Tide finally turns in equities' favour, says Fidelity chief
It’s been all gloom for equity investors in recent months, but there are some who think we’re over the worst.
We’re on the verge of a strong run for equity markets, according to Fidelity’s Dominic Rossi (pictured), who thinks much of the downside risk is now factored into prices.
The chief investment officer at the firm remains vigilant, but says he is quietly confident that risk assets will outperform for a sustained period.
“As time has progressed and doomsday scenarios have been avoided, equity markets have switched out of panic mode, and grown accustomed to the possibility of a Greek default and Spanish and Italian bailouts,” he explained.
“In my view, these risks are now largely factored into valuations. While we are by no means out of the woods yet, there are more reasons to be cautiously optimistic.”
“The tide is beginning to turn for equities and historically when such a turning point is reached markets can move ahead strongly.”
The last year or so has been pretty miserable for many equity investors. According to FE data, 11 of the 17 pure equity IMA sectors have lost money over a twelve month period, including the hugely popular IMA Global
, Asia Pacific ex Japan
and UK Smaller Companies
Performance of IMA sectors over 1yr
Source: FE Analytics
However, Rossi says it’s now time for investors to put the pain of the last year behind them and focus on the more optimistic macro outlook.
“Having been bearish on equities for the last 18 months, I now see growing evidence for cautious optimism on the part of equity investors,” he said. “The humility being shown towards equities has been justified, but equity markets have a habit of moving back out of the shadows when they become most overlooked.”
“Previously, I said the key risks to equity markets were bank deleveraging, policy inaction and political risk related to the eurozone crisis, and commodity prices. Encouragingly, these risks have been recognised and either mitigated by a growing acceptance among policymakers to undertake the right actions, or priced into equity valuations or, in the case of commodity prices, risks have subsided due to a mix of demand and supply factors.”
Though markets have rallied in short bursts during the last year, Rossi says the recent upturn – which has seen the FTSE 100 break the 5,800 barrier for the first time since April – is more telling.
“Markets are rising for the right reasons - income and security - despite the well-documented risks. With the prospect of significant downside in equities receding, I think markets now have an opportunity to build on what appears to be a consolidating platform.”
“Even with the US fiscal issue still outstanding, US bond yields suggest that most of the investors who wanted to get out of the equity market have already done so.”
“I feel a lot of the reasons for not owning equities have become well-established and well-embedded within current valuations. The time has come to stop thinking about selling equities and to start thinking about buying them.”
Rossi’s comments echo those of Rathbone’s chief investment officer Julian Chillingworth, who thinks the relative value in equities more than cancels out perceived headwinds
FE Alpha Manager Martin Gray
remains unconvinced however, arguing in a recent interview with FE Trustnet that positive corporate figures are “built on sand