Sunshine has followed the storm
Global markets remain volatile and choppy. In fact, almost one third of all trading days over the last six months have seen moves of greater than 1% (both up and down), indicating a market driven by daily news headlines and emotion. In such environments, it’s easy to get whipsawed around. However, to 30 April 2023, the Fidelity Global Future Leaders Fund has returned 5.5% in the same six-month period, rewarding investors who have looked through the daily noise and focussed on the business operations and fundamentals.
The culprits remain the same: persistently high inflation, resolute central banks committed to taming the inflation beast, and a global economy that is lacklustre and fuelling fears of a recession. This scenario currently seems most pronounced in the USA, with recession fears elevated in the world’s largest economy. By contrast, China has emerged from multiple Covid lockdowns and the economy is seemingly on an upwards trajectory, buoyed by excess savings fuelling an increase in consumer spending.
Domino’s fall in financials
To make the situation even more challenging, regulators are walking a tightrope to reduce pressure on the banking system. The collapse of Silicon Valley Bank, Signature Bank and First Republic Bank in the USA, as well as Credit Suisse in Europe, sent shock waves through the financial system. However, regulators were quick to act, stabilising confidence in the system.
Within the Fidelity Global Future Leaders Fund, our exposure to the financial sector is primarily via insurance brokers, asset managers and exchanges.
Who were the winners?
In terms of what has been working, quality and value styles remain the primary contributors to the Fund’s performance, as well as that of the broader market. Despite the more challenging macro headwinds facing corporates, we maintain a favourable exposure to reasonably priced high-quality compounders. Our portfolio is expected to maintain low double-digit earnings growth over the next two to three years, near-term headwinds notwithstanding.
The balance sheets of our portfolio companies are, on average, in better shape than the broader market. This means our holdings should weather macro slowdowns with more ease, and if weaker competitors start to falter, they will be in a good position to consider some opportunistic acquisitions.
Once again, it’s worth stressing that valuation in this market environment is paramount. Money and credit are no longer free, and those who hand it out are demanding higher and higher returns. This continues to mean that businesses with nothing other than attractive narratives based around conquering the world will remain under pressure.
We continue to favour high quality stable businesses that generate plenty of free cash and are trading at moderate or average multiples. For now, we’ve continued to refrain from adding too much cyclicality and economically exposed businesses to the portfolio, though a time will come in the future when we may.
