This is no ‘last hurrah’ from markets

20 February 2018

Sound economic conditions will continue to support market growth even as rate increases become real this year, explains Mark Rider.

We’ve seen dramatic shifts in world sharemarkets this month: values plunged significantly early in February and began to recover the week after, though they’re still some way from returning to January’s elevated levels.

Investors were spooked because the continuing strength of the economy means central banks are likely more willing to gradually withdraw policy support as it is less needed.  And without the same level of support there’ll be greater challenges for sharemarket returns this year.

Though there are some warning signals that we could approach the end of the current investment cycle over the next few years, ANZ’s chief investment office has not yet discerned strong signals that the “last hurrah” is imminent.


What we do see is that:

  • global economic growth will remain above trend
  • most major developed economies will continue to perform well
  • shares continue to look expensive, especially in the US, despite the recent drop in value.

One positive side effect of February’s correction is that investors are now less complacent in their expectation of sharemarket growth, and the anxious sentiment that markets were overvalued has eased somewhat.

The other good news is that there is also now a more realistic acceptance that the US central bank will increase rates three times this year while the European Central Bank backs away from buying bonds, which it’s been doing to support the eurozone economy for years.

ANZ chief investment office strategy

In consideration of all this, ANZ is holding its ‘neutral’ position on growth assets including local and international stocks.

As we’ve outlined above, while the fundamental backdrop of this asset class is supportive, valuations are still elevated despite the recent pullback, and central banks are steadily tightening policy which adds a cautious tone to riskier assets.

We’re still holding off bonds, with an ‘underweight’ recommendation, but we do see they’re becoming more attractive.

The table below shows our investment stance on asset classes this month.

Investment positions at February 2018

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
  - Australian Neutral
  - New Zealand Neutral
  - International Underweight
Cash3 Overweight
AUD/USD Neutral
NZD/USD Neutral
USD TWI Neutral

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. 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.

Read the full Chief Investment Office House View.