Fidelity Sustainable Multi Asset Fund range portfolio manager Caroline Shaw examines the outlook for the year ahead

We expect central banks to have to tighten further if inflation remains sticky on the back of Russia’s invasion of Ukraine, and in the face of slowing growth prospects across most of the world.

In these circumstances, we would retain a cautious, risk-off stance and expect volatility to remain high as investors adjust to fast moving variables such as conflicts in monetary and fiscal policy, China’s growth prospects, as well as the longer-term impact due to rising commodity prices and climate change. The varying impact of these variables on different parts of the world will mean that tactical allocation will be an important source of value-add. However, we do think that this will lead to attractive opportunities to add to risk-on positions.

In these circumstances, the ability to remain nimble, react quickly to changes in markets and the ability to focus on finding secular growth opportunities will be key.

What could surprise markets in 2023?

Given appropriate policy support, it could be the European equity market that offers a positive surprise in 2023. Markets have severely corrected during 2022 and valuations are starting to look attractive in some sectors. For sustainable investors, Europe leads the way with sustainability standards, high levels of corporate disclosure and transparency and in the early adoption of a double materiality approach.

There are risks within Europe, not least the ongoing energy crisis and the war in Ukraine. Whilst gas storage levels look sufficient to cope with the imminent winter, based on reduced demand across Europe, it is next winter that appears less secure. We are therefore mindful of the bigger picture and long-term nature of the energy crisis solutions.

Positioning for what lies ahead in 2023

Listed alternative investments focused on renewables and infrastructure have been at the mercy of energy prices, rising rates and UK political (and fiscal policy) uncertainty from short lived policies through to leadership changes. From a sustainability perspective, renewable infrastructure investments are a key element in the transition to net zero and in energy security. From an investment perspective, the inflation linkage is an attractive characteristic, in addition to the differentiated sources of revenue. Experienced management teams running trusts with valuation cushions against higher risk-free rates look attractive for the longer term though we are mindful of the policy risks facing the UK given the economic backdrop and the politics of support for the energy transition in such an environment.

Being well diversified across both asset classes and underlying investments has been helpful during 2022. The key has been a cautious approach overall with lower equity exposure and lower fixed income exposure than during a typical year.

The offset has been higher than usual cash positions which we do not expect to sustain through 2023. We expect to see plenty of interesting investment opportunities to redeploy this cash into though the trigger for this is likely to be sight of the ending of rate hikes in the US and across Europe, and a change in the upward trajectory of inflation. With that in mind, we expect to have lower cash levels and higher equity exposure during 2023, reflecting more of a risk on environment.

Sustainability considerations

Climate risks, most easily seen in changing weather patterns around the world, are hard to ignore. We anticipate greater recognition of the need to assess, understand and disclose climate risks and opportunities and embed these into risk management and strategic planning at company level. Preparedness for change will be one factor that will influence shareholder returns as this isn’t just about minimising climate risks

CDP, a global non-profit which runs the world’s environmental disclosure system, estimates that US$4 trillion worth of assets will be at risk from climate change by 2030. Importantly, its recent report based on US company disclosure identifies potential financial benefits of climate transition opportunities at least 15 times higher than the potential financial impact of the risks.

Within multi-asset, we expect increased levels of active engagement with our internal and third-party managers as we seek improved integration of ESG and climate factors in investment decision making, increased transparency, measurable data points and consideration of the management of ESG and climate risks, alongside pathways to net zero and recognition of the opportunities afforded by the transition. We believe our engagement efforts positively influence returns to our investors.

Hear more from Fidelity, a 2023 Dynamic Planner Conference Partner, live in London on Tuesday 7 February.

Important information

This information is for investment professionals only and should not be relied upon by private investors. 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. Fidelity’s Multi Asset 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. 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. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.

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