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Sharemarket hopes depend on US-China deal


13 December 2019

House view






ANZ's chief investment office explains the tensions at work in the global economy and what investors can expect.

Investors should expect low returns in 2020 across asset classes – for the sharemarket, mid-single-digit returns are expected to outperform even lower returns from cash and fixed-income investments.

Such low returns stem from the muted recovery in the global economy that is likely to take place throughout next year: a recovery that remains fragile and tentative.

This frail recovery, underscored by greater global economic stability (and corresponding lower risk of recession) is undermined by the continuing US-China trade war and economic indicators that cast doubt on the longevity and strength of any recovery.

This is why ANZ’s chief investment office is hesitant to increase its exposure to growth assets for now. To increase investment in the sharemarket we’d need to see a greater recovery in world economic fundamentals and a settled trade deal between China and the US.

And so we’ll be watching what happens with an expected trade deal between the US and China this month, with news outlets reporting on December 12 that a new wave of US tariffs on about $US160 billion of consumer goods from China – due to take effect December 15 – was likely to be averted.

If these tariffs were implemented, markets would take a dimmer view on the likelihood of a US-China trade deal, which would in turn threaten the recovery


Investment outlook – in brief

The economic recovery should support the sharemarket, which is already looking more attractive than bonds in terms of likely returns, due to rate cuts in Europe and the US. Overall, we believe Japanese, European and emerging market shares offer the best value to take advantage of the nascent recovery.

Australian equities are less attractive than other markets as they’re more highly valued, and so look more stretched relative to what can be considered ‘fair value’ according to our analysis. We should also note that domestic listed companies’ earnings expectations are lower.

In our view, bond yields will be capped at or below 2 per cent for the first half of next year unless the world economy shifts to a strong recovery.

While the mild recovery we’re in would normally support the Australian dollar, we expect it will remain under pressure as the Reserve Bank is likely to continue rate cuts in the new year. If the recovery solidifies as we expect, the Australian dollar may offer good value. The Australian dollar is currently caught between these two opposing forces.

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ANZ investment strategy positions - December


Investment position
Asset class Assessment
Developed equities Valuations are around fair value overall for global shares, with Europe and Japan relatively attractive versus the US.
Australian equities Valuations look stretched and are now close to the top of our fair-value range as the market factored in policy support from tax cuts, lower rates and some easing in lending restrictions.
Emerging-market equities Valuations remain generally more attractive than developed markets. More sustained outperformance will depend upon the US-dollar weakening.
Listed real assets1 Valuations in global listed property and infrastructure are now expensive. This asset class generally does well in periods of uncertainty while bond yields are low.
Alternative growth Held at benchmark, this asset class adds to diversification and it typically has less volatility than listed real assets.
Defensive assets (fixed income and cash)
International Signs that growth is likely levelling out have been a headwind with yields rising as further central-bank easing has been scaled back. Nevertheless, we expect subdued inflation and modest growth to continue to support yields at low levels.
Australia Fixed income has rallied strongly, but signals remain ‘neutral’ on subdued inflation and expectation of further rate cuts.
Cash We are neutral between cash and fixed income at present.
Foreign currency hedge ratio2 We need firmer signs of a recovery to emerge to change from a ‘neutral’ position.


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

As at December 2019


Read the full Chief Investment Officer House View (PDF 968kB)


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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