CIO Podcast: Finding value and income

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Fidelity's Chief Investment Officer Andrew McCaffery talks to Editor in Chief Richard Edgar about what stage we are at in the Covid crisis, where to find value and income in a world of dividend cuts and how the outbreak is changing the way we think about investing.

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Key quotes

What stage we are at in this crisis:

“Volatility in asset classes is starting to show signs of easing in a more protracted way. One shouldn’t lose sight that overall implied volatility is still very high, and could stay high in the months ahead. So we have got to see more work done there. But it has meant that some of the real concerns around dealing spreads have improved from the worst we were seeing in the middle of March.”

“It’s too early to get highly excited on the upside, but also to be getting too bearish on downside. We need to see how some of the data feeds through and how that impacts thinking for the months ahead.”

On investor behaviour:

“Different investors have behaved differently thus far. A lot of hedging, fast-moving and systematic money has moved, but a lot of institutional and individual investors have not moved that much. Meanwhile, some month-end rebalancing flows have provided support to the market.”

On positioning and opportunities:

“From a strategic asset allocation perspective, it is a little early to make big calls. But there are opportunities within asset classes and across sectors where investors can start to reposition to extract some of the potential created through spread moves, but not yet through a significant re-rating in equities and bonds.”

“In investment grade, there has been significant support and the market has reopened. New issuance is coming through for some of the larger borrowers. In the high yield market, pricing suggests significant default and recovery rate risks have been discounted even for companies that have good balance sheets and access to refinancing.”

On dividends being cut:

“Not just banks, but other companies being supported could have to forgo paying dividends until they’ve paid back taxpayer money. They will have to build up capital to pay down debts and be in a position where they can function without government support.”

“It is very challenging for investors and will push them to look around the world to where this is not happening, where there is a healthier recovery."

On where to find income:

“European high yield had been compromised for a long time through what the ECB had been doing with their buying patterns. But then yields went up to 7 per cent plus for very good companies, and all of a sudden there was real value there.”

“The risk implied in the volatility is looking to where we have been. The risk looking forward on certain debt securities, and what they are pricing, has fallen to be better value and should be able to pay the income that is required.”

On the oil shock:

“You cannot ignore that it has had an enormous impact on the energy sector broadly, but especially in the US. A high number of companies will move to having stranded assets very quickly. The damage has been substantial, and it is hard to see how that will disappear for some time.”

“Even as the Chinese buy oil for their reserves, it is not going to make up for anywhere near the surplus we have seen developing in the oil market. So looking forward, the challenge is around stability and when lower prices can become a stimulus - when economies can start getting back to being active and productive.”

On passive and active investing:

“Active investing has shown merit and has some good analytics and data to support that during recent events and as we look forward.”

“Active ETFs are likely to grow in this environment. We see them as a vehicle that can work well. There have been discounts in there due to the nature of the underlying exposures and index weights, but the reality is that investors may look towards active ETFs, and the profiles of how you can incorporate those in future.”

On how things will change in a post-pandemic world:

“This crisis has highlighted the value of technology and for some businesses, especially service industries, what could be improved. At Fidelity, for example, the incredible level of collaboration and speed at which we have been able to share insights across markets has actually proliferated through working from home and linkages via the virtual versus the physical world.” 

“In two years’ time, the level of state intervention will be a key factor for businesses and the markets.”

“These difficult times have made people realise how important sustainable investing is and that it is not just on the side lines but embedded at the heart of how they think and behave as that will be where capital flows. The driving of capital towards this area, including by the state, will be an important consideration.”

“There will be risks to unwinding all the potential growth that has been brought forward to try and stabilise economies. And will we see more challenges around supply chains going from global to local, with possible risks around prices in the future? It’s about how we navigate the post-pandemic environment as much as the current crisis."