increases to risk assets.
| Asset class | Reasoning |
|---|---|
| Growth Assets | We moved to neutral weighting ahead of the U.S. election due to the probability of increased volatility and uncertainty of the result’s impact on markets. Whilst short-term headwinds - COVID-19 outbreaks and U.S. election uncertainty - persist, we believe central banks and governments will continue to provide fiscal and monetary to support risk markets in the medium-term. |
| Developed equities | We maintain our overweight position on global developed markets with preference on US shares. As central banks continue to support, markets appear to be stabilising and we expect that economic progress will be the primary driver of markets between now and year-end. Whilst fundamentals don’t paint a solid backdrop - we are constructive on a medium-to-long-term basis due to the low yield environment which is supportive for equities. |
| Australian equities | We maintain our overweight position on global developed markets with preference on US shares. As central banks continue to support, markets appear to be stabilising and we expect that economic progress will be the primary driver of markets between now and year-end. Whilst fundamentals don’t paint a solid backdrop - we are constructive on a medium-to-long-term basis due to the low yield environment which is supportive for equities. |
| Emerging-market equities | We maintain a neutral stance on Emerging Market (EM) equities in line with our more balanced approach across the entire equity portfolio. Given the more recent outperformance, this asset class should benefit from further US dollar weakness and provide cyclical exposure if we see the economy recover further. Within EM, the Asia region is where we expect to see the most upside, especially China, Korea and Taiwan. |
| Listed real assets1 | Valuations and yields are becoming more attractive in the sector. However, we hold our view, for the time being, that a global recession is likely to put further downward pressure on rents. REITS remain under pressure, with shopping centres challenged by e-commerce and office spaces suffering from the move to working from home for many businesses We see strategic opportunities in listed infrastructure given the “lower for longer” rates scenario and potential fiscal support via infrastructure spending. We remain neutral as we await better entry opportunities. |
| Alternative growth | We maintain our benchmark position as we continue to advocate a long-term strategic allocation to alternative risk and return drivers to provide diversification. This asset class typically has less volatility than listed real assets (which has continued to play out) and is, therefore, a valuable diversifier in periods of extreme markets conditions. |
| Defensive Assets | We returned to a neutral position on defensive assets in October. This move was at the expense of cash with global and Australian fixed income being our preferred asset class within defensive assets. Australian and global fixed interest provides duration to the portfolio, which remains one of our preferred diversifiers in a volatile environment. |
| International fixed income | We are overweight international fixed income. Central banks have reaffirmed their commitment to a ‘lower for longer’ environment with further monetary stimulus expected to keep yields and spreads low. We still prefer U.S. Treasuries primarily due to their long duration characteristics and as a low yielding but stable investment that offer diversification and downside protection. |
| Australian fixed income | We are overweight Australian fixed income as the ‘Aussie’ rates look attractive on many metrics. |
| Cash | We are underweight cash, having recently used our previous overweight position to fund equity purchases in developed market and Australian shares. Cash remains an important source of liquidity in portfolios, enabling us to deploy capital as necessary, alongside its risk-reducing characteristics. |
| Currency | |
| Foreign currency hedge ratio2 | We remain underweight the AUD as an additional portfolio protection despite improving fundamentals. We believe there is upside potential for the AUD once any uncertainty around the US election outcome disappears. Our view is that the AUD is fair value at USD0.75 and should be supported by strong demand for industrial commodities and a more conservative central bank (by global standards). |
Notes:
1. Comprises of 50/50 split between GREITs and infrastructure securities.
2. Percentage of developed market and emerging market equities hedged from foreign currency into Australian dollars. Representative diversified portfolio with 70/30 growth/defensive assets.
As at 1 November 2020.
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