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Sharemarkets get closer to ‘fair value’


16 September 2019

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There’s no reason yet to get too worried about the infamous inverted yield curve, explains ANZ's chief investment office.

Despite rampant talk of economic recession last month, it’s our position that global conditions are not inexorably leading in that direction.

Worldwide reporting on the inversion of the yield curve in August—when investor reward for US Treasury bonds briefly favoured short-term holders (two-year) over long-term ones (10-year)—focused on its history as an indicator of impending recession.

What the media didn’t fully explain was that we’re in an extraordinary period with exceptionally low rates aimed at avoiding recession. Central banks continue their efforts to keep economies stimulated and growing. Because of this we expect the investment cycle to be extended for a while longer although the growth outlook will be much softer than we have come to expect.

To sum up, even noting increased risks such as companies’ lower earnings expectations, we are in a very different environment to past periods of softening growth, with rates globally at record lows (some banks in Europe even paying customers to take out loans).

There are still positive indications of economic activity, such as:

  • US mortgage applications have improved as rates have dropped (as has auction clearance rates in major Australian cities)
  • Investment-grade credit spreads are still reasonably tight (they usually widen sharply before sharemarkets see a recession coming)
  • Surveys show US credit supply is not tight (with tight conditions usually seen before a recession).

Furthermore, valuations of shares are now returning closer to our estimate of ‘fair value’. With bond yields so low that even with listed companies reporting flat earnings, shares look relatively more attractive.

We’re looking for two more developments to give greater reassurance that recession risks will abate:

  • For central banks to ease rates further to support the investment cycle for longer
  • The US bond yield curve to steepen a little in the months ahead in response to rate cuts, more Chinese stimulus, and easing measures in Europe.

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ANZ investment strategy positions - September

Following the recent sharemarket corrections, valuations have moved closer to our estimate of fair value.

However, we’re slightly ‘underweight’ shares due to such risks as continuing trade tension between the US and China, and as growth and inflation continue to disappoint in the Chinese and European economies.

More defensive investments, such as listed real assets and alternatives, are at benchmark levels. International and Australian fixed income are also at benchmark. Reflecting our caution, cash is overweight.


Investment position
Asset class Reasoning
Developed equities Valuations in the US and Europe are now closer to fair value and Japan and Britain are relatively cheap. Relative to very low bond yields, and with further rate cuts expected, shares appear more attractive.
Australian equities The domestic outlook is a little better due to more stable house prices. Shares are closer to fair value.
Emerging-market equities Better valued than developed markets, but growth prospects look weak due to US-China trade war and high US-dollar value.
Listed real assets1

While valuations in global listed property are now expensive, this asset class generally does well in periods of uncertainty while bond yields are low.

Alternative growth

This asset class adds to diversification and it has less volatility than listed real assets.

Defensive: fixed income
International While fixed income has rallied slower, global growth will exert downward pressure on yields.

Fixed income has rallied strongly, and valuations are moderately expensive with signs that housing is stabilisng.


Our cash position reflects our slightly defensive stance to growth assets.

Currency: Neutral
Foreign currency hedge ratio2 Our fair-value estimate for the Australian dollar has fallen from around US80¢ back to mid-to-low US70¢ level.

1. Comprises of 50/50 split between global real estate investment trust 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 September 2019.

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


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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