By the Fidelity Multi Asset Income Team – Eugene Philalithis, George Efstathopoulos & Chris Forgan
We are yet to see this extent of recovery in fundamentals for equities and dividend payments, and while earnings have generally been better than expected across regions and sectors, there is the risk that they could stall from here.
In contrast to equities, the rally in credit markets has a healthier spread, where the narrowly led nature of the equity market indicates fragility, acutely seen for US equities.
It’s no secret that both equity and credit markets have seen a strong recovery after the aggressive sell-off to their March lows, and the bleak economic data that followed. We have seen a liquidity-driven rally through which credit especially has staged an impressive recovery.
Against this backdrop, we have maintained our bias for credit risk over equity risk and continue to focus on assets further up in the capital structure for income security and capital preservation. In particular, high yield bonds and emerging market debt (EMD) in hard currency are two key areas of conviction that we have been adding to over recent months.
Regionally, we see Asia as favourable compared to other regions – both under the base case scenario and in terms of the upside / downside ratio, although we are starting to become more constructive on other regions. Valuations also continue to be attractive given spreads remaining high versus their historical ranges, and importantly, the boosting of yields supports income sustainability.
Within high yield, our preference for Asian high yield has persisted over recent months due to a number of factors including Asian companies having reduced debt on their balance sheets, supportive funding conditions. The domestic focused nature of the Asia high yield universe also offers some insulation against any sustained trade war resurgence.
However, we are now moving towards a more constructive view on US and European high yield, which we think offer a more attractive risk-reward against their respective equities. The fundamental outlook for EMD has improved with the re-opening of the world’s major economies, upward oil price trend and the scale of IMF support. We therefore continue to rotate from EMD local currency to hard currency due to its attractive valuations, defensiveness relative to local currency EMD, and more upside participation in oil markets.
Of course, inherent risks remain within credit – particularly amongst the most challenged emerging market issuers, which have a lack of fiscal headroom to continue quantitative easing over a prolonged period – and so when we evaluate credit asset classes, the downside scenarios are interrogated closely.
Overall, after a strong rally, our preference for credit over equity risk is still intact. However, a more finely tuned credit asset allocation is needed as the risk-return asymmetry is more attractive in certain areas of credit than others. We believe that a multi asset approach that can allocate flexibly across the spectrum of income paying assets, and navigate the caution required around various credit assets, makes our income-focused strategies well positioned to deliver on their objectives.
Important information
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 Income 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 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. 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. 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. 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. UKM0820/32078/SSO/NA
