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Investors brace for turning point in markets

The coming quarter could be pivotal in determining the trajectory for markets and economies over the next few years, with Fidelity International expecting the start of a ‘great reset’.
Idyllic winding road through the green pine forest.

After a year-to-date defined by surging inflation, the war in Ukraine and market volatility, themes such as an inevitable hard landing, China re-emerging from lockdowns and global consumer demand will dictate the longer-term outlook.

Fidelity International believes that these dynamics could mark a turning point for markets amid intensifying inflationary pressures and supply chains being redrawn.

“We see this as the start of “The Great Reset”, in which the Fed leads central banks down a more hawkish path that prioritises managing inflation above a soft landing,” said Andrew McCaffery, the firm’s global chief investment officer.

As a result, downside risks to global growth have increased substantially, he added. “Recession in Europe now looks very likely, while the US too has edged closer to a hard landing scenario.”

However, as investors continue to focus on managing risk against this backdrop, there will also likely be a raft of opportunities for individual companies.

McCaffery expects some of these in sectors exposed to long-term trends that were previously overbought, while others will be in sectors overlooked in the rush for growth that should come to the fore again as rates rise.

Key themes to watch

With inflation seeming to be edging ever-higher, investors now need to consider how hard the landing will be.

Rather than previous views that central banks might be able to engineer a soft landing, the decision by the US Federal Reserve to match its hawkish rhetoric with hawkish action has changed the dynamics.

While Fidelity expects a shallower hiking path in the UK and eurozone, the firm sees clear risks to global growth and, in turn, has increased its likelihood of a hard landing scenario from 35% to 60%.

China re-emerging from lockdowns is also key for investors to pay attention to. The easing of the restrictions from April and May is positive for the domestic economy, but some indicators suggest caution is still warranted.

According to Fidelity, primary property sales are still below previous levels, plus unemployment is rising. Such issues are worrying for a government already focused on social stability.

Further, the effectiveness of China’s fiscal and monetary policy, as well as consumer sentiment post-lockdowns, remain unknown – including whether the economic recovery will be strong enough to offset slowdowns elsewhere in the world.

Fidelity sees the global consumer already feeling the inflationary pinch – leading to a fall in real wages – combined with mounting discontent, as fuelling record-low consumer confidence indicators.

This might start to show in terms of the level of resilience to rising costs and tightening financial conditions. The asset management firm believes that various concerns, such as uncertainty in China over potential future lockdowns, or higher mortgage rates in many Western markets, or plummeting affordability metrics generally, could prove key in determining the severity of the economic landing.

Amid this outlook, Victoria Mio, head of equity research in Asia Pacific at Fidelity International, is optimistic about the pockets of opportunity for investors to tap into.

“Further stabilisation of the regulatory environment [in China] and a continued effort on global integration and collaboration will further support a lift in investor sentiment,” she explained.

“While we expect short-term volatility, there are pockets of sector opportunity, particularly within auto, renewable energy and new infrastructure which benefit from favourable policies.”

Part of the Mark Allen Group.