ANZ predicts three main forms a downswing could occure this year. While the base case suggests a market downturn, the two risk scenarios are not so rosy.
The most likely scenario is what ANZ’s Chief Investment Office is focused on – a gradual slowdown. The investment and economic cycle is continuing to slow with inflation only gradually lifting. Central banks will balance attempts to dampen any financial market ‘exuberance’ while working against recessionary forces. This isn’t a bad outcome.
In terms of risks, while a relatively low probability, a sharper lift in inflation would be very concerning because it would make it harder for the US Federal Reserve to pause rate rises. Such a situation could lead to negative returns for investors and a sharp loss of sharemarket value.
A mild recession is a little more likely than this. This will occur if US rates stay on hold and the economy slows. Company earnings would be negative due to higher costs and lower growth. Tariff escalation due to the US-China trade war would compound this situation.
ANZ’s view is cautious towards growth assets such as shares for the coming year. While share valuations have improved, analysis shows the global economy has slowed. All up, returns are expected to be below the average of recent years.
Mark Rider is Chief Investment Officer – Wealth at ANZ