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Tariff tension intensifies risk of sharper slowdown


28 June 2019

House view






The US-China trade war is becoming a more serious issue for investors, explains ANZ's chief investment office.

ANZ’s chief investment office has responded to possible continued fallout from the US-China trade war with a modest shift toward more defensive investing.

We’ve moved from “underweight” in our exposure to international fixed-income assets, such as bonds, towards “benchmark”.

Markets have reacted to the trade war by pricing in rate cuts across a raft of central banks. This expectation has supported the current valuations of bonds and equities.

As we discussed in the previous House view, global growth was likely stabilising but one of the key risks is the trade war, and it’s becoming clearer that a near-term truce between the conflicting nations is unlikely.

It has been more than a year since the US and China began jousting on trade policy. The most recent move by the US was to lift tariffs on $US250 billion of Chinese goods by 15 per cent, with US President Donald Trump threatening 25 per cent tariffs on remaining Chinese imports worth around $US300 billion.

Companies to suffer in trade-war fallout

The government also banned US companies, such as Google and other technology businesses, from supplying products to Chinese telecommunication powerhouse Huawei. Such measures mean US trade policy is threatening to unpick global supply chains that have evolved over the past 20 years.

The stakes are high for the sharemarket in this trade war. Listed manufacturers in emerging markets are particularly exposed to the fallout – such as the break-up of global supply chains and the uncertainty this creates – which means their plans to spend capital may be put back in the draw.

Of course, the tariffs also directly raise costs for many US companies, with these costs passed on, absorbed, or offset against any gains in their productivity. Regardless of the way companies choose to react, they will likely have lower profit margins as a result of a prolonged trade war.

Through May, key indicators – such as slowing take up of credit in China and high company inventories (unsold goods) across most regions – have been sources of concern, and signs of companies’ capital expenditure have slowed further. Moreover, it is likely the trade war and the Huawei ban could further depress company activity and these indicators in the months ahead.

Recessionary forces become stronger

All the tariff hostility happening is increasing the likelihood of a recession:

  • Our tracking has led us to increase our assessment of recession risk from 25 per cent to 30 per cent.
  • The Federal Reserve Bank of New York gauges risk of recession at 27 per cent (still slightly below the 30 per cent level that usually flags a recession within the next year or so).
  • Our investment-cycle clock has also risen further (due to the tightness of the US labour market) – and a further lift is often associated with a fall in returns from shares of 20 per cent or more.

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ANZ investment strategy positions - June

Given the many risks we are seeing at present we are raising our exposure to more defensive assets. As a result, as mentioned, we decided to lift international fixed income towards “benchmark” (or “neutral”) from “underweight”.

It’s important for investors to note that despite rising risk of recession, this is not yet at a critical point, and if economic growth falters further then global central banks can take action to ease the situation. So we’re not going “underweight” on growth assets just yet.


Investment position
Asset class Preference level Reasoning
Developed equities Underweight Valuations across most markets are fair although the US is on the expensive side.
Australian equities Underweight The outlook is improving, shares are overvalued, but another rate cut will make them more attractive.
Emerging-market equities Underweight Valuations remain generally more attractive than developed markets though uncertainties around US-China trade negotiations persist.
Listed real assets1 Neutral Valuations in global listed property are now relatively expensive.
Alternative growth Neutral These assets should provide protection if volatility were to return in the months ahead.
Defensive: fixed income
International Underweight Fixed income has been supported by slowing global growth and inflation.
Australia Neutral Valuations are moderately expensive possibly reflecting expectations for inflation and growth.
Cash Overweight We prefer cash over global fixed income in our defensive asset positioning.
Foreign currency hedge ratio2 Underweight Our fair value estimate of the Australian dollar is at US78¢.


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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