Chris Forgan and Charlotte Harington, portfolio managers of the Fidelity Multi Asset Open range, outline how they are navigating a turbulent macro backdrop characterised by ongoing supply constraints and concerns over rising inflation and interest rates, while offering an insight into the important role manager research can play in the current environment.
Dissecting the current macro backdrop
Inflation fears and the corresponding shift from central banks towards aggressive monetary policy tightening have gripped markets in recent months. Additionally, the Ukraine war has compounded inflation worries by causing further commodity supply shocks to be priced into a range of commodity markets. Energy and food inflation - the volatile components that are excluded from core inflation - are reaching extreme levels, especially in Europe, underscoring the extent to which consumer incomes are being squeezed by commodity price increases in recent months.
Whilst core inflation is showing early signs of peaking in places like the US, the global growth contraction shows few signs of abating. Business confidence is falling and consumer confidence is extremely weak as a result of the real income squeeze. The labour market may look tight today, but we believe there are early signs that labour demand is starting to wane. Meanwhile, China, an important global growth impulse, is pursuing a zero Covid strategy and stimulus remains disappointing versus expectations.
Business and consumer confidence is falling
Cautious on riskier asset classes
In the Fidelity Multi Asset Open range, we have held a cautious position on risk assets for some time and that continues to be the case. This is especially true in those markets that are hampered by higher real rates, such as the technology-heavy US equity market and also where valuations look stretched.
Closer to home, the burden of substantially higher costs facing UK consumers makes us wary of the UK domestic market, as well as Sterling. We are also overweight the US dollar because we expect central bank policy divergence to be supportive for the time being.
Positions in US utilities and the Fidelity Global Dividend Fund continue the defensive theme and have proven resilient against the bouts of volatility in recent months. Finally, we have started to build some US government bond exposure - valuations are attractive and the market has fully priced in the Fed’s hawkishness.
The importance of manager research
The challenging macro backdrop also drives us to ensure our underlying exposures remain weather-proof in the long-term. Recently, in our Asia Pacific ex-Japan exposure, we initiated a new holding in the JP Morgan Asia Growth strategy. We like the fact that it is built around the joint efforts of the research team and the two co-portfolio managers are based in Hong Kong and have spent virtually their entire careers at JP Morgan.
The investment process is driven by bottom-up stock selection and informed by analysts, portfolio managers, country specialists and the factor inputs of quant screens. The process is structured and well-defined and seeks to avoid biases and over-reliance on quant metrics while taking a very comprehensive approach to risk. This approach not only works but also represents a different proposition to the wider quality-growth Asian universe.
