Investors are facing a world that is very different to the previous decade due to the change in monetary policy, the pressures on the global economy from decades high inflation, and the energy crisis in Europe. Accordingly, the Fidelity multi-asset team is currently very conservative and is overweight cash, said Taosha Wang, portfolio manager, multi-asset at Fidelity International.
The multi asset team’s core view is taking into account four main factors, she said:
1. Global centrals banks are committed to do whatever it takes’ to fight inflation – which is seeing them walk back for more than a decade of accommodating policy.
2. The very large energy price shock, especially in Europe – which is affecting households, corporate, industrials, financial institution’s and government.
3. The Chinese economy continues to face headwinds – due to the lingering impact of the soft property market and the Chinese authorities’ zero Covid policy.
4. Financial conditions are tightening, the impact of which has yet to be fully reflected in earnings forecasts.
These significant factors are leading the team to have a cautious outlook and to take defensive position as high inflation is forcing high monetary conditions, Wang said. “We are underweight risk assets across equities and credit and overweight cash and neutral on duration.
From a sector perspective, Wang said the team prefers US equity to European equity at present from a macro perspective, “due to the greater magnitude of the shock to energy prices in Europe, and as high energy pricing is not nearly as disruptive in the US as it is in Europe, and the US is a net export of energy.” The European equity market has high exposure to sectors sensitive to energy disruptions, she added, notably in the financial, industrial, consumer discretionary and energy sectors.
On the credit side, the team prefers investment grade credit over emerging market dollar debt. “The reason is that we are concerned by the large stock of debt that has built up in the emerging markets since the global financial crisis. As the global financial conditions tighten we expect to see higher risk of capital outflow from these countries, making them more vulnerable from a downside perspective.”
The shift in central bank monetary policy is forcing investors to rethink assumptions which have been widely held for more than a decade, Wang said. “As inflation has become higher, so equities and bonds are more correlated because inflation rather than bonds is in the driving seat of monetary policy. This dictates the cost of capital for both equities and bonds alike, causing their correlation to be more positive.
“The bottom line is, investors are facing a world that is quite different to most of the period following the global financial crisis. Some of the old playbooks may not be working anymore. We believe a tighter monetary policy is required to combat the high inflation we are seeing currently. This is further pressure on risk asset prices in general and we are positioned conservatively with an overweight to cash.”
Where the team sees a thematic opportunity is in renewable energy. “Here, long term sustainable growth meets the near term ongoing inflationary energy crisis,” Wang said. “The transition to renewables from traditional energy sources, from a smaller start point, will trigger a significant growth rate for years to come.
“The cost of generating electricity from renewable sources has reduced significantly over the past decade. Globally, the cost of generating electricity from a solar plant is now lower than burning gas or coal and recently the dramatic price rise in natural gas will have widened the cost advantage in favour of solar. In other words, the ongoing inflationary energy crisis is accelerating a structural long term growth strategy of the transition to renewable energy.”
