Fidelity global chief investment officer, Andrew McCaffery, shared his expectations of central banks in their hard landing approach towards 2023.
Interest rates had been rising worldwide and the firm said it expected rates would reach a 10-year high, settling “far higher than they had at any point over the past decade”.
The annual outlook report analysed the risk of over-tightened monetary policy which would likely trigger an “inflation bust”, alongside a polycrisis across global economies.
Asset allocation
McCaffery reported on the defensive positioning of asset allocation, which was underweight in equity and credit and overweight in government bonds and cash. Fidelity explained that this position would remain defensive until market volatility eased.
The report favoured the “safer haven” of US equities when compared to Europe, as uncertainty surrounding the Russia-Ukraine war continued to grow.
Henk-Jan Rikkerink, global head of solutions, commented on bonds: “The structural tailwinds that drove the bond rally over the last 40 years may have diminished somewhat, but government bonds are still the go-to asset for portfolio diversification in a recession.”
Equities
Marty Dropkin, head of equities in Asia Pacific, and Ilga Haubelt, head of equities in Europe, both recommended caution be exercised around equities.
“We expect a high degree of volatility and uncertainty for global equities in 2023, as stubbornly high inflation and interest rate rises lead to a rough landing for large parts of the global economy,” they said.
Investors were advised to remain highly selective and should consider the balance sheets and funding positions of companies during this period of economic downturn.
Fixed income
Fidelity global chief investment officer, Steve Ellis, exhibited a hopeful outlook towards fixed income markets for the next 12 months.
Ellis further reiterated the attractiveness of government bonds for investors, due to tightened financial conditions and an expected recession.
US and core Europe duration was considered “relatively attractive” considering their hard landing risks while Fidelity remained neutral on UK duration as it was concerned by the extremely high level of volatility and dependence on future fiscal policy.
Ellis also noted he expected interest rates, which had been rising in the UK, US and Australia, would settle far higher than they had at any point over the past decade.
