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Asset class outlooks: Cautious optimism…

  • Bull market still intact but late stage
  • Global growth moderating, but earnings outlook is positive
  • Leadership has swung back to quality growth stocks
  • The risk of policy mistakes remains elevated
  • Key drivers of bond markets: central bank policy, inflation and outlook for China

Bull markets are born on pessimism and die on euphoria. By that yardstick, the current bull market - already one of the longest on record - has further to go. Many investors remain cautious and uncommitted; this has been one of the most miserable and loathed bull markets in memory. Yet, this feature helps to explain its remarkable longevity. Bull markets end only after the last buyers are flushed out, but there is abundant cash on the side-lines. We are not seeing the kind of ‘cult of equity’ or FOMO (fear of missing out) behaviour evident in previous market tops. Market progress is being underpinned by better earnings growth.

We see three key themes for the third quarter of 2017:

1. The bull market is intact but beginning to look stretched

The bull market is still running, but nervousness over when and how it might end is consuming investors. And not without justification; we have travelled a long way in the current cycle. The 99 months since March 2009 mark the second-longest bull market since the Second World War. Many of the issues holding back equities have been addressed and markets have risen considerably. While we are not yet at the top, investors should start preparing for it happening in the next 12-18 months.

Taking the measure of bull markets

Source: Fidelity International, Thomson Reuters, 16 June 2017. Based on the S&P500 Index.

2. Earnings growth is underpinning equity markets for now - Europe most attractive

Earnings growth is supporting equity markets. We are not seeing valuations becoming detached from earnings to the worrying extent evident in previous market tops like the 2001 dot-com bubble. Europe, in particular, is benefiting from a catch-up effect in both economic and earnings growth now that political worries have faded. European earnings revisions have turned firmly positive - in fact, they haven’t been this positive in five years; earnings growth and revenue estimates are now outpacing the US.

Earnings growth to support markets

Source: Fidelity Earnings Forecasts, Fidelity Insight, Fidelity International, June 2017.

3. China and inflation are the key factors to monitor

US inflation has been unusually weak for three consecutive months - but it didn’t stop the Federal Reserve hiking rates at their June meeting. Chair Janet Yellen believes the inflation weakness will prove temporary. Sustained weakness would raise questions about the state of the US economy, so US growth and inflation data will be keenly anticipated and analysed.

Meanwhile, China is trying to cool certain areas of its economy and improve financial transparency. We are seeing a tightening of regulations and financial conditions in the banking sector and credit growth has slowed. We see GDP growth slowing to c.6.5%, but investors will want confirmation that any kind of harder landing has been avoided.

Fidelity's Investment Outlook: At a glance

Equities
Overall The bull market remains intact but it is now in its last phase. Fortunately, earnings growth is underpinning share prices and there are few signs of irrational exuberance.
US The market is grinding on and should continue to, supported by earnings growth. If the leading tech stocks keep beating earnings, the market will keep going up.
Europe The most attractive equity market in terms of earnings growth and return potential. Political worries have faded, leaving significant scope for a catch up relative to the US.
Asia Pacific Earnings momentum has turned positive. China is cooling parts of its economy but the slowdown should be managed. The Fed could be the bigger worry for the region.
Japan Market prospects are tied to global growth and currency moves. Inflation remains positive though; this could be a game-changer for companies after years of deflation.
EMEA/Latin America Politics have become a prominent feature again, and the macro picture is decidedly mixed, but we continue to find good individual stock opportunities.
Global sectors We favour the technology and healthcare sectors, where high levels of innovation are sustaining strong earnings growth.
Fixed income
Overall Expectations around Trump-flation have faded, and the Fed is now ahead of the curve after raising rates in June in the face of weak inflation. Yields to stay low.
Inflation linked The outlook has become more balanced after a soft spot in US inflation. This may prove temporary and we see some value in US inflation-linked bonds.
Investment grade Valuations now look rich by historical standards and the upside is limited. Europe is our preferred market given we have a buyer of last resort in the ECB.
High yield Valuations in high yield are also stretched and now fail to adequately compensate investors for the risk they are taking on. We prefer Europe over US and Asia.
Emerging markets Global growth momentum has slowed and there are also concerns over the slowdown in Chinese growth. We favour USD corporate bonds and local duration.
Alternatives
Commercial real estate: Continental Europe Investor demand remains high. Indeed, the risk of plentiful capital pushing income yields too low means investors need to be vigilant.
Commercial real estate: UK Political and economic uncertainty has increased after the election. The silver lining could be a softer Brexit and even 'lower for longer' monetary policy conditions.
Commodities Our leading indicator of global activity suggests growth is slowing, so we are less positive overall. We prefer energy to metals.
Infrastructure and loans Infrastructure remains attractive as a source of diversified, uncorrelated returns although valuations are rich. Loans should outperform high yield bonds.

For full details, read our Q3 Investment Outlook report.

Download report
 

This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser.  You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

© 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

This website is intended to provide general information only and has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information and consider the relevant Product Disclosure Statement for any product named on this website before making an investment decision.

© 2017 FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340.
Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL limited.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 ("Fidelity Australia"). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making an investment decision retail investors should seek advice from their financial adviser. Please remember past performance is not a guide to the future. Investors should also obtain and consider the Product Disclosure Statements ("PDS") for the fund mentioned in this document. The PDS is available on www.fidelity.com.au or can be obtained by contacting Fidelity Australia on 1800 119 270. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. This document may include general commentary on market activity, industry or sector trends or other broad based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. References to ($) are in Australian dollars unless stated otherwise. © 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International, and the Fidelity International logo and F symbol are trademarks of FIL Limited.