Amid a global health crisis, this year has been characterised by huge uncertainty in markets.
In his recent presentation at the Multi Manager Forum event, Eugene Philalithis, Portfolio Manager of the Fidelity Multi Asset Income range discusses the growing disconnect between some asset classes, which are close to record highs in terms of valuations and explains why the team are focusing on credit opportunities over equities to help deliver stability of income.
In the last few months, we have seen big moves from policy makers, dramatic moves in economic data and a sharp rebound in markets. How do you assess the current market environment?
This year has been characterised by huge uncertainty from an economic perspective and we are still seeing the unfolding impact of the lockdown restrictions through lower consumer confidence, corporate confidence and continued localised lockdowns. At odds with this however, we continue to see markets perform very strongly.
We believe markets are mainly focused on three things; a) the virus becoming less of a risk and the promise of a vaccine; b) fiscal policy and moving from an intervention phase to a stimulus phase and c) central banks keeping interest rates low.
We have seen good economic recovery over the last few months, which was expected as lockdowns began to ease, and economies were re-opened. However, caution is warranted and as economists keep reminding us; it’s the next few months that are critical to the shape of the recovery. Broadly speaking activity has settled at around 5-10% below pre-crisis levels to date. However equity markets have priced in a V-shape recovery - largely driven by positive signals from China and US tech stocks.
In terms of the portfolios, we have shifted our strategy and reduced our exposure to equity income as regulatory pressures have led to waves of dividend cuts. In order to increase the security of the income we’re looking to generate in the portfolios we have shifted our focus to credit assets, adding to high yield as valuations become more supportive and investment grade credit as we saw additional support from central banks.
With your team’s current preference for credit over equities, which areas within fixed income markets are you seeing opportunities in?
Our strategy turned on its head as the market volatility hit in early March. While we had been reducing our exposure to high yield over the last few years, we began buying the asset again in early April.
As spreads began to widen and the Fed offered liquidity support, we started buying investment grade bonds as the risk premium became more attractive. However, as the market more recently is normalising, we’re monitoring that exposure and will act if the diversification benefits and risk/reward profile changes.
Within high yield we continue to like Asia as it maintains attractive valuations and strong balance sheets.
From a risk perspective we’ve looked at several scenarios and even in extreme cases, the risk/reward profile of these assets is still attractive versus broad equity markets, from a volatility perspective as well as ensuring the security of the income.
Looking at opportunities more regionally - has the news around the European Recovery Fund changed your view on Europe and the outlook for European assets?