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US rate hikes set the tone for a global slowdown

 

22 August 2018

House view

 

Mark Rider explains why we may already be past the peak of global growth.

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.

Mixed signals in the short and long term

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.

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Key global risks to watch

Looking ahead, we see three key risks that could drive our current slowdown signals to recession levels:

  • Faster than expected interest rate rises in the US due to higher US inflation
  • A sustained slowing in Chinese credit growth
  • A more severe trade war between the US and China

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.

ANZ investment strategy positions

Investment position
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 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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