Three key themes to dominate Q3: Fidelity

With the belief that markets are oscillating between fragility and resilience, Fidelity has outlined three themes it expects to see in the third quarter of 2023.

The asset manager outlines the ongoing ‘polycrisis’ with tight labour markets and abundant liquidity on one hand and delayed effects of tightening rate hikes and tightening lending standards on the other. 

“For now, a cyclical recession where employment in the US rises between 4.4 to 6.5 per cent over the next 12 months is the more probable than a serious balance sheet recession, but either way, a soft landing is unlikely,” said Andrew McCaffery, Fidelity International’s global chief investment officer. 

It has positioned cautiously underweight equities and credit. Although economic activity remains robust in developed markets, there are indicators of falling earnings, Fidelity added. 

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So, it is allocating to minimum volatility equities and defensive sectors over cyclical sectors and, in fixed income, Fidelity prefers government bonds and investment grade over riskier high yield. 

It also notes that H2 represented a good buying opportunity in European real estate markets, as in typical real estate cycles, individual property repricing moves long before wider market indices. 

Fidelity will also continue to look east to China, where the post-COVID-19 recovery remains underwhelming despite a strong start to the year.

“Earning estimates are down, young unemployment is up, and consumers aren’t spending enough, but our on-the-ground research suggests the rebound has barely begun,” McCaffery noted.

“Monetary and fiscal policies are supportive, with more stimulus measures likely.”

Until then, the disjunct between the market expectation and reality has left Chinese equities trading at a significant discount. 

Global luxury equities benefited from China’s reopening through tourism and increased spending and Fidelity believes the sector should also offer some downside protection. 

Finally, it foresees corporate sentiment stabilising following an uptick in June.  

McCaffery said: “Fidelity’s analysts are reporting improving moods among management teams. Avoiding a meltdown in the financial sector has certainly helped.

“However, we remain wary of complacency, policy lags, high wage cost pressures, and likely further action from central banks all pose risks.” 

Fidelity adds the majority of its analysts still anticipate recession over the next 12 months. 

Still, opportunities could exist in select emerging markets such as Brazilian equities and bonds, Indonesian equities, and South African local government bonds. It also sees bright spots in Japan, given its trend of shareholder friendly action.