Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
Trevor Greetham is the London-based asset allocation director at Fidelity International, where he is responsible for global investment strategy research. He joined Fidelity in January 2006 and is a member of FidelityÆs asset allocation and investment strategies groups. He is the portfolio manager of the Fidelity Funds û Multi Asset Navigator Fund, the Fidelity Funds û Growth & Income Fund, and the Fidelity International Funds û Multi Asset Strategic Fund. Those are global portfolios with exposure diversified across stocks, bonds, commodities, property and cash, and have around $370 million in assets combined.
Greetham has more than 15 years of experience in the investment industry. Before Fidelity, he spent 10 years at Merrill Lynch, where he was director of asset allocation. He was also an assistant fund manager and actuary for Provident Mutual.
Fidelity International, which covers Fidelity InvestmentÆs business in Europe and Asia-Pacific, manages around $198 billion.
What are the biggest opportunities that you see in the coming 12 months?
Greetham: Our multi-asset funds are positioned defensively with large overweight positions in bonds. Government bonds are particularly attractive as central banks slash short-term interest rates and inflation expectations fall. We are seeing a wave of buying moving out all along the yield curve, pushing yields down and generating strong returns.
The world economy has very strong downward momentum right now but as the year progresses it is expected to see early signs that monetary and fiscal ease are taking effect. This will trigger a move towards the riskier assets that should offer good returns in this environment, starting with corporate bonds and moving on to equities as our conviction of economic recovery builds.
How has the global financial crisis affected the way you manage your portfolios?
Financial crises are a fact of life. It is very hard to find an economic cycle that didnÆt end with stress somewhere in the financial system in response to central banks withdrawing liquidity. In the year 2000, dotcoms were the bubble that burst. This time it was the US housing market. After three years of Federal Reserve rate hikes, we were on the lookout for signs of stress and were early to recognise the US subprime crisis as a possible signal that the global economic cycle was peaking. We moved to a defensive posture in our multi-asset funds in the third quarter of 2007 as signs of an economic slowdown in the US gained force.
What is the biggest lesson you have learned from the US credit crisis?
The current financial crisis is far larger and more geographically widespread than any of us have seen in our careers and central banks are struggling to contain its effects. We are confident policy makers will eventually win the day, and our underweight stance in equities is smaller now than it was a year ago. However, like other investors, we have learnt not to assume that any particular measure will work until we see evidence of improvement in credit flow, house prices or economic confidence. The biggest mistake of the last few months would have been to buy aggressively into every bear market rally on hopes of a recovery for which there was no hard evidence.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
Having spent most of 2008 worrying about inflation, the possibility of deflation is now policy-makersÆ greatest fear. The collapse in commodity prices has seen the global economy move decisively from the stagflation phase of the cycle to what we term reflation. This stage of the cycle is characterised by weak activity and falling inflation. It is generally a very good time to own bonds and my portfolios have been changed to reflect this shift.
While inflation pressures were rising we had been overweight in commodities. We moved to a large underweight in the middle part of the year and we maintain that position.
Within equities, we are buying health care, consumer and financial stocks that have tended to do well early in the cycle. We have sold late-cycle industrials, resource stocks and the emerging markets. We still believe in the long-term potential of these areas but seek a better point in the future to re-establish an overweight position û perhaps once the larger, developed economies have troughed. The decoupling thesis that said emerging markets could prosper despite a slowdown in the developed world, has been tested to destruction by synchronised recessions in all of the worldÆs largest economies.
What are your favoured markets in Asia?
Developed market equities will likely continue to outperform emerging markets. The US market, especially, will benefit from its relative diversity, heavy exposure to consumer staples and healthcare stocks and the likely continuing strength of the dollar as overseas interest rates fall towards US and Japanese levels.
At some point, hopefully in 2009, reflation will likely move on to full-blown recovery and a sustained bull market in equities. For me to become bullish on Asian stocks, I will need to see signs that global policy ease is taking effect, banks are lending again and bargain hunters are coming in to support property prices
What markets are you bearish over?
I believe the residential property market will likely continue to fall, although the rate of decline will slow as the impact of lower interest rates begins to be felt. Commercial property will also likely continue to be affected by a shortage of credit as banks rebuild their balance sheets.
An easing in trade finance may see a spike in commodity prices because manufacturers have been forced to run down stockpiles of raw materials and may need to re-stock. But it would probably be right to sell into such a rally as commodity prices are likely to remain under downward pressure.
Which sectors would likely outperform in the coming year?
Next year, income will likely be at a premium as deposit rates fall sharply. For more adventurous income-seeking investors, corporate bonds look attractive in Asia as well as globally. Yields are very high compared with those on risk-free government securities, although investors should move in gradually and will have to brace themselves for a significant rise in corporate defaults from their current low levels.
Within developed equities markets, interest rate-sensitive sectors such as consumer cyclicals and defensive areas such as staples and healthcare will be the most attractive areas for equity investors.
Which sectors would likely under-perform?
Industrial and resource sectors outperformed the broader market over the first part of the financial crisis, as financial stocks fell and commodity prices surged. These sectors are expected to under-perform in 2009 as growth slows. Many sectors, including financials, benefit from interest rate cuts even when growth is weak, but itÆs hard to see how they would help a steel company for example.
What are the main challenges that you expect to face in the coming 12 months?
Next year promises to be no easier for investors. Global growth is slowing sharply in response to the broadening credit crunch and 2009 will likely see recessions in a number of countries. Volatility is likely to remain extremely high. Rather than trying to time moves into and out of stocks, investors looking for a lower risk profile would do best to diversify their exposure across a range of asset classes or invest in a balanced fund.
What are the main risks of investing in Asia at the moment?
There are two risks at the forefront of my mind. The first is the risk of a sustained downturn in global growth, with negative implications for Asian markets via the export channel. The second risk is actually an upside risk. This is the risk that China manages to confound expectations and grow strongly in 2009 and 2010 on the back of their substantial government spending program. It is impossible to judge which force will win out in 2009 and there will be no substitute for detailed and ongoing analysis of the economic news flow.
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