Investors’ sentiment has broadly shifted from one of pessimism to fully embracing the possibility of a ‘soft landing’ for the global economy. The US economy, in particular, has remained remarkably resilient in the face of aggressive monetary policy tightening. However, we still think a cautious approach to asset allocation is prudent.
The full effect of interest rate increases is still to make itself fully felt through the broad economy. The US housing market is under strain from much higher mortgage rates. Corporates are also feeling the impact in the form of higher funding costs. Valuations expanded in several regions, most notably the US, where market leadership has been extremely concentrated. Consumption has been maintained during this hiking cycle by the spending of excess savings built up during the pandemic, but these are now fully depleted and consumer debt is growing.
So, while risk assets are painting a more positive view of the world as we head into 2024, we think the reasons above are enough to warrant some caution, given the data implies a global slowdown is coming. To this end, we remain wary of equities and prefer the safety of fixed income.
It is true that inflation is slowing in major regions and the US economy is still resilient, but we believe that the underlying data does not support the recent positive moves we have seen in riskier assets such as equities over the final months of 2023. Incoming data that does not corroborate a soft-landing outcome has the potential to cause volatility. This might be in the form of higher inflation numbers, perhaps precipitated by oil prices moving higher, or growth slowing faster than expected.
In 2023, our positions in gold supported our defensive stance. The metal remained resilient in the face of higher real yields and a stronger US dollar. Rising geopolitical tensions, corporate failures and strong central bank purchases helped underpin support for the yellow metal. We still favour a position in gold due to its defensive nature.
After years of low yields, we believe bonds now look attractive and offer appealing characteristics to investors. Given the heightened risks to growth that we have mentioned above, coupled with the decelerating inflationary backdrop and weak returns in recent years, we believe the opportunity for markets at this junction lies within core fixed income assets. The yields now available in core markets are attractive on a medium to long-term basis. However, we are still wary of high yield bonds given the relative tightness of credit spreads in this part of the market.
Although we remain cautious on equities as a whole, within our allocation we prefer defensive exposures such as utilities, minimum volatility strategies and the Fidelity Global Dividend Fund. If a global slowdown occurs in the coming months, as the data currently implies, we believe that small-caps should be well placed to outperform in a recovery as they have already endured substantial pain in the face of higher interest rates.
Chris Forgan, Portfolio Manager, Fidelity Multi Asset Open range
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