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Trade war threatens stabilisation of global growth

 

24 May 2019

House view

 

 

 

 

A resurgent trade war coincides with early signs that global growth is no longer sliding, explains Mark Rider.

As this year has progressed sharemarkets have recovered from last year’s losses as investors anticipate improved economic growth. This optimistic expectation is supported by:

  • a pause in US interest rate rises
  • China stimulating its economy
  • greater confidence of a truce in the trade war between the two countries.

ANZ’s chief investment office believes a base in global growth is forming and there will be some improvement in companies’ earnings, as would be expected in a U-shaped market recovery, which we covered last month.

However, the escalation of the trade war – with markets already factoring in a truce – means if the recovery doesn’t progress as hoped we face elevated risk the nascent recovery will suffer.

We maintain a vigilant focus on these risks, given signs that any recovery would be subdued and that markets are already fairly valued.

ANZ investment strategy positions – May

With global markets around fair value and our economic scorecard still suggesting caution, we hold to our overall ‘neutral’ position towards growth assets such as shares. We lean toward global shares for now given Australia’s housing market and weak wages.

For us to take an ‘overweight’ position on growth assets we will need to see evidence of an established earnings-upgrade cycle for companies. This is particularly the case give the risks surrounding the re-escalation of the trade war.  For defensive assets we favour cash investing and are ‘underweight’ international fixed-interest investment this month.

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Investment position
Asset class Preference level Reasoning
Growth
Developed equities Overweight Valuations across most markets are at fair value although the US is on the expensive side.
Australian equities Underweight The outlook is improving, shares are fairly valued, but weak credit growth is a constraining force.
Emerging-market equities Neutral Valuations remain generally more attractive than developed markets.
Listed real assets1 Neutral Valuations in global listed property are now at the expensive end of fair value.
Alternative growth Neutral These assets should perform well if volatility were to return in the months ahead.
Defensive: fixed income
International Underweight Fixed income has been supported by slowing global growth and the oil price fall.
Australia Neutral Valuations are moderately expensive possibly reflecting markets shifting to a rate cut.
Cash Overweight Investors are not being compensated much for holding bonds over cash, so cash is providing a relatively good risk-adjusted return.
Currency
Foreign currency hedge ratio2 Neutral Our fair value estimate of the Australian dollar is at US78¢.

Notes

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 and emerging-market equities hedged from foreign currency into Australian dollar.

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

As at May, 2019.

Read the full Chief Investment Officer House View (PDF 197kB)

 

Mark Rider, Chief Investment Officer

Mark is responsible for delivering an overarching investment strategy, including asset allocation, investment themes, investment manager and product selection and monitoring for ANZ Wealth in Australia. Before joining ANZ in 2013, Mark spent 15 years at UBS and 10 years at the Reserve Bank of Australia, making him a well-recognised and respected member of the Australian investment community.

 

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