27 Nov 2024
Talib Sheikh, Portfolio manager
Key points
The US elections have undoubtedly been a key topic of discussion for Fidelity’s Solutions & Multi Asset investment team. Trump’s win is generally positive for markets as US policies are expected to be expansionary and of course uncertainty around the election is now behind us. We expect US exceptionalism to extend especially compared to Europe. Opportunities may also appear elsewhere, for example in China where big stimulus could potentially arrive in reaction to US tariffs.
Portfolio positioning
Going into the final few months of the year, with fundamentals remaining supportive and seasonality typically positive, we have a fairly constructive view on risk assets. We have, however, been conscious of the risk of heightened volatility around the US elections and chosen to hold some ‘dry powder’ to take advantage of market pull backs to add to risk.
The strategy also holds exposure to emerging market local currency debt. While fundamentals are supportive - local inflation is under control and the US has embarked on an interest rate cutting cycle - the asset class, particularly the currency element, is vulnerable to volatility caused by the US elections and for this reason we have trimmed our exposure and fully hedged the currency risk for now.
We are fundamental investors and fundamentals for the US, independent of the election result, are relatively strong. Growth remains solid, inflation is moderating, and corporate earnings are healthy. We have a preference for quality dividend equities and have been taking advantage of volatility to top up our US exposure. We have also been adding some additional cyclical exposure, rotating from more defensive sectors such as healthcare into more cyclical sectors such as financials, and added some tactical EM/China risk, which stands to do well from further stimulus announcements in China.
Looking ahead
We remain fairly cautious but tactical on duration and have benefited from hedges given the material rise in yields over the past month. On credit we remain selective. We have little exposure to investment grade bonds where valuations are very tight and continue to spread our exposure across high yield bonds, hybrid bonds, and structured credit. We have also added exposure to convertible bonds and REITs, which do better in modestly constructive growth/inflation environments and when rates are falling. We are of course mindful of the risks, which in our view are primarily the US deficit and potential for inflation to reaccelerate, which would bring instability in bond markets, although this is more of a medium-term risk.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Investors should note that the views expressed may no longer be current and may have already been acted upon. Fidelity’s Multi Asset Income funds can use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. These funds take their annual management charge and expenses from your clients’ capital and not from the income generated by the fund. This means that any capital growth in the fund will be reduced by the charge. The capital may reduce over time if the fund’s growth does not compensate for it. The investment policy of these funds means they invest mainly in units in collective investment schemes. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than other more developed markets. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the fund investing in them. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.