22 August 2018
House view
Rising interest rates in the US and firmer China policy remain a headwind to strong earnings. These headwinds have been intensified by the risk that trade wars could escalate. This year, business expectation surveys have eased and signs have emerged of some softening in the US housing market. The lift in US rates has also increased stress on the more vulnerable emerging markets, particularly Turkey where the local currency has depreciated sharply. Our scorecards signal that global growth momentum has peaked and is now gradually easing, primarily due to a modest slowdown in Europe and China and early signs that US momentum is now also easing.
While our key indicators continue to suggest a slowdown, the strength of the negative signal is mild. There are also a number of other shorter-term indicators we believe are supportive of continued growth with financial conditions still supportive. This leaves us at a point where we’re carefully balancing near-term upside potential from solid earnings with longer-term signals around 1 year forward that point to slower growth and returns. However, these indicators are still far from flashing recession signal.
Looking ahead, we see three key risks that could drive our current slowdown signals to recession levels:
We’ll be watching carefully to see how these risks play out. The good news is that China has started to ease policy and trade war risks have moderated. In the meantime, we expect growth to slow further, with markets more susceptible to downside risks. For our investment strategy, we continue to hold a neutral position to most asset classes. However, we consider that a more defensive stance around a neutral position will likely become prudent as we expect growth to moderate further and our investment cycle clock continues to flag heightened vulnerability to downside risks.
| Asset class | Position relative to benchmark/outlook1 | Strategy positions |
|---|---|---|
| Growth assets | ||
| Australian equities | Neutral | Offer an attractive yield and can continue to perform well relative to bonds. |
| International equities | Neutral | We expect relatively good performance, with good but easing economic and earnings momentum. |
| Emerging markets | Neutral | Growth momentum has eased across emerging market economies, with more challenges to come as US rates rise. |
| Listed real assets2 | Neutral | Valuations are relatively attractive relative to shares, with consistent earnings and fundamentals supportive. |
| Defensive assets | ||
| Fixed income | ||
| Australia | Neutral | Corporate bonds will struggle as leverage increases and the investment cycle matures. |
| International | Underweight | We expect low but positive returns, with rising interest rates overseas and steady rates locally. |
| Cash3 | Neutral | |
| Currency | ||
| AUD | Neutral | We expect low but positive returns, with rising interest rates overseas and steady rates locally. |
"While our key indicators continue to suggest a slowdown, the strength of the negative signal is mild”, Mark Rider CIO
Notes:
1. Equities, fixed income and cash are relative to benchmark. Currencies are relative to an absolute return outlook (short term).
2. Comprises of 50/50 split between GREITs (global real estate investment trusts) and infrastructure securities.
3. Cash is the balancing asset class. Cash is a residual to portfolio manager’s overall implementation of other asset class strategies. It continues to form part of the overall defensive asset allocation, with PMs having flexibility in terms of how to implement the stated defensive asset strategy across fixed income and cash. In the RIC model cash overweight to facilitate an underweight position we hold in international bonds and to manage overall fund duration.
As at 22 August, 2018.
Read the full Chief Investment Office House View (PDF 147kB)
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.
To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below
25 July 2018
INVESTMENT
Australia’s economic strength, while pleasing, is shadowed by the faster-than-expected slowdown in China and rising rates in the US.
28 June 2018
INVESTMENT
The yield curve is seen by many to be the most reliable predictor of the economic outlook, and right now it says recession is on the way.
18 June 2018
INVESTMENT
Split, fixed or variable? How you manage interest rates depends on the assets you invest in.
Speak to the ANZ Private team directly
We're available weekdays 9:00am to 6:00pm AEST
ANZ Private Bankers are representatives of Australia and New Zealand Banking Group Limited ABN 11 005 357 522 (ANZ), the holder of Australian Financial Services Licence number 234527. This document ("document") is distributed to you by ANZ and may not be reproduced, distributed or published by any recipient for any purpose.
The information provided is general in nature only and does not take into account your personal objectives, financial situation or needs. Please consider its appropriateness to you before making any investment decisions. It should not be relied upon as a substitute for professional advice. For any product referred to above, ANZ recommends that you read any relevant offer document or product disclosure statement and consider if the product is appropriate for you. For products issued by ANZ, these documents are available at www.anz.com. This document is current as at the date of this publication but is subject to change. The document is provided and issued by ANZ unless another author is specified in the document, in which case it is provided and issued by that author. The views expressed are those of the authors only and do not necessarily reflect the opinions or views of ANZ, its employees or directors. Whilst care has been taken in preparing this document, ANZ and its related entities do not warrant or represent that the document is accurate or complete. To the extent permitted by law, ANZ and its related entities do not accept any responsibility or liability from the use of the information. Past performance is not indicative of future performance and any case study shown is for illustrative purposes only. Neither are a prediction of the actual outcome which will be achieved. Some of this information may have tax implications. We recommend that you seek specialist tax advice on how it may impact your tax obligations, liabilities or entitlements.
