Three reasons global equities look good, May 2017

Fidelity Global Special Situations is on the Chelsea Selection and has returned 117% under manager Jeremy Podger’s tenure since 2012*, versus 90% for the global index.

Jeremy believes global equities will continue to deliver positive returns this year, despite elevated political risks and higher market valuations. He outlines three reasons why.

1. Attractively valued versus global bonds

Although both the US and the UK stock markets have reached record highs over the past year, Jeremy believes global equities continue to offer much better value than global bonds in the current environment where interest rates are rising and inflation is a concern. Although he is currently underweight UK, Jeremy maintains significant holdings in North American and Japanese equities.

“The fact that the US is near full employment and commodity prices have stabilised has helped shift the rhetoric away from worries around deflation towards the prospect of some inflation, growth and a normalisation in interest rates. This makes US domestic businesses relatively attractive, although if stimulus effects become too effective this could lead to problems further down the road,” he says.
“Elsewhere, Japan remains interesting with improving corporate governance and strong balance sheets. Even though a lot is dependent on the yen, Japan has the potential for real surprise in terms of wages, economic growth and corporate taxes. We are happy to remain overweight, but are looking to broaden our holdings, more recently focusing on domestic growth names which have lagged similar stocks elsewhere in the world.”

2. Corporate earnings growth may rise

While the fund is currently underweight certain industries including financials and consumer staples, there are other sectors where Jeremy predicts strong growth prospects. For example, the fund is overweight technology^, where he says there is no shortage of interesting companies.

“Over the last five years, the addressable markets for such businesses have expanded meaningfully and the trend towards automation, and data processing in every aspect of personal and corporate life will continue, creating many interesting investment opportunities. 

“As far as healthcare is concerned, after having a tough run in the last year, many of these businesses now offer a decent two-way bet in terms of recovery from greater clarity on policy and from their defensive merits, if investors grow concerned about protectionist policies.
“Among cyclicals, integrated energy businesses offer greater value than upstream companies [the guys that get the stuff out of the ground], while miners remain susceptible to long-term demand concerns as the pace of development in China matures. Banks as a whole are unloved, but here there may be selective investment opportunities, especially if there are indications that the regulatory overhang of the post crisis years may abate.”

3. Mergers, acquisitions and restructuring could boost returns

According to Mergermarket, the value of global deals in the first quarter of 2017 was up 9% in US dollar terms, although across a smaller number of deals than in the prior corresponding period†.

The UK’s currency weakness since the Brexit vote has led many investors to speculate on the potential for increased merger and acquisition activity at home, as British companies become more appealing to overseas buyers. Despite some reversal of these falls after Theresa May’s surprise election announcement last month, Jeremy doesn’t expect a complete ‘recovery’ in the pound any time soon.

Meanwhile, although policy plans in the US remain uncertain, some of Trump’s proposed cash repatriation and corporate tax reform ideas, as well as cutting back on regulation, could free up money for acquisitions. That said, his protectionist stance could also block some attempts at international mergers.

“Sterling appears to have stabilised somewhat for now although there are no clear grounds for expecting a rebound. Higher inflation has not yet kicked in but the UK economic outlook remains uncertain. While we are happy to maintain the current underweight, we remain on the lookout for exporters that can benefit from weaker currency.

“Europe remains a ‘special situations’ case because of the political uncertainty stemming from the crowded electoral timetable and is firmly out-of-favour with international investors. Should the situation improve, there is upside in these markets. At this stage, however, market valuations remain polarised, with defensive stocks still trading at rich valuations and cyclicals [companies whose profits tend to be correlated to the economic cycle] reflecting pockets of value. Here we currently favour corporate change situations and infrastructure spending beneficiaries.”

* FE Analytics, Fidelity Global Special Situations vs MSCI AC World, total returns in GBP, 01/03/2012–04/05/2017
^ Fidelity Global Special Situations fact sheet, 31 March 2017
† Mergermarket, Global and regional M&A: Q1 2017, data 01/01/2017–31/03/2017

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Jeremy's views are his own and do not constitute financial advice.

Published on 04/05/2017