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'There will be no recession'

1 October 2019







ANZ Private’s investment experts shared their expectations for the world economy at a recent client event, leaving plenty of room for hope. By Byron Smith.

Ignore the doomsayers, there will be no recession and the world economy will continue to grow, but at a much slower pace, said DWS Asia Pacific chief investment officer Sean Taylor.

DWS, one of the world's leading asset managers, is a key adviser to ANZ Private.

Speaking at ANZ Private’s investment insights client event at Sydney’s Four Seasons Hotel on September 19, Taylor said 2019 had been a very good year for risk assets (such as shares, currencies and commodities) across the world.

He attributed their growth to the positive flow on from the US central bank changing its policy in January from increasing rates to holding them steady, which is now an easing or rate-cutting policy. This change of position, to support US economic growth, has reassured investors around the globe, even in the face of other risks.

Taylor said consumer and service sectors are holding up the global economy and will prevent recession but manufacturing is a troubled sector.

“There will be two US rate cuts this year, though consensus is there will be four. We believe US employment levels will hold steady, giving the US Federal Reserve less reason to cut rates. We expect one cut now [which happened on September 19] and one going forward,” said Taylor.

He blamed declining manufacturing for the slowdown in the global economy, describing it as a structural problem, not cyclical, meaning cutting rates won’t be the full answer to slowing economic growth. Another reason he said there’d only be two further rate cuts in the US is that employment there is holding up, giving the US central bank less reason to cut.

Where to invest

Also speaking at the investment insights event, ANZ's chief investment office expressed the same cautiously optimistic view as Taylor, seeing no room for recession to emerge as yet and expecting the global economy to continue to grow.

For this reason, he said investors shouldn’t totally avoid growth assets, such as shares.

“Determine your risk profile and time horizon of investment, and then diversify your investments across a range of asset classes including shares and defensive assets such as fixed income and cash.

“If the investor is new to the market, move towards your target asset allocation in growth assets in stages, rather than all in one go. There are worthwhile opportunities there and with continuing economic growth supporting earnings, modest sharemarket returns are possible.”

Taylor was not as enthusiastic about the sharemarket, saying shares are so fairly valued there’s little to be gained at present, unless companies’ earnings increase, which will in turn increase shares’ value.

“In Australia, companies’ earnings have been resilient; in the US they are deteriorating; and Germany is at its worst in years because trade is letting them down.”

DWS currently has a slight preference for fixed-income investing over equities, with a primary focus on US Treasuries, which Taylor described as the main asset he’s focussed on.

“With fixed interest, rates are now lower for longer, so in a place like Europe you get no yields on bond investments. It’s actually low everywhere, but Australia is in a really good position because there’s still some return on deposits. Sure, the rates are not as good as what it was five years ago but we’re in an environment where in some countries, like Switzerland, you’re paying to keep your money in the bank. To get return in the current environment you must take some risk.

“It’s not a bad idea to keep some cash in safe assets and wait for the next upcycle in investment markets. When it comes to equities we like real estate and infrastructure, which is an ignored market. These areas hold up better than global equities.”

He also nominated technology and financial stocks as more positive sectors in the sharemarket.

Why is the economy slowing?

The declining manufacturing sector is slowing the growth of the global economy, said Taylor.

“[US President Donald] Trump says to cut rates to stimulate the economy, but it is manufacturing that is the disaster area. However, the services sector is holding the economy up as manufacturing is not as important as it once was.”

The other powerful force having a dramatic effect on world economic growth was the US-China trade war, stated Taylor.

“This has to change otherwise it will hurt everyone. Top companies’ earnings are slowing down and this is connected to trade problems. So a trade deal is very important. But we do expect a trade deal next year. However, a full resolution in the near term may not be possible as it is not purely a trade issue but an ongoing competition between China and the US for technological dominance in the world.”

Taylor identifies the US economy as outperforming other world economies in the past few years, “but at some point that must change, so we’re expecting people to move their dollars out of the US eventually”.

When asked about the impact of Britain leaving the European Union, Taylor downplayed the economic repercussions of a ‘no-deal’ exit, expecting the British economy would be somewhat protected by an expected US trade deal in that event. He added that London in particular wouldn’t suffer, but British regional economies such as Scotland could be in for a tougher time.

He expected other world economies to enact measures to support growth. And in China, and other emerging markets that rates would be cut. In Europe, he believes new management at the European Central Bank will give clear direction to governments there to use their spending power to invigorate their economies.

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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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