Global hybrid bonds, European and Japanese equities and financials sector are three main areas of the market that Fidelity International’s Nick Peters is finding opportunities in. 
The manager, who co-runs 23 funds including the five crown-rated Fidelity Multi Asset Strategic portfolio, believes we are in an environment where global growth will slow somewhat but interest rate hikes will continue.
As such, he warns that many areas of the fixed income market and equities that are exposed to the consumer discretionary sector could well struggle this year.
As such, Peters says it pays to be selective given today’s macroeconomic backdrop and, in the below article, he discusses three main market areas he is keeping a keen eye on.
Fixed income
Fixed income assets across the board have been largely unloved by investors over recent months, given heightened expectations for fiscal loosening, increasing inflation and the continuation of interest rate hikes.
While Peters is currently underweight fixed income assets, he says there are areas of the market he does like on a relative basis.
“We think a Fed rate rise in June is extremely likely and, therefore, I am seeing government bonds as a source of cash that looks more attractive within fixed income on a relative basis,” the manager said.
“Global hybrids is one area [we like] – these are predominantly European debt instruments with some equity characteristics such as convertibles.
“As an asset class they’re generating a yield of around 5 per cent and many of the issuers are financials, where I remain positive, and so that’s supporting the thesis for global hybrids.”
Elsewhere, Peters has been trimming high yield positions as spreads within the asset class have narrowed significantly over recent months. Not only this, he says the increased competitiveness within the retail sector caused by e-commerce has become even more pronounced.
Performance of sector over 1yr
Source: FE Analytics
“Another area we continue to like is EMD [emerging market debt] local currency, there are attractive yields around 6 per cent and it’s an area that is going to benefit from a weaker US dollar,” he explained.
“I can’t really see why the dollar is going to strengthen much further from here so, if it stays at these sorts of levels, or weakens, that is going to help or support EMD.”
The manager is also relatively positive on inflation-linked bonds and holds a small percentage of these as a hedge against inflation surprising on the upside.
Equities
In terms of equities, Peters believes the current strength of the asset class is living on borrowed time. While he has a small overweight to equities, he has also ensured he is overweight cash so that he can utilise any future weakness as a buying opportunity.
When it comes to regional equities, he is negative on the US but positive towards Japan and continental Europe.
“[US equity valuations] have been more expensive in the past, such as during the tech bubble in the early 2000s, but they are still looking on the expensive side,” the manager said. “But, the market will not just correct because of high valuations and certainly the earnings picture from this year looks reasonable.
“We’re talking about forecasts of more than 10 per cent and companies look as though they are going to be able to achieve that. In Q1, more than 50 per cent of companies beat expectations, so we’re still pretty comfortable about the earnings outlook.
“Consumer confidence is at near-record highs, profit margins are close to peak levels, so I do worry that we have a bright outlook which is more than priced in by investors.”
Elsewhere, Peters such Japanese and European equities are more attractive on a relative basis because geopolitical risk in Europe and a lack of growth in Japan has deterred investors.
Performance of indices over 3yrs
Source: FE Analytics
Financials
On a global sector basis, Peters has a long position in financials as he believes there are numerous positives for the sector over the medium-to-long term. This is reflected in his equity positions as well as his positive stance on hybrids.
“There are fundamentals such as the clarification of bank regulation and even a suggestion in the US that we could see some loosening of that regulation,” he reasoned. “There is the ongoing strengthening of capital buffers - US banks have now have a Tier 1 ratio north of 10 per cent and well-financed European companies are now looking at Tier 1 ratios of 15 per cent. That’s compared to around 8 per cent after the financial crisis.
“That strengthening of capital and improvement of returns means that actually banks are now in a position where they can start increasing dividends and pay-outs are picking up.”
The manager also says bond yields are rising and that the upward-sloping yield curve will further benefit banks’ margins.
“This sector still looks pretty reasonably-valued relative to other sectors across the market, but investors have already picked up on this story – certainly in the US where you’ve seen a pick-up in relative performance in the second half of last year,” Peters continued. “But, the weakness we have seen very recently as the Trump trade unwinds I think is a buying opportunity.
“With the S&P 500 banks, we’ve seen that pick-up in performance, but the European banks haven’t reacted at all and we are seeing an improving economic backdrop in Europe which has got to benefit financials as well. I still think that’s a story that has further to run.”
Performance of indices since 2016
Source: FE Analytics
Since its launch in 2007, the £642m Fidelity Multi Asset Strategic fund has returned 79.9 per cent compared to its IA Mixed Investment 20%-60% Share sector average’s return of 50.82 per cent.
It has a clean ongoing charges figure (OCF) of 1.08 per cent.