Markets have reached a turning point in how they view the world with more news-driven mini-cycles likely to emerge, according to Fidelity International's Bill McQuaker.
Multi-asset manager McQuaker said slowing global growth has made investors “markedly less bullish” since the start of the year.
“While growth remains strong overall, it is the change in growth that matters for investors and a slowdown could be a significant headwind to equities,” he said.
“The moderation in growth so far has been most marked in Europe and Japan, with these economies typically more sensitive to changes in global conditions.”
Global GDP growth
Source: OECD
McQuaker also said that consumers across the world appear “sluggish”. Retail sales data has disappointed in the US and UK, while consumer confidence is coming off its highs across other major economies.
“That picture seems unlikely to get any better as interest rates rise across the world and higher oil prices push up inflation,” the manager added.
Indeed, the slowdown appears to have been reflected in markets where investors are now less bullish than last year, particularly given a more strained geopolitical backdrop.
The election of pro-business presidential candidate Donald Trump in the US was initially seen as positive for markets, but the second year of his presidency has so far been by greater antagonism over North Korea, Iran and, when it comes to trade, China.
“In 2017, investors focused mainly on the positive elements of Trump’s agenda – tax reform and the repeal of regulation,” said McQuaker.
“Trump’s announcements of tariffs on steel and aluminium, however, have led to a much greater focus on the risks posed by his presidency, including his hard-line stance on issues such as Iran and North Korea.”
While his approach to North Korea appears to have paid off as it announced the suspension of its nuclear and intercontinental ballistic missile programmes, the next potential flashpoint will be over the Iranian weapons treaty, which had signalled a return to warmer relations with the West when it was announced in 2015.
However, Trump has threatened to withdraw the US from the deal – negotiated by the previous administration – over perceived flaws.
“Trump seems inclined to give markets plenty to focus on,” the Fidelity multi-asset manager said.
“The president has to renew the waiver on Iranian sanctions before 12 May, for example, something he promises not to do unless there are significant changes to the current deal on Iran’s nuclear programme.”
He explained: “While Trump might have previously been constrained by those surrounding him in the White House, his recent appointees – such as John Bolton to the post of national security adviser – enable his more hawkish instincts. Bolton is famously said to have never met a war he didn’t like.
“Perhaps most importantly, moreover, he [Bolton] understands how to draw on and use the full resources of the US government.”
McQuaker said the renewal of sanctions against Iran would provide further support for oil prices, which has strengthened to $70 per barrel this year.
If the current price level is sustained for the remainder of 2018, inflation could exceed 3 per cent in the US and come to target levels in the eurozone.
“That would hurt an already sluggish consumer and potentially lead central banks to tighten monetary policy faster than expected,” he said.
Inflation in the US and eurozone
Source: OECD
The Fidelity manager said while increased US shale production might compensate for global supply issues, “the oil price has not reflected those predictions over the past six months”.
“It’s possible we see a geopolitical risk premium being built into the oil price over the coming months, reflecting the perceived dangers around oil supply, even if these do not materialise,” he added.
“Ultimately, it seems like markets are at a turning point in how they view the world. Bulls, rather than bears, will have to justify their views going forward and the normal flow of news will provide cover to those of a more pessimistic bent.”
McQuaker (pictured) said there is evidence that some investors are now moving out of equities. The net exposure of long/short equity funds has fallen to an 18-month low while other quantitative strategies reducing their equity allocations, he claimed. 
He added: “To my mind, this all argues for being neutral on risk, and adding some defensive exposure to portfolios.
“We are likely to see mini-cycles in equity markets, with periods of risk-on and risk-off behaviour.”
The Fidelity manager that investors may want to consider using these episodes as an opportunity to sell on strength, so they can gradually de-risk into the late cycle.
Having joined the firm in October 2016 from Janus Henderson, McQuaker has been the sole manager of the £625m Fidelity Open World fund since January 2017.
He also co-manages the Fidelity Multi Asset Open range alongside Ayesha Akbar, which includes the Fidelity Multi Asset Open Adventurous, Growth, Defensive and Strategic funds.
Since taking over the Fidelity Open World fund, it has delivered a total return of 6.99 per cent compared with an 8.21 per cent gain for the average IA Global peer.
Performance of fund vs sector under McQuaker
Source: FE Analytics
Fidelity Open World invests across a range of asset classes providing exposure to global markets, primarily through equities, and aims to provide an average annual return of 7 per cent after the deduction of charges over a typical market scale of 5-7 years.
A minimum of 80 per cent of the fund will be held in equities, although up to 20 per cent may be held in fixed income assets or alternatives strategies.
The fund’s largest exposure is to North American equities at 46.9 per cent of the portfolio, and includes top holdings 10.3 per cent stakes in Angel Agudo’s Fidelity American Special Situations and the Old Mutual North American Equity fund, overseen by Amadeo Alentorn, Ian Heslop and Mike Servent.
Fidelity Open World has an ongoing charges figure (OCF) of 1.64 per cent.