By Eugene Philalithis – Head of Multi Asset Investment Management, Europe & Portfolio Manager of the Fidelity Multi Asset Income fund range
What is your investment outlook for 2021?
Overall, we are cautiously optimistic on the investment outlook for 2021. The team expects periods of heightened volatility through the year, as markets respond to monetary and fiscal policy dynamics, and a range of political developments. However, as we have seen already this year, periods of volatility can create opportunities across asset classes.
Looking into 2021, our team prefers credit over equity risk and is focusing on assets higher up the capital structure. Credit, particularly on a risk adjusted basis, is likely benefit from loose monetary policy, due to a combination of bond purchases and the likelihood that interest rates will remain low as economies return to trend in terms of growth, inflation and employment.
We believe equities will continue to be supported by a combination of monetary policy (and potential further stimulus), a slower normalisation of real yields, and supportive fiscal policy (albeit with variation across global regions).
What do you think could surprise the market in 2021?
We believe the following trends could shape the markets over the coming quarters:
- Inflation: The jury is out in terms of whether and how much inflation will rise in 2021. An important development this year is the Fed’s average-inflation targeting framework (FAIT), and the prospects for longer-term inflation will continue to influence investment decisions.
- A new US presidential term: The economic implications of the US election will extend well into 2021. Given the importance of fiscal policy to the medium-term economic outlook, this matters for markets and poses significant risk. Overall, we see potential for a fairly volatile recovery path across asset classes.
- Vaccine and pandemic induced behavioural changes are likely to be a significant driver of market volatility in 2021. Consumers have seen changes to every aspects of their lives, which is likely to have lasting implications for the economy.
What themes, sectors or regions would offer opportunities or potential risks in a post Covid-19 world?
We believe that equity markets face a fragile growth backdrop, but stimulus should remain supportive. From a risk-reward perspective, we expect decent compensation for high yield bonds and emerging market debt if the credit default cycle evolves in a moderately positive direction over 2021. Within high yield bonds, we prefer Asian securities, given stronger underlying credit fundamentals and strength of regional growth.
Inflation will remain an important theme for investors in 2021. We are watching the global macroeconomic backdrop closely to understand its trajectory over the year in order to remain flexible to any changes in this unfolding picture.
Given these considerations, the team will be drawing on our tactical asset allocation (TAA) toolkit to respond to changing market conditions. Alternatives also have an important role to play in well-diversified portfolios, and 2021 could provide plenty of opportunities for them to prove their worth.
How do you expect sustainability factors to influence returns and how is this reflected in your portfolio?
Embedded in Fidelity Solutions & Multi Asset’s assessment of global markets is our awareness that sustainability and ESG factors remain a critical element of investment risk. Unlike previous crises, the Covid-19 pandemic has disrupted far more than just asset markets: it has raised fundamental questions about the sustainability of industries, the responsibility of stakeholders and the long-term prospects for capitalism as we know it.
Sustainability factors are reflected in all multi asset portfolios owing to the fundamental integration of ESG in our underlying strategy and instrument research process. The team formally assesses the ESG characteristics of all strategies under coverage, and we believe this added layer of analysis helps us to ensure we have a deep understanding of the factors driving investment decisions. Our research analysts are expected to fully integrate ESG assessments into their initiation research and ongoing assessment of in-house and third-party strategies. Engagement is a big part of what we do.
Earlier this year for example we engaged with the management of one of the third-party managers we invest with on the topic of cybersecurity, reviewing processes and controls in place as we felt that action needed to be taken to strengthen these. We engage with management on all aspects of ESG with the aim to influence positive change.
What are your areas of highest conviction and where are you avoiding?
Across our income-focused investment strategies, the team remains focused on delivering a sustainable yield and capital preservation. We maintain highly diversified exposure to yield-generating asset classes and manage risks carefully.
We maintain a preference for credit assets such as high yield bonds, over equities, as credit markets have explicit central bank support and valuations have not advanced to the same extent. However, developments on the vaccine front and continued easy monetary and fiscal policy are likely to provide support for equity markets. We have recently closed our equity hedges and continue to explore opportunities in sectors that have lagged in the recovery and stand to benefit from a more positive economic outlook.
Chinese government bonds continue to be an area of conviction as a defensive asset class offering a meaningful yield pickup over other government bond markets. Our conviction level is strengthened by the inclusion of Chinese Government Bonds in the World Government Bond Index, providing a significant tailwind for the asset class. We have been adding to this exposure in the income portfolios in recent months.
This information is for investment professionals only and should not be relied upon by private investors. The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Fidelity Multi Asset funds 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. Investments in overseas markets, changes in currency exchange rates may affect the value of an investment. 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 issuer’s ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different 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 and is only included for illustration purposes. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current annual and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1220/32695/SSO/NA