1. Analyst survey: the end of optimism
Each year at this time, we take the pulse of the global economy and markets with a survey of Fidelity’s research analysts. This time, 165 took part, providing an invaluable view from the coal-face that the more usual top-down analyses fail to capture. Benefiting from around 16,000 company meetings a year, the Fidelity investment team is well-placed to understand the hopes and fears in boardrooms all over the world.
We asked the analysts a range of questions - around 60 - but they boiled down to one key uncertainty: are we heading into a recession? The short answer is no. But we are clearly closer to the end of the cycle than we were a year ago when businesses were notably more confident than they are today.
The difference in sentiment is pronounced. A year ago, just 13% of our analysts reported their sectors were in a slowdown or recession. 12 months on, that proportion has risen to a third. At the beginning of 2018, 35% of analysts said the companies they followed were expanding. Today, just a fifth are so optimistic.
The key drivers of this increased pessimism are weakening consumer confidence and the rising costs of doing business. There’s been a big reduction in the number of analysts expecting companies to deliver better returns on the capital they employ in their businesses. This is notable in China - dropping from 43% to just 7% - and America - down from 50% to 20%.
A couple of striking examples of reduced consumer optimism have emerged. Analysts say the Chinese car market, which is the world’s biggest at 25 million vehicles sold a year, ‘cracked’ in the last four months of 2018. Luxury goods, too, are in retreat. High double-digit sales growth is expected to fall close to zero, thanks in large part to more caution from Chinese consumers who account for a third of the sector’s sales.
As for rising costs, as the chart shows, inflation may not be a problem in the developed world, but it is increasing in emerging countries. Funding costs are also on the rise, although it’s worth noting that the survey was conducted before the Fed’s change of tune.
So, recession is not imminent. But we are closer to the end of the business cycle than we were. The fundamental driver of stock markets is corporate earnings growth and the outlook for this is cloudier than it was. The silver lining to that cloud, however, is that investors have already priced in some of these weaker prospects. That’s a better place for investors to start from than last year’s over-optimism.
Inflation rising in emerging economies
Source: Refinitiv/Fathom Consulting, as at 15.11.18.
2. Fund recommendations update
No-one should pay much attention to the performance of an investment over an insignificant period of time like the first three months of the year. As the old adage says, in the short-term markets are voting machines and only in the long-run can we view them as weighing machines that accurately reflect the true substance of an investment. Over short periods of time they are just a measure of investors’ appetite for risk and, as we have discussed elsewhere, the past three months has been a positive one for markets.
Having made that clear, however, and for the sake of transparency, I want to give a short update on the performance in the year to date of 2019’s fund recommendations. As the chart shows, it’s been a reasonable start to the year for all four of them.
I agonised over whether to recommend Nick Train’s Lindsell Train UK Equity Fund or Alex Wright’s Fidelity Special Situations Fund. I plumped for Train because of the prevailing uncertainty around Brexit and because it felt like the less risky option. In the early weeks of the year, that looked like the wrong call because Special Sits raced away, but three months in there’s not a lot between the two funds.
Neck and neck with the Lindsell Train fund is the Baillie Gifford Japanese Fund. That reflects the sharp recovery in Japanese shares so far this year. I am a great admirer not just of this fund but of many that are managed by this Edinburgh-based manager. I believe this is a great way to play the undervalued Japanese market.
The two Fidelity funds are slightly lagging the other two recommendations but still delivering a more than acceptable return of around 5% in both cases. Both the Fidelity Global Dividend Fund and the Fidelity Select 50 Balanced Fund are defensive options, which continue to make sense in light of the late cycle markets we find ourselves in.
Look out for further updates. I’ll review the recommendations in all future Outlooks.
Source: Morningstar as at 31.03.19. Basis: bid to bid with income reinvested in GBP. Excludes initial charge.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Please be aware that past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in small and emerging markets can be more volatile than those in other overseas markets. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity.
|(% as of 31st March)||2014-2015||2015-2016||2016-2017||2017-2018||2018-2019|
|Fidelity Global Dividend||19.7||6.2||23.6||-4.5||15.3|
|Fidelity Select 50 Balanced||-||-||-||-||4.4|
|Lindsell Train UK Equity||17.2||4.1||15.7||8.4||12.9|
|Baillie Gifford Japanese||26.9||-6.4||44.2||15.4||-1.1|
Source: Morningstar as at 31.03.19. Basis: bid to bid with income reinvested in GBP. Excludes initial charge.
3. Three dominant themes
The first quarter of 2019 has been dominated by three stories and I suspect that they will continue to make the weather in the second three months too.
The first is the ongoing trade negotiations between the US and China. These have settled down into a kind of shuttle diplomacy, with key figures criss-crossing the Pacific for alternate talks in Washington and Beijing. The key moment in the first quarter was Donald Trump’s decision to postpone a more than doubling of tariffs from the proposed implementation date of March 1. That seems to have taken the pressure off China to comply with America’s demands and could mean that talks drag on for months now. The key for China is not to lose face. It cannot be seen to have caved into US demands and America’s negotiators look slow to understand this key cultural aspect to the talks.
The second important theme is related to the trade talks. The Federal Reserve’s softer tone since January is a reflection of the global slowdown that trade tension has triggered. As the chart here shows, the rate-setters at the Federal Reserve are now much more cautious about raising rates than they were. The so-called dot plots indicate that interest rates are unlikely to rise much further from here. Indeed, there is a very real prospect of the next move in US rates being down not up. The Fed’s flexibility will help support the stock market, but it can only go so far. If Donald Trump is to go into next year’s Presidential election on the coat-tails of a strong economy and rising corporate profits he needs to strike a deal with China.
Closer to home, the third key market theme needs no introduction. You are either enthralled by the drama in Westminster or thoroughly bored and probably a bit irritated by the ongoing Brexit saga. From a market perspective, the response has been surprisingly muted when you consider that we are experiencing a major constitutional crisis. Some would say this is the greatest humiliation for Britain since Suez and I wouldn’t disagree. The outlook for the UK market is covered in more detail in the UK market section.
Federal Reserve: interest rates on hold
Source: Federal Reserve, March 2019
Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.
4. Sustainable investing
One of the interesting findings from our Analyst Survey this year was the fact that 70% of our researchers said the companies they followed were increasing their focus on environmental, social and governance (ESG) policies. That was a 12-percentage-point increase on last year’s survey. The trend is particularly noticeable in Europe, where 92% of companies are paying closer attention to ESG factors.
But it is in China that the biggest uplift has been recorded. Two thirds of companies are looking at sustainability issues this year versus just one third in 2018. In part, this might reflect more foreign capital looking to invest in Chinese companies. Partly, it is just a reflection of more integrated global supply chains. As consumers in the developed world become more focused on the provenance of what they buy, companies are becoming more stringent about holding their own suppliers to account.
ESG has been around for a while but it is more mainstream now. Certainly, big investors like Fidelity are more explicit about sustainability criteria in their investment process, although it has always been an implicit concern of analysts and fund managers. As for end investors, many more are serious about making sure their money is making a difference.
This increased investor demand for sustainable investing options lies behind our recent launch of an ESG investment hub within the Markets & Insights pages of www.fidelity.co.uk. Here you can find information about what ESG is and why it matters. There are interviews with fund managers operating in this part of the market and links through to the funds which our partners at Morningstar have flagged as sustainable. I hope you find this new feature useful.
5. Select ETF
If ESG is becoming more mainstream, ETFs have already made that transition. Demand for low-cost exchange-traded funds has soared in recent years. Initially, ETFs were pretty much all passive funds, and these still dominate the market. But there is a growing variety of flavours of ETF now, including so-called smart beta funds which introduce an element of stock-picking via quantitative screens.
We recently launched a new select list for investors who are attracted by ETFs. It differs from our Select 50, which focuses on the quality and consistency of management of funds. This is the key differentiator of good actively-managed funds. For passive funds, this is obviously not an issue.
When it comes to ETFs there is less variation between the best and worst but there are important distinctions when it comes to cost and how closely the funds track their underlying indices. Our new Select ETF list is designed to give investors a short-list of funds which deliver what they say on the tin, at a reasonable cost. Again, I hope you find this a useful addition to our investment offering. You can find the Select ETF under the Funds tab at www.fidelity.co.uk.