Fidelity says a defensive investment mix makes sense

Investment Outlook Series: Trevor Greetham, director for asset allocation at Fidelity International, is overweight on commodities, bonds and cash while still a loyal holder of equities with a long-term view.
This is part of an AsianInvestor series on the investment outlook of fund managers with Asian portfolios.

Trevor Greetham is the UK-based director for asset allocation and portfolio manager of Fidelity Funds û Multi Asset Navigator Fund. He handles asset allocation and performance evaluation of the portfolio as well as formulating the overall investment strategies of the fund. He is responsible for a total of $450 million in a range of multi-asset funds in Europe and Asia including the Fidelity Funds û Growth & Income Fund and Fidelity International Funds û Multi Asset Strategic Fund.

Fidelity International manages around $260 billion across both Europe and Asia.

What are the biggest opportunities that you see in the markets you are responsible for in the coming 12 months? How are you preparing to take advantage of those opportunities?

Greetham: The large developed economies, led by the US, are slowing in the face of a credit crunch and falling property prices. However, emerging economies are still booming, forcing commodity prices and global inflation rates higher. Taken as a whole, the world economy is suffering from a mild bout of stagflation, an environment in which central banks are reluctant to cut rates and stock markets are volatile. A defensive mix of investments makes sense.

Our multi-asset funds offer investors diversified exposure to stocks, property, commodities, bonds and cash. At present we are overweighting commodities, bonds and cash but we maintain a meaningful exposure to equities as they are the asset class likely to offer the best returns over the long run. We see good equity market opportunities in the hot spots of the world economy.

How different or similar is your 12-month investment outlook now compared to the start of this year?

My asset allocation strategy makes use of an investment clock approach which links the performance of asset classes and equity sectors to the evolution of the global economic cycle. I tend not to make forecasts and instead focus on what I refer to as now-casting. In other words, my investment strategy changes depending on whether recent trends in global growth or inflationary pressures are continuing or reversing tack. The current configuration of weak growth and rising inflation has been in place since the second half of 2007 and, so far, thereÆs no sign of a change. My funds have been underweight equities and property for the last nine months with equity exposure focused on areas of continued strength.

Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?

I have not made significant changes to my asset allocation since the middle of 2007 when the US subprime crisis hit with a vengeance, calling the previously strong global growth trend into question. At that point, I moved from a position where I was overweight both equities and commodities to my current stance in which I remain overweight commodities but have raised exposure to the more defensive assets classes of bonds and cash. I have been underweight financial, property and consumer sectors since early 2007 and that remains the case, with the underweight positions deepened in recent months.

What are your favoured markets in Asia?

Our investments in Asia are determined on a company by company basis by experts based in the region, rather than at a national level, as we feel this plays to our research strengths. That said, we prefer the stronger economies in the region to Japan, where growth is weak and wages are being squeezed by rising food and energy prices.

What are the markets you are going to steer clear of in the coming year?

Our equity exposure is currently tilted away from the US and Europe, where inflation-targeting central banks are likely to keep policy tight despite problems in the banking and property sectors. We saw recently how tough that inflation-fighting resolve can be when the ECB (European Central Bank) raised its benchmark interest rate by a quarter point. The markets currently expect the Bank of England and Federal Reserve to follow suit. With profit growth slowing and rates flat or rising, this is not a good equity market environment.

In global sector terms, we are tilted away from financials, consumer stocks and property as these are the areas likely to feel the effects of the credit crunch most acutely.

What are the main challenges that you expect to face in the coming 12 months?

With stagflation hitting the headlines and investor sentiment depressed, IÆd prefer to think in terms of the opportunities that are likely to emerge over the coming 12 months. Growth may recover. Inflation may fall. Either could happen at any time and either would be positive for stocks.

We are watching two potential triggers particularly closely. First, the US housing market. US house prices peaked a year before the broader US economy and stock-market and housing ought to be the first area to respond to monetary ease. Second, the oil price. As global growth slows, demand for energy ought to ease off.

At some point the oil price will peak and inflation pressures will drop allowing developed economy central banks to cut rates in earnest. That would probably be a signal to move back into interest-rate sensitive stocks and property in the US and Europe.

What are the main risks of investing in Asia at the moment? How are you managing those risks?

With real interest rates in the larger Asian economies low or even negative and regional banks relatively unexposed to global credit woes, it seems likely that the current strong trend will continue. However, domestic monetary policy is tightening and developed economy trading partners are slowing down so, at some point, this combination could lead to a period of slower growth. If this coincides with a fall in commodity prices, as seems likely, we would be likely to shift our overweight focus back to developed equity markets to take advantage of the sectors most likely to benefit from lower interest rates.

We would always retain exposure to Asia, though, as there is no other region offering such impressive long term growth prospects.
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