CIO podcast: Pandemic, credit markets and central banks


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How is economic data playing into markets and what is Fidelity’s scenario-planning telling investors about the performance of different asset classes through the pandemic? Chief Investment Officer Andrew McCaffery discusses these topics with Editor-in-Chief Richard Edgar.

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Key quotes

On bond markets and central bank intervention:
“When you look at the Fed, the ECB and the Bank of England, and others … you've got a buyer of last resort or, in some cases, a buyer of first resort, [which] really is a significant underpinning for those markets, [such as] the investment grade sector, especially in the US with what the Fed’s done, but also parts of the high yield market. It still looks like the risk for the relative reward, given that backstop, is quite attractive.”

On downside macro risk:
"[In the event] that a vaccine is not likely to be operational for large parts of the population until 2021, it would mean that economic growth would be very challenging and likely to be down more in the region of 5 per cent. And that would have significant repercussions for earnings, for the challenges around defaults and therefore the pricing of financial assets.
“The risk is you're going to see a degree of unsynchronized activity, which means that some of the supply chains are going to be challenged.”

On equity valuations:
“We're somewhat priced for a slightly more favourable [macro] scenario, and therefore, when we look at some of the equity markets, especially in the West in Europe and distinctly in the US, it appears that we’re near the top end of trading ranges for the moment.”
“We've got to see a bit more information, and it is likely the markets are going to struggle to get some good news that can propel them much further than this.
“The challenge is to test out how good the support is, and what the evolution of that data and insight is over the course of next few weeks, as maybe we trade off again.”

On what comes next:
"The recent Pulse survey of our analysts produced an update on their thoughts from conversations with companies - how long the impact will be for individual companies across different sectors, what it will mean for earnings, what it will mean for liquidity and the risks around their solvency. I think that was very insightful in that the change over the last few weeks has been quite considerable, showing that a number of companies feel more stressed, the outlook is going to be more elongated and challenging to get back to levels of activity and earnings close to the pre-Covid environment."

"We have a baseline scenario of growth to be in the region of -1.5 to -2 per cent. That is driven by a view that it will be a drawn out, U-shaped recovery with a phased return to activity and some elements of risk of a second wave."

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