Looking for income in an extreme world

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?

We think Europe does present opportunity at this point, given the reopening of the region’s economies. The European Recovery Fund is a landmark agreement that moves the region from being a monetary union to a fiscal union with agreed sharing of the fiscal burden. This takes away some of the risks that many investors look at when considering an allocation to the region which is the possibility of a break-up of the region.   

Against this backdrop, we have started to look at the Euro as well as some equity opportunities as there are some undervalued sectors in the region such as basic resources and autos that can offer some income.

With volatility remaining elevated, how can income investors stay diversified and protect their capital without having to sacrifice too much yield?

With government bond yields where they are, we are seeing a lack of diversification available to income investors. We have been looking at other ways to add diversification and currency exposure and gold have been two ways in which we have done this. Whilst gold is a non-yielding asset, it does have interesting defensive properties.

Chinese government bonds are another area we have been adding to as they offer a positive yield and remain attractive in the context of other markets to provide ballast to the portfolios.

Find out more

Important information

This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. 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. 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 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 issuer's ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different 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. 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. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0920/32154/SSO/NA