WITH key headwinds from last year reversing, even in the face of ongoing US-China uncertainty, there is a basis for expecting continued recovery and global growth in the fourth quarter compared with Q4 2018, notes Fidelity International’s latest Investment Outlook.
The third quarter saw no resolutions to the many risks weighing on the markets, the US-China trade war, global recession fears and Brexit, and introduced a few new ones such as yield curve inversion, Hong Kong protests, a higher risk premium on oil as a result of Saudi production facility attacks, and the threat of impeachment of the US president.
But no resolution does not mean an absence of progress. Central banks have turned dovish rhetoric into material action in both developed and emerging markets, which, along with lower bond yields that support growth and targeted Chinese fiscal and monetary stimulus, gives us comfort.
Economic data is pointing to flatlining, not declining, activity. And crucially, the US consumer is proving resilient, helped by employment levels remaining at record highs.
However, growth is still weak, and while investors should remain on their guard. Consumer numbers should be watched closely. If consumer data components show signs of fraying it could remove a key support for the economy.
Default rates in the most levered areas of the fixed income market have started to rise, albeit from a low base but could be a sign of vulnerability. In equities, the recent rotation into value stocks may prove short-lived without sustained economic recovery.
Fiscal policy is another theme. There are signs that monetary tools are reaching their limits and calls for fiscal stimulus are growing louder.
If fiscal levers are pulled, it could have far reaching consequences across asset classes and regions, including the return of inflation, a weaker US dollar and a resurgence in emerging markets.
Due to the role governments play in fiscal policy, and now, arguably, on monetary policy, it’s prudent to be aware of political developments. However, it’s also made central bank policy more unpredictable in both its direction and impact.
In this more uncertain paradigm, investors are better served by centering their attention on individual companies and allowing themes to emerge rather than the other way around.
Paras Anand, head of asset management, Asia Pacific at Fidelity International, says, “For now, the economy is bending, not breaking. In this environment we suggest portfolios are tilted towards safety but remain exposed to risk assets."
"That means a quality bias in equities, favouring US government bonds for protection in market sell-offs and being more selective on tenant exposure within real estate. As we enter the fourth quarter, there’s plenty in the calendar to keep markets anything but quiet,” he adds.