In its global investment outlook for 2024, Fidelity International outlined why it is important to adopt a “scenario-based approach” which takes into account the complexities of the current global economic and markets cycle.
A “soft landing” (moderating growth and inflation in the US) be maintained for some time, but as 2024 progresses the probability of a cyclical recession rises sharply, the asset manager told a media briefing in Hong Kong last week.
“Markets continue to believe in a ‘soft landing’, where the rate hikes and the tightening of the past two years will do just enough to gradually return the economy and labour market to equilibrium,” said Salman Ahmed, global head of macro and strategic asset allocation, Fidelity International.
“We have a different view,’ he said.
Fidelity warned that its proprietary macro and bottom-up indicators show a mixed picture driven by the delayed effect of the extraordinary fiscal stimulus, run-down of excess savings and a refinancing picture that is still benign.
As the year progresses, Ahmed (main picture) thinks the transmission channel will strengthen leading to a cyclical recession outcome, to which he gives a 60% probability.
“Europe is already feeling the pain of the rate hikes (as growth has slowed sharply) but the macrocycle path in the US is likely to remain more complex into 2024 as well,” he said.
Ahmed is “confident” that the US and other developed world interest rates have most likely peaked, and against this backdrop, he expects growth will moderate with a high risk of a moderate growth contraction developing later in 2024, with both the domestic and geopolitical picture remaining in flux as major elections approach, including in the US.
“Fundamentally, we continue to believe there is simply a lag between policy tightening and the effects on the real economy. The transmission channel is delayed, not broken,” he said.
Alongside cyclical recession, Fidelity’s 2024 outlook also considers the investment implications of a more severe balance sheet recession (10% probability), which would prompt widespread cutbacks in spending by both companies and consumers; the more benign soft landing scenario (20%), whereby the current set-up extends well into 2024; and a case in which there is no landing in 2024 at all (10%), where the economy holds at above trend level of growth and sticky inflation, provoking central banks into another round of policy rate rises.
“This scenario-based navigation map underpinned by a suite of proprietary macro and bottom-up indicators is critical to our investment process, which is embracing the reality of faster cycles and need for flexible tactical asset allocation, as the old regime of “Great Moderation” starts to firmly fade into history,” said Ahmed.
Investment opportunities in 2024
As the cyclical recession outcome takes hold later in 2024, Fidelity International believes there are good opportunities for investors who are discerning about sectors and geographies.
Fidelity thinks US equities will be “well positioned”. In particular, mid-cap stocks along with much of the S&P 500 that have not shared the incredible performance this year of the “Magnificent Seven” technology stocks.
“Valuations look reasonable for these well-run companies with solid growth prospects,” Matthew Quaife, global head of multi asset investment management, Fidelity International, told the briefing.
Meanwhile, the reduction in bond yields has led to “above normal positive returns for government bonds” is another area Fidelity is focussing on as the interconnected and interdependent nature of soft landing and cyclical recession scenarios mean lower yields as the Fed starts to change policy next year.
Quaife (pictured above) highlighted intermediate-maturity investment grade bonds and inflation-linked bonds as offering value.
Fidelity also advises taking long positions in certain emerging markets, given attractive valuations and idiosyncratic economic cycles, but its “preferences change depending on which scenario emerges”, said Quaife.
Nevertheless, Fidelity argued that China offers value especially as the macro cycle stabilises and expectations of growth for 2024 rise from current depressed levels.
“Chinese equities which currently offer attractive valuations compared with most other regions, as well as cyclical stocks including shipping, industrials and the oil services sector, would also benefit from rising economic output,” he said.
Finally, Quaife also sees opportunities within Japanese equities, as the economy transitions into a mildly inflationary state. From a sector perspective, technology currently delivers the most attractive earnings forecasts, followed by healthcare and communications services.
“We see both cyclical and structural tailwinds for the technology sector overall. Within technology, Artificial Intelligence continues to provide a long-term growth story.”