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Article | 6-minute read

Potential for equities to drift higher

October 2021

Despite the recent risk-off tone across markets, our Chief Investment Office believes there is still potential for equities to grind higher from their current levels. Find out why in our latest House View.

Our view

In August, we noted that investors seemed to be waiting for the next catalyst to dictate the near-to-medium direction of markets. While some major economic events have transpired since and markets have become wobbly at times, the story remains largely the same.

Yes, the Delta variant persists in causing disruption globally. And yes, the Evergrande crisis and concerns including slowing growth and regulatory uncertainty in China remain unclear. However, both appear largely priced into markets. The US Federal Reserve (Fed) managed their taper message at Jackson Hole with aplomb, disentangling the withdrawal of stimulus from an inevitable rate hike (ANZ expects this will be in the first half of 2023). The US debt ceiling was the latest headline to grab the market’s attention.

It is not intended to discount the potential implications of such events for markets. Indeed, each has been a contributor to a somewhat bumpy ride of late, yet none have seen markets head south for a prolonged period, nor north for that matter - rather markets have kept an even keel. We believe markets will continue to navigate this same course in the months ahead. While it’s unlikely to be smooth sailing throughout, and investors may need to change tack slightly, we believe markets should continue to drift marginally higher from here towards year-end.

We believe the market is underestimating the global economic recovery and further job tightening potential once economies reopen. While peak economic growth may have been reached, inflation is expected to be less transitory than initially thought and higher yields could follow consequently. This type of environment would be supportive for the ‘value trade’ to recommence.

Equity market valuations remain stretched across most developed markets; however, strong earnings momentum abroad has supported equity prices so far and appears set to continue propping up risk assets in the near term.

What this means for our diversified portfolios

Given this, we believe risks are currently skewed to the upside and with the potential of further gains for equity markets we remain mildly overweight risk assets. This position is a construct of a mild overweight to developed markets equities alongside benchmark positions in Global REITs (GREITS) and Australian and emerging markets shares.

The latter two face challenges in the near term. Both will be impacted by the slowdown in China, to varying degrees by the Evergrande situation and Australian shares appear to have reached peak company earnings. However, emerging markets valuations are now very attractive relative to their developed market peers and Australian shares could be a beneficiary of higher yields if the ‘value trade’ resurfaces towards year-end.

We remain mildly underweight defensive assets. Cash remains our preferred defensive asset class, providing liquidity to portfolios as well as risk-reducing characteristics. The prospect of higher yields, the construct of the Australian bond market (with a lower allocation to credit markets than the global market) and its propensity to act as a higher beta market means we remain underweight Aussie rates. We have a current preference for global bonds, primarily due to the higher exposure to credit, where we remain at benchmark. We are carefully watching yields with a view to trimming this position if they start to rise in a meaningful manner.

ANZ investment strategy positions - October

Investment position
Asset class Reasoning
Growth Assets


Developed market shares

Developed markets equites (DM) continue to be our preferred exposure within portfolios. We remain mildly overweight the asset class and remain positive on the short-to-medium term outlook.

We expect a relatively flat period for DM in the near-term with sector rotations likely to be the driver of most major market changes. Positive earnings revisions from the most recent reporting season were broad based across all sectors and regions. However, with economic momentum appearing to have peaked for the time-being, alongside fiscal stimulus to consumers, markets could be vulnerable to any downside disappointments.

Australian shares

The domestic share market is currently facing numerous headwinds including continued lockdowns across Australia’s two largest capital cities, a challenging outlook for earnings momentum and potential implications for commodity prices stemming from slowing Chinese growth, increasing environmental regulations in China and the potential fallout from the Evergrande debt crisis.

Despite these headwinds we remain at benchmark to Australian shares - albeit very mildly below neutral. We continue to favour global developed market shares, where we see better earnings momentum and diversification characteristics. However, there is scope for the ‘value trade’ to reignite later this year if labour market conditions remain tight, inflation persists, and bond yields are able to shift higher. Should these conditions materialise we may consider building our tactical position accordingly.

Emerging-market shares

Recent underperformance has now seen emerging markets shares (EM) lag developed markets equities by 6.2%, as of 30 September on a year-to-date basis. Alongside the possibility of the People’s Bank of China (PBoC) loosening monetary policy, this has seen us consider increasing our benchmark position to the asset class. However, while valuations are now considered cheap, sentiment remains very negative, and this tilts our decision in favour of remaining at benchmark for now. 

Much like the concentration of the index (China accounts for approximately 40% of the EM index), most of the headwinds for EM are centred around China. Continued uncertainty surrounding Chinese regulations, downgraded growth prospects for China, a commodity downturn and the possibility of spill over from the Evergrande debt crisis remain the major concerns. Valuations should at least partially compensate for these headwinds.

Listed real assets

We retain a tactical mild underweight to listed real assets this month. The position is owing to a benchmark allocation to Global REITs (GREITs) and a mild underweight position to listed infrastructure.

GREITs have performed broadly in line with global equity markets over the past month and remain ahead on a 12-month basis. Following a stellar run, we have less conviction for near-term outperformance from the asset class. However, similar to Australian shares, should the ‘value trade’ re-emerge later this year GREITs could benefit.  Given this dynamic, and the additional benefits the asset class provides to portfolios - namely an attractive dividend yield, diversifying effect for multi asset portfolios and hedge against inflation - we remain at benchmark.

There is no change to our outlook or position in listed infrastructure. We remain mildly underweight, preferring GREITs and developed market equities.

Foreign Exchange Hedge Ratio*

The Australian dollar (AUD) is likely to remain range-bound in the short-term with several factors working to offset one another. Despite strong seasonal effects and the likelihood of growth stabilising, tighter liquidity is likely to see the AUD display slightly higher volatility in the coming months. We retain our year-end forecast of USD0.75.

Within our diversified portfolios we maintain a benchmark position to the AUD. We prefer more developed market foreign currency exposure (particularly the USD) which should act as a form of protection in the event of any equity market pull-back.

Defensive Assets


International fixed income

The path of increasing yields reversed recently due to discussions about the potential for peak economic growth being reached and inflation numbers being transitory.  We believe the market is underestimating the economic recovery and job tightening potential. With the possibility of inflation being less transitory than expected, higher yields may follow as a result towards year-end.

We remain at benchmark this month and closely watch yield movements. Should yields trend higher on a meaningful basis we will give consideration to reducing our exposure to the asset class.

Australian fixed income

It’s the composition of the Australian bond market, alongside its propensity to act as a higher beta market than many of its global peers, which frames our relative positioning in the asset class. We continue to favour credit versus sovereign bonds and the domestic market has a higher allocation to sovereigns than the global bond market. In the event of a broad-based sell-off in bonds we would expect the domestic market to be harder hit than global counterparts.

We hold our expectation of yields trending higher from here. Therefore, we have a mild dislike for bonds currently and remain underweight Australian fixed income as a result.


Cash remains our preferred defensive asset class, and we are now mildly overweight the asset class. Cash provides liquidity to portfolios as well as risk-reducing characteristics.



*Percentage of developed market and emerging market equities hedged from foreign currency into Australian dollars.

Tactical Asset Allocation is current as at 1 October 2021.


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