SECTION HEAD
changing. The focus has shifted to how shale producers are maintaining capital discipline, and not overcommitting to new production. Markets seem to be accepting that at least some of the rise in oil prices is fundamentally driven, and that new producers like shale companies are not going to come to the rescue and produce more oil. Investors may have no choice but to live with higher prices.
The impact of oil For the meantime, moves in the oil market are having only a limited impact on bonds. Investors are generally assuming that growth will moderate from here and help inflationary pressures to ease. Short term bonds, repayable anywhere from a matter of months to around ten years, are where most of the upwards pressure on yields is. However, if commodity prices maintain their current levels, and we see inflation reaching 3% as a result, you could see a more significant impact across all parts of the bond market, with yields shifting up on longer dated debt too.
be upwards. But I don’t think we’ll see a dramatic strengthening phase like that from 2014–16. Apart from anything else, the rest of the world is in much better relative shape. EM currencies remain cheap based on their economic fundamentals, while the rise in commodity prices this year should boost many EMs’ terms of trade. The complications come if a strong dollar derails commodity prices, the EM picture weakens, and the dollar rises in response to that. The likelihood of that negative feedback cycle is slight, but it is a risk we remain alert to.
That’s not what we expect for now. Inflation should stay contained, allowing the Federal Reserve — as well as central banks globally — to gradually remove accommodative monetary policy. But the most interesting development over April was that rising US interest rates have finally started to support the US dollar. This is most relevant to our position in local currency emerging market (EM) debt. While it is a negative development, we did anticipate it, and our hedge in several EM currencies performed an important role in protecting client’s capital against a portion of the dollar’s rise.
When will the animal spirits return?
If we continue to see global growth outside the US moderating, the direction for the dollar will probably
Whether we see a return to animal spirits then, depends on two things. The first is a continuation of the strong growth backdrop. We can afford to see economic growth slow a bit from here, but too much might mean investors getting nervous. Markets also need to find a new, positive narrative to latch onto, if only to prevent them from looking over their shoulder at labour costs, oil prices or a stronger dollar. Across the rest of the year, we will likely maintain our defensive positioning, adding to safe haven assets like US Treasuries. Where we are taking risk, we will attempt to think of efficient ways to protect our positions, without giving up a disproportionate amount of upside. n
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. 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. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. Investments in overseas markets, changes in currency exchange rates may affect the value of an investment. 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. Investments in small and emerging markets can be more volatile than other more developed markets. 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. 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.
www.rsmr.co.uk Summer 2018
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