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Volatility returns amid short-term uncertainties


9 October 2020

House view






As market volatility returns, ANZ’s Chief Investment Office anticipates potential re-entry opportunities.

Market volatility returned in September as the sell-off in the Technology sector pulled the broader markets lower as investors took profit.

The US S&P 500 index lost over 9% from its all-time high in early September as it neared ‘technical correction’ territory. But we considered the correction a ‘healthy’ one given the strong performance of global markets in previous months. Some potential headwinds exist which may impact investor sentiment in the short-term. These include:

  • The deadlock between the US Congress and the White house on the amount of a new fiscal package
  • Political uncertainty as the US presidential election nears On a more positive note, some encouraging developments have emerged.

On a more positive note, some encouraging developments have emerged.

For one, China’s economic activity appears to be on track to reach pre-Covid-19 levels. Recent data on industrial production, retail sales and fixed-asset investments showed healthy recovery.

At the same time, global central banks have reaffirmed their commitment to keeping interest rates ‘lower for longer’. This means the injection of liquidity into economies will continue which should prop up investor confidence in the near-term.

We have been positioned as underweight to growth assets recently, believing a correction was possible and could provide a good re-entry point to growth assets.

Whist short-term risks remain, we have taken this opportunity to increase our portfolio allocation to growth assets and may look to build our exposure to equity markets further if additional weakness arises.

Investment outlook in brief

We have increased our allocation to equities both in Australia and the developed markets. This was funded using our cash position that’s been built up over the past few months.

We maintain our view that US Treasuries and Australian government bonds are sensible investments as they provide the most dependable source of diversification and negative correlation to risk assets.

We remain underweight the Australian dollar as we see some downside risk in the near-term.

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ANZ investment strategy positions - October

Investment position
Asset class Reasoning
Growth Assets We remain underweight growth assets despite the buy-back towards benchmark. While short-term headwinds – geopolitical tensions, Covid-19 outbreaks and US election uncertainties – persist, we believe global central banks and governments will continue to provide fiscal and monetary stimulus. We expect volatility to continue in the short-term and may use this as an opportunity to re-enter some positions closer to benchmark.
Developed equities We maintain our preference for developed market equities relative to emerging markets — with a preference for U.S. stocks. Whilst near-term risks, namely the U.S. election and COVID-19 outbreaks across Europe are concerning, we believe the recent sell-off has brought equities back closer to fair-value.
Australian equities We remain underweight Australian equities but have bought back closer to benchmark in September. The government’s recent announcement to wind-back responsible lending rules and the continued strength in commodity prices should be more supportive to the Financials and Resources sectors which remain the two largest sectors in the domestic equity markets.
Emerging-market equities We maintain our neutral position in this sector in favour of our preference for Australian and developed market equities. We believe emerging markets may come under pressure in the near-term if the US dollar regains further strength. 
Listed real assets1

Valuations and yields are becoming more attractive in this sector. However, we hold our view that a global recession is likely to put downward pressure on rents, with retail and offices expected to be hit harder than residential properties. REITS remain under pressure, with shopping centres challenged by e-commerce and office spaces suffering from the move to work from home for most businesses.

While we see the ‘lower for longer’ rates scenario may be supportive of infrastructure spending, we remain neutral and will avoid unnecessary turnover of the portfolio.

Alternative growth We maintain our benchmark position and continue to hold a long-term strategic allocation. This asset class offers less volatility than listed real assets and should be a valuable diversifier during extreme market conditions.
Defensive Assets We reduced our overweight position to defensive assets in late September after the pull-back in equity markets. We maintained our preference for fixed income – Australian and global fixed interest – within our defensive asset portfolio.
International fixed income We retain a slight overweight position on global bonds as our preferred defensive asset — primarily due to its long duration characteristics — but also as a low yield but stable source of diversification and downside protection. As global central banks reaffirmed their commitment for a ‘lower for longer’ interest rate environment, we expect more monetary stimulus to keep yields and spreads low.
Australian fixed income We maintain an overweight position on domestic bonds as they provide a good source of diversification and negative correlation to risk assets.
Cash We are neutral cash after we used our previous overweight position to allocate more funds into equities. Cash remains an important source of liquidity in our portfolio.
Foreign currency hedge ratio2 We have maintained our underweight to the AUD. Given the AUD is a risk currency, the position aims to provide additional protection in the event of further equity weakness and acts as a hedge as we look to push growth assets back towards benchmark in the near-term.



1. Comprises of 50/50 split between GREITs and infrastructure securities.

2. Percentage of developed market and emerging market equities hedged from foreign currency into Australian dollars. Representative diversified portfolio with 70/30 growth/defensive assets.

As at 1 October 2020.

Read the full Chief Investment Officer House View (PDF)


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