Which assets could perform best with possible economic recovery?

Big tech and certain small companies could be the first to rebound if markets gain confidence that the end of interest rate rises are in sight, Fidelity International has suggested.

Providing an overview of the state of the market, the investment managers noted that the mood in stockmarkets was more positive than at perhaps any point this year.

“Prices have been rising for the past month as investors jump on any positive news that suggests inflation could be peaking, or interest rate rises slowing down,” Fidelity stated.

 “That makes sense when you consider that it is the job of the market to anticipate and move ahead of economic changes. The market has been falling for most of this year in anticipation of tougher times to come and now, as the economic pain is being felt in earnest, it has already priced in a slowdown.”

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But if markets gained confidence that the end of interest rate hikes was on the horizon and inflation had in fact peaked, recovery could gain momentum. With this, there was “room for a substantial recovery for tech”.

According to figures obtained from Morningstar Direct, major tech companies had seen significant falls since the start of the year, such as Amazon down 47%, Alphabet (Google) down 32%, and Meta (Facebook) down 66%. Only Apple had kept pace with the market, down 19%, which was the same as the S&P 500.

Fidelity noted: “Those falls are justified on the basis that rising interest rates damage these companies’ valuations by discounting the value of their future earnings. That effect won’t be undone completely until interest rate rises peak and begin to fall back again. Even then we may not see interest rates at the low levels of a year ago for a very long time, if ever. 

“That said, there is still room for a substantial recovery for tech if interest rate rises turn out to be less severe than currently expected. Much will depend, also, on how badly the looming economic slowdown worsens earnings expectations.”

If earnings hold up, big tech could become very attractive, it added. Apple would face less downturn in advertising revenue that could accompany a recession while enjoying a significant power to actually raise its prices. Microsoft and Alphabet’s business in cloud computing, too, would make them less exposed to cyclical factors that come with a recession. 

There was also promise in small companies, generally viewed as a riskier prospect for investors, if market sentiment changed. 

“Recession tends to hurt most those companies that depend on their domestic market and tends to create jeopardy for those small firms with only limited cash reserves to see them through periods of tough trading,” Fidelity explained. 

It offered a similar optimistic outlook on small economies, which were among the first affected when global activity slowed down but also quicker to recover before US markets in the last few economic cycles.

“Valuations are clearly cheap, and cyclical winds are shifting in favour of emerging markets as global inflation eases more quickly than expected, the Federal Reserve stops hiking rates and the US dollar declines,” observed Jonathan Garner, chief Asia and emerging market equity strategist at Morgan Stanley.