Old tailwinds, new headwinds

Despite the choppy start to the year, and asset market volatility due to the geopolitical and public health crises, our outlook remains based on fundamentals. The synchronised global growth slowdown during 2019 saw many central banks, most notably the US Federal Reserve (Fed) and European Central Bank (ECB), respond with monetary policy easing. This left investors optimistic about future growth and asset markets rallied on expectations of better growth. We can see some signs of stabilisation but few signs of a V-shaped recovery. We are only expecting a shallow recovery given the structural trend of Chinese growth moderating and continued geopolitical uncertainty.

China is setting the pace

China tends to set the pace for global growth, and while there was some easing of policy in 2019, the long-term deleveraging objective remains in place. 2019 saw more targeted easing rather than a system wide flood of credit. Without better growth from China global trade will remain soft. In addition, the China/US trade tensions drove sentiment in 2019, and despite the Phase One trade deal acting as a near-term support, we expect this issue to rumble on through 2020.

Why is oil a possible risk?

We are cautious on the richly valued US stock market. We expect bond yields to rise in the near-term if the risk-off stance we are seeing is only transient, but this can only run so far given global inflation remains benign and central banks have signalled that they will keep easy monetary policy until inflation is persistently at or above target. In our view, higher oil prices are the greatest risk to an upside inflation surprise. We are positive on oil prices for the second half of this year given OPEC cuts, demand resilience and slower US shale growth. We believe the marked slide in the oil price on fears of a demand slump from China’s public health crisis is unlikely to persist and sentiment has likely overshot.

We also see more currency volatility in 2020 relative to 2019. Last year saw low foreign exchange volatility due to the synchronised nature of the slowdown and the policy response. This year, we think currency volatility can rise from these depressed levels and expect the ECB to stay on hold in 2020, but we do see room for the Fed to cut rates again.

Investors are walking a fine line

Against this backdrop, investors will have to walk a fine line between upside participation and downside protection. Gold has already been an important holding this year given the risk-off turn in markets, and we think gold’s strength may continue into 2020. Alternatives are also likely to have an important role in portfolios. Our team uses a range of strategies from this broad universe to access opportunities, including hedge funds designed to take advantage of rising volatility. As we move further into the year, these volatility-focused strategies may be an important part of our toolkit in responding to a changing investment landscape.

Central banks remain in play, and investors would be making too bold a call to close the ‘Powell Put’ trade, but equally, positioning aggressively risk-on is not prudent given stretched valuations, weak growth, and geopolitical tensions across the board.

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. 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. Investments in overseas markets, changes in currency exchange rates may affect the value of an investment. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates fall 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 small and emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. 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.

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