Remaining cautious in choppy waters

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.

The process results in a concentrated, long-term Asian growth strategy with a quality tilt. The team stays disciplined on style exposures by investing in growth companies that can deliver superior returns in the long run, particularly those exposed to the structural changes driving Asia’s dynamic growth. Importantly, there is no attempt to second-guess politics or take macro bets, as the research team is focused entirely on bottom-up stock selection. We think this quality growth focus strategy will work well in conjunction with our other Asian managers and will add to performance going forward.

Learn more about the Fidelity Multi Asset Open Fund range

Important information

This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets may be more volatile than other more developed markets. Changes in currency exchange rates may affect the value of investments in overseas markets. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds. The investment policy of the Fidelity Multi Asset Open Funds mean they invest mainly in units in collective investment schemes. Fidelity’s range of Multi Asset Open funds can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0522/370856/SSO/NA