CIO Podcast: Andrew McCaffery on Asia

Fidelity's Chief Investment Officer Andrew McCaffery talks to Editor in Chief Richard Edgar about why we might see a change in market leadership as China and other parts of Asia benefit from their handling of the pandemic, and what public rescues of private companies mean for sustainable investing.

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Key quotes

On where markets are at in the run-up to Easter:

“In terms of one of the most challenging elements for markets - liquidity - we have seen spreads and the ability to trade at bid/offer prices calm down a bit recently, but we are still a long way from where we were in January and February.”

“Volatility definitely eased in the last part of March and overall levels have come down, which is encouraging. But we still have elevated levels and are seeing high single-figure percentage points moves on a daily and intraday basis.”

On what to watch:

“We have to be careful [in relation to markets] until we get some clarity in terms of the time and level of the impact on the economy, the depth of recession, whether it is a rolling recession or a one-off and then recovery. Swings in sentiment will be extreme, as people hope for the best and then all of a sudden have to contend with not quite the reality they would like.”

On how our portfolio managers are reacting:

“Where fund managers have strong conviction and believe a company is mispriced versus their sector and the market, they can use the recent market environment to increase or move positions to reflect those thoughts.”

“In bond markets, where you have had a higher level of issuance in investment grade but also strong support from central banks, you can pick up very good companies trading at attractive spreads that we think will not only survive, but thrive.”

On your outlook for the coming weeks:

“At some point, we will have to switch from the Covid-19 focus, and trying to understand where the curves flatten out, to the reality of when activity can re-start, how will that activity look and how long will it take to recover.” 

 “At the moment, we are looking through [bad economic data] because we expect it to end in the next few weeks. But the knock-on consequences could last for some time.” 

On Asia being in a better position: 

“You have to ask where’s the ability to get back to activity, and that’s when you start to think that somewhere like Asia is in a better position than the US and Europe, in terms of how societies behave and how they are coming out of this.”

“Also, look at what has happened to oil. Oil has had a significant decline driven by a supply shock and demand decline across the world, so we now have a stimulus for Asian importers that had been a headwind only six to nine months ago.” 

“There are signs that the gravitational pull [to Asia] could increase over the next few weeks and months as we see more problems in the West and other emerging markets.”

On state intervention:

“The authorities have done a fantastic job to move quickly to address liquidity concerns. The next move is about solvency and fiscal intervention. Lower levels of intervention in Asia means they can do more if required, but it will come down to country selection not broad regions, and then the companies operating within those countries and across borders where they can to take advantage of activity that is starting to rebuild. Differentiation will be key.”

On adjusting to more state involvement:

“The consequences of this will pan out over time. We won’t suddenly realise that the state owns x in the broader economy. The process of buying public and private enterprise in the way they support them has a long way to go. Also governments will try to protect supply chains.”

“There will be a focus on not just shareholders but also other stakeholders in society. The conditionality that we see through state intervention could have meaningful ramifications for how companies are run and how they have to properly embed sustainability at the core of what they do.”

“The reality is that returns for investors may well be lower, and take a different form because of what we are seeing around dividends and buybacks. So this will mean thinking in a longer-term profile as opposed to the more shorter-term market experience we have seen in recent years.”

On ESG as a condition of state aid:

“The challenge is to save the economy and then work out the conditionality attached to [state aid]. Some of these things will take time to play out, but I think the focus that existed around climate change and getting to a policy framework going into 2021, and beyond, is likely to be key part of that. And behaviours that demonstrate you are far more engaged with your community will go up the priority list.” 

On managing money in this new environment:

“We have to go back to being very disciplined. We have to connect the dots across different sectors and asset classes to test if themes really are playing out or not. And then base our investment decisions on whether companies can navigate these changes or be at the heart of them.”