skip to log on skip to main content

Will the investment cycle end soon?

24 January 2018

House View

The strong investment growth of 2017 is unlikely to be repeated, explains chief investment officer Mark Rider.

Last year was a strong one for sharemarkets, which delivered double-digit returns for investors. The challenge for 2018 is, will this continue? And if so, how long can this all last?

Strong investment market performance is not unusual as the end of an investment cycle nears. (Markets in 2017 were also boosted by low interest rates and easy financial conditions.)

ANZ’s chief investment office envisages 2018 to be more of the same in terms of economic growth, but as we start the new year, some of the key indicators are starting to wane.

 

Giant US retailer Wal-Mart recently increased entry-level wages for its employees. Wage increases in the US could lead to restraining activity from the US central banks, affecting market growth possibilities.

Rising risks

The indicators we’ve been monitoring – such as the US yield curve (which shows the difference between the yield on the 10-year Treasury bond and the 2-year Treasury bond) – are starting to shift from the “green zone” to amber and this suggest greater need for caution. And when that gap turns negative, it could signal that the current investment cycle is coming to an end.

While that indicator is one to watch, the key challenge we see in 2018 is the outlook for wages and inflation, particularly in the US.

The US economy is at full capacity already. And with the US unemployment rate set to fall below 4 per cent this year, this could mean wages are about to rise.

If wages rise more rapidly than anticipated, we may see the US central bank increase rates faster than it otherwise would – bearing in mind there are already three rate rises expected in 2018.

The problem with additional US rate increases is that other central banks may join the US in synchronised policy tightening.

Already the European Central Bank has stated it would reduce the amount of bonds it purchases from this month.

Other key central banks are also gradually reining in the accommodative monetary policy that has been in place since the global financial crisis, which has arguably been a strong force behind the sharemarket rallies in recent years.

In 2017, economies and financial markets were largely insulated from rising political risk, possibly due to stronger growth and easy monetary policy.

This could change in 2018 as firmer central bank policy creates a more fertile environment for political risk to become a driver.

Add to these risks the conundrum that China is in as it attempts to tighten financial conditions and create a more sustainable future for its economy.

A network of investment professionals

Contact us

Source: ANZ Wealth CIO

"Balancing growth expectations with emerging risks, we maintain a neutral stance on shares and all growth assets."

Growth assets still in favour

While we’re mindful of these challenges, we expect the environment will continue to favour growth over defensive assets in 2018. But the investment cycle will face greater challenge this year, and any of the risk factors outlined above could change market dynamics, potentially bringing it to an end.

Therefore, balancing growth expectations with emerging risks, we maintain a neutral stance on shares and all growth assets. We’ll be keeping a close watch on our key indicators: history suggests that if wages and inflation lift even slightly faster than currently factored into financial markets, amber signals can shift to red – which may signal the need for a more conservative approach.

Investment positions at January 2018

Investment strategy
Asset class Position relative to benchmark/outlook1
Growth assets Neutral
Australian equities Neutral
International equities Neutral
United States Neutral
Europe Neutral
Japan Neutral
Emerging markets Neutral
Listed real assets2 Neutral
Defensive assets Neutral
Fixed income Underweight
Australia Neutral
New Zealand Neutral
International Underweight
Cash3 Overweight
Currency  
AUD/USD Neutral
NZD/USD Neutral
USD TWI Neutral

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 and infrastructure securities.
3. Cash is the balancing asset class

 

Read the full Chief Investment Office House View for January 2018 (PDF 467kB).

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.

 

To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below.

You might also like

ANZ Global Market Outlook 2018

INVESTMENT

January 2018

 

Read more

Risk and reward: how ANZ invests

INVESTMENT

June 2016

Read more

Understanding the dramatic sharemarket fall

INVESTMENT

January 2018

Read more

Contact us

Request a call back

Provide your details and we'll call when it suits you

Request a call back

   

Email us

Send us an email directly

contact_anzprivate@anz.com

Call us

Speak to the ANZ Private team directly

1800 316 926

We're available weekdays 9:00am to 6:00pm AEST

Find an ANZ Private office

Our locations across Australia

Find an office

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.