Are markets too complacent about a ‘soft landing’?

The full effect of interest rate increases is still to make itself fully felt through the broad economy. The US housing market is under strain from much higher mortgage rates. Corporates are also feeling the impact in the form of higher funding costs. Valuations expanded in several regions, most notably the US, where market leadership has been extremely concentrated. Consumption has been maintained during this hiking cycle by the spending of excess savings built up during the pandemic, but these are now fully depleted and consumer debt is growing.

So, while risk assets are painting a more positive view of the world as we head into 2024, we think the reasons above are enough to warrant some caution, given the data implies a global slowdown is coming. To this end, we remain wary of equities and prefer the safety of fixed income.

It is true that inflation is slowing in major regions and the US economy is still resilient, but we believe that the underlying data does not support the recent positive moves we have seen in riskier assets such as equities over the final months of 2023. Incoming data that does not corroborate a soft-landing outcome has the potential to cause volatility. This might be in the form of higher inflation numbers, perhaps precipitated by oil prices moving higher, or growth slowing faster than expected.

In 2023, our positions in gold supported our defensive stance. The metal remained resilient in the face of higher real yields and a stronger US dollar. Rising geopolitical tensions, corporate failures and strong central bank purchases helped underpin support for the yellow metal. We still favour a position in gold due to its defensive nature.

After years of low yields, we believe bonds now look attractive and offer appealing characteristics to investors. Given the heightened risks to growth that we have mentioned above, coupled with the decelerating inflationary backdrop and weak returns in recent years, we believe the opportunity for markets at this junction lies within core fixed income assets. The yields now available in core markets are attractive on a medium to long-term basis. However, we are still wary of high yield bonds given the relative tightness of credit spreads in this part of the market.

Although we remain cautious on equities as a whole, within our allocation we prefer defensive exposures such as utilities, minimum volatility strategies and the Fidelity Global Dividend Fund. If a global slowdown occurs in the coming months, as the data currently implies, we believe that small-caps should be well placed to outperform in a recovery as they have already endured substantial pain in the face of higher interest rates.

Chris Forgan, Portfolio Manager, Fidelity Multi Asset Open range

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Important information

This information is for investment professionals only and should not be relied upon by private investors.

The value of investments can go down as well as up and clients may not get back the amount invested. The Fidelity Multi Asset funds use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The investment policy of these funds means they invest mainly in units in collective investment schemes. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. 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. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the fund investing in them. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi-annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1123/384620/SSO/NA