“Risk assets have benefited from what you might call a ‘Super Goldilocks’ environment over 2017″, said Fidelity’s Bill McQuaker. He added that growth has also accelerated into the year, and, while it has fallen back a bit, it remains at high levels. As a multi-asset fund manager within Fidelity’s international investment team, McQuaker offers comprehensive commentary on the week’s markets and investment opportunities:
“With central banks still injecting liquidity into the financial system on a large scale, markets have also enjoyed ‘Super Calm’, with the S&P 500 experiencing its lowest intraday moves since the 1920s. Meanwhile, investors believe all but the most utopian of growth scenarios for ‘Super Companies’, McQuaker said.
“This is all risky. Retail cash allocations are at or close to multi-decade lows, and positioning has become extreme, with significant flows into equities, bonds and just about everything else that has done well.
“But what could challenge our trifecta of ‘Supers’?”, McQuaker asks.
“Higher inflation”, he argues; “possibly driven by an acceleration in wage growth, would bid goodbye to the ‘Super Goldilocks’ environment of strong growth and low inflation. Central banks would almost certainly be compelled to raise interest rates, which would force a reassessment of the outlook, and the low discount rates upon which high equity valuations have been justified.
“Despite lurking in plain sight, markets are also largely ignoring the potential fallout from the Trump White House, with many arguing that his administration will struggle to implement its agenda of economic nationalism. Even the more positive aspects of this could cause temporary disruption, with tax reform likely to create losers as well as winners. And while Trump may exceed expectations, Super Companies could easily disappoint investors, through failing to execute business plans properly, incurring the wrath of antitrust regulators, or over-promising on the benefits of new technology”, McQuaker said..
“Perhaps the most vulnerable of the Supers, however, is ‘Super Calm.’
An unforeseen rise in volatility could lead to quantitative strategies like trend followers or risk parity funds amplifying the rise, panicking retail investors who have pumped cash in over the course of the past year.
“Against this backdrop, I have adjusted the Fidelity Multi Asset Open Range to make the portfolios more robust in the event of a risk-off move, while avoiding a wholesale curtailment in our upside exposure. Avoiding richly priced areas of the market, adding to areas that have lagged like energy, swapping higher beta exposures for lower risk equity holdings, and tightening up on our exposure to hedging assets to maximise the bang for our buck.
Market laggards offer the best of both worlds
“Given the high level of risk appetite across markets, we have tried to seek out areas that have lagged in recent months. We added to the energy equity sector over August, as the market has been remarkably stubborn in pricing better oil fundamentals into oil stocks. We also added to an American equity fund, which has lagged peers in recent months as a result of not owning key technology stocks. Technology stocks are where some of the riskiest behaviour has been seen, with investors displaying ever more faith in future expectations.
“We sold some broad European exposure and recycled some of the capital into the lower beta US and UK equity markets. Europe continues to benefit from a broad upswing in growth, but we decided to take some profits here, as well as on our long position in the euro. However, we maintained our allocation to active strategies like Invesco Perpetual European Equity Income, which offers us a focused play on banks and oil.”