Fidelity International (Fidelity) has released its Q3 outlook, outlining the current state of both equities and fixed income and providing details on the potential ramifications for investors.
Despite flat corporate earnings, the report shows that global equities have performed strongly this year due to a re-rating. Nevertheless, quality stocks remain valued above long-term averages, with Fidelity suggesting that fear is influencing the market. It also highlights that disconnects are appearing. Examples of this includes energy stocks decoupling from the oil price and fixed income and equities being in seeming contradiction. From an equity perspective, Fidelity believes that the data available on China looks promising, even if assuming a full China recovery in the second half of the year is premature.
In regards to fixed income, the report showed that US Treasury yields have dropped to their lowest levels since November 2016 due to dovishness from the federal reserve alongside concerns about global growth and a deterioration in trade talks between the US and China.
Fidelity state that the market is pricing in three rate cuts in the US in 2019, but that the company’s base case is for only two, due to its expectation that the slowing US economy will avoid recession. Across the pond in Europe, bund yields were pushed new lows as a worsening of the outlook drove companies including Fidelity to consider its European duration exposure. This resulted in a “scramble for safe haven assets and ECB dovishness”.
Paras Anand, head of asset management, Asia Pacific at Fidelity International, analysed the mixed bags from both sectors and argued that the economy is “in a finely balanced position epitomised by an overly pessimistic bond market on the one hand, and an optimistic equity market on the other”.
Commenting on the wider economic picture, he said: “The bond market, egged on by dovish central bank rhetoric and US-China trade war concerns, is fearing recession, and the equity market, taking the same themes is hoping for continued dovishness and progress in trade disputes. The US economy is slowing down but we don’t think it will slip into recession, so the extent of dovish Fed expectations may be overdone. And trade talks will rumble on, at least in the short to medium term - this is not a fleeting battle, it’s a drawn-out war. Barring any exogenous shocks, we could find the market in a sort of limbo for some time, albeit with bouts of volatility as investors latch on to the latest event looking for direction.
Offering a sunnier outlook on the situation, he added: “The good news is that late cycle dynamics and punchy valuations offer areas of the market for investors to exploit, but it requires a nuanced approach. For example, in the short term, equities are richly valued so we are moderately underweight but in the long term it’s still an attractive market supported by global growth. In government bonds, in the short term the market could still go higher but long-term risk-adjusted returns may underwhelm.
Mr Anand concluded that an emphasis needed to be maintained on long-term investing.
He concluded: “Central banks are attempting to extend a cycle that has already gone on for a long time, and this ratchets up the potential volatility we could see as investors weigh up data, policy and political developments. The best defence for investors is maintaining clear-eyed, sober analysis and focussing on the long-term.”
