By Amit Lodha, Portfolio Manager, Fidelity Global Equities Fund
2018 started on a strong note for global equities, boosted by a supportive macroeconomic backdrop, moderately rising inflation, tightening labour markets, positive corporate earnings outlook and the confirmation of a major tax reform in the US. The increased confidence amongst corporates is also evidenced in the heightened merger & acquisition (M&As) deal activity this year. Globally, M&As have totalled close to $2 trillion year-to-date, mainly on the back of strengthening corporate balance sheets and a need to invest in disruptive technologies across sectors. Our anticipation is that this pace will only increase, with specific focus on the pharmaceutical and technology sectors.
Despite a seemingly benign backdrop, the last few months have been characterised by a spike in market volatility. Higher US wage growth led to fears of faster interest rate hikes by the US Federal Reserve (Fed), while concerns over the US administration’s approach to global trade, especially relating to ongoing trade frictions with China; and tensions in the Korean peninsula also hampered market sentiment. Investors were also concerned over the implications of the political turmoil in Italy and Spain on the Eurozone.
At a regional level, the outlook for US equities appears positive, with the passage of the tax reform bill. Business optimism remains high and the capital expenditure cycle, triggered by tax savings by corporates, augurs well for economic expansion. Our focus remains on bottom-up stock picking, so the regional weightings of the portfolio are not necessarily a reflection of our top-down view of the markets. However, from a valuation perspective, regions outside the US appear relatively more favourable and the recent sell off in emerging markets has also thrown up some interesting opportunities.
Meanwhile, despite increased market volatility and Brexit-related concerns this year, UK stocks remain attractive from a historical valuation perspective and a weak sterling has provided a tailwind for large-cap exporters – an area where the fund has been overweight.
In Japan, despite the slowdown in GDP growth in the first quarter, the economy is likely to return to growth this quarter led by strong overseas demand, although trade frictions, rising oil prices and geopolitical factors pose immediate risks to the export-reliant economy.
Overall, given the above macro uncertainties, we continue to believe that stock-specific fundamentals will remain the key driver of equity returns. Consequently, the portfolio continues to focus on companies that demonstrate strong pricing power, are led by talented management teams and are available at reasonable valuations. Our aim is to link all the information globally and leverage Fidelity’s global research capabilities to identify the best ideas and investment opportunities, with an eye on quality, sustainability of returns and predictability of expected returns.
