“If nothing else, the market gods seem to have re-discovered their sense of humour,” according to Fidelity’s Amit Lodha, as the macroeconomic uncertainty appears to have strengthened but so too has the market. 
Lodha, manager of the £473.9m Fidelity Global Focus fund, said that while the macro environment is “mixed” there are some reasons to be tactically positive – but at the same time there are some key issues lingering within markets.
“Central bank financial terrorism continues with over 25 per cent of government bonds in negative yield territory - this is clearly where the bubble lies and what is currently playing havoc with earnings and discounted cash flow models,” the manager said.
“The difference between a 2 per cent risk-free discount rate and 5 per cent rate for a given stream of cash flows is around 50 per cent on any stock price.”
The total amount in bonds with negative-yielding debt currently stands at $17trn. This means that 30 per cent of all investment grade securities now hold a negative yield, according to Bloomberg.
Market value of negative-yielding bonds in the Bloomberg Barclays Global-Aggregate index
Source: Bloomberg
Holding these bonds to maturity would guarantee that the investor makes a loss but Premier Asset Management’s Simon Evan-Cook said this is being driven by a general sense of fear in the market.
“People are looking for 100 per cent certainty, not 99 per cent certainty, and they’re prepared to pay an awful lot for that extra one per cent,” he explained. “This has led to a certain point where the European Central Bank can now issue bonds that are negative yields.
“It seems crazy that you'd lend to someone and get less money back when you get the money back and no coupon in the meantime. I think people will look back at this time and scratch their heads and wonder what was going on.”
The problems don’t just stop at the state of bonds either, with Fidelity’s Lodha highlighting several other worries that are currently hanging over markets.
“Incentive structures mean corporate leverage – particularly in the US – has continued to rise with buybacks continuing to fuel equity markets,” he said.
“On the trade war front, we may get a temporary resolution, but it is unlikely we will go back to how things were before Trump intervened.”
Not stopping there, Lodha added that social pressures on markets are building too, pointing to protests in Chile, London, Barcelona, Argentina, Lebanon and Hong Kong.
These upsets, which are linked to inequality, are “a sure-fire indicator that the current state of play is not working and needs change”, according to Lodha.
“Constructing portfolios to outperform in this environment becomes ever more complex,” he continued.
“Bond-like defensive equities feed off the circular logic of being cheap ‘relative’ to their negative yield government bond brethren yet seem egregiously expensive on any historical absolute measure in a ‘normal’ world. Quality at reasonable value is an oxymoron.”
But one of the biggest concerns for Lodha remains the risks to globalisation and the damage political factions will have on markets both in the US and the UK.
“What I am worried about is ‘democracy’ and capitalism. As a student of history, it is clear that the world goes through cycles of wealth accumulation and redistribution and it seems we are the end of accumulation and possibly at the start of redistribution,” he said.
“Higher taxes, more fiscal rather than monetary policy, protectionism and inflation are legitimate worries for the 2020s. Most of all being a global investor, I worry about the risks to globalisation.”
This political uncertainty and the rise of socialist elements within the US’ Democratic Party and UK’s Labour Party are a particular concern for investors.
“If there is an upcoming regime change in politics, this would be undoubtedly negative for markets,” Lodha said, adding that the US should remain an underweight in any global portfolio as we navigate 2020 as the market is underestimating the probability of a more socialist administration.
“Technology, especially large-cap, companies will see risk of increased regulation as also the likelihood that the tech world will be increasingly divided into China and non-China. The law of large numbers also looks like it is catching up on them. Invest accordingly,” he added.
“Against this backdrop, pockets of stability where there is limited risk to current systems of governance, or which can safely work with both the US and the Chinese systems, may enjoy premium valuations - seek those out.”
However, Lodha said that there are several reasons to remain relatively optimistic despite the above concerns.
“The job description of an active equity investor is simple - develop a view on markets/individual stocks to exploit an inefficiency, decide how to express that view (which stocks to buy/sell) and when,” he said.
Whilst the manager believes that this year has been an especially difficult market for investors to navigate, he said that “tactically I find it tough to be too negative,” since there appears to be a lot of reasons for some “short-term cheer”.
Looking first to the US and whilst the trade war pushes forward, the upcoming presidential election is likely to benefit the US market greatly because Trump cannot let it slump into a pre-election recession.
“There is a lot that can still be done to ‘juice’ the economy - constant pressuring of the Federal Reserve (Fed), a minor trade war resolution, payroll tax cuts and fiscal stimulus for infrastructure build,” Lodha said.
In addition, the manager believes that the US and China will eventually reach a trade deal as this would help Trump’s “election math” considerably.
Added to this Lodha noted that that the Fed and the European Central Bank have made a decisive move away from quantitative tightening back to the decade old habit of quantitative easing.
“Broad liquidity and money supply growth has rebounded in most parts of the world and in China it has stabilised - when things go from bad to less bad, good things happen in markets,” he explained.
“Lead indicators seem to have bottomed-out and while there is no steep re-acceleration at least things are not getting worse.”
Turning towards the UK and Lodha said he is not overly worried about Brexit.
In fact, he said now a ‘no deal’ Brexit is off the table a resolution appears much closer, meaning that the uncertainty could be eradicated within the next six months and a lot of the issues investors are having with the UK would be alleviated.
“Theoretically this would be positive for sentiment both in the UK and Europe,” Lodha said.
“With the elections we should see some resolution and with uncertainty removed, this should augur well for UK and European equities (markets hate uncertainty more than anything else). In fact, if we did not have the non-zero risk of a Labour government, UK domestic stocks would be the biggest overweight in my portfolio.”
While the above positives are “the tactical set-up which could continue to lead the market higher”, Lodha said it would require a rotation from defensives into cyclicals and value from growth.
“We have had a number of false starts to this but it does feel like that with the round of co-ordinated global easing since January 2019, central banks have succeeded once again to administer more morphine to the patient and grab a temporary victory from the jaws of defeat,” he continued.
“As ever companies which are not impacted by significant government oversight and regulation and are in control of their own destiny, run by exceptional managers, available at reasonable valuations would be the best place to be in all scenarios. That remains where we seek to spend most of our time.
Performance of fund over the last 3yrs compared to sector and index
Source: FE Analytics
Lodha’s £473.9m Fidelity Global Focus fund has outperformed the IA Global sector over the past three years, making returns of 45.78 per cent compared with the peer group’s 33.47 per cent.
It has an ongoing charges figure of 0.93 per cent and holds an FE fund Crown Rating of five.