Strong US growth is piling pressure on other countries around the world as the dollar continues to strengthen and president Donald Trump creates greater geopolitical uncertainty, according to Fidelity International’s Bill McQuaker. 
After a year of synchronised growth in 2017, this year has seen greater divergence between global economies, said the multi-asset manager.
Indeed, growth in the eurozone and Japan has weakened markedly during the past few months while the US is beginning to outpace other developed economies.
However, McQuaker (pictured) said the strength of the US economy is starting to have knock-on effects elsewhere.
“While it remains to be seen whether US growth can hold up in the face of a global slowdown — even with the impact of lower tax rates and increased government spending — developments in the US have already introduced pressures to the system,” he said.
“The interesting thing about today’s fragilities [in markets] is that the majority have their causes or catalysts in the US.
“A stronger dollar, higher US rates and the credibility of US policy under Trump represent key risks to markets.”
McQuaker added: “These forces have not all appeared overnight, but slowing and less synchronised global growth make them more potent.”
As an example, the manager noted the recent rise in the dollar, which while small by historical standards has happened quickly.
Performance of US dollar vs sterling over 3mths
Source: FE Analytics
“The move has been enough to put pressure on Argentina and Turkey however,” he said. “Their respective central banks have been forced to raise rates to defend the value of their currencies, damaging growth in the process.
“While these countries are particularly fragile, the risk is for further spill-over effects. Countries like Indonesia are taking those risks seriously, as seen with the precautionary rate rise in May.”
Rising US Treasury yields are also putting pressure on equities and growth stocks in particular, said McQuaker.
This year 10-year US Treasury yields have breached 3 per cent, the psychologically-important level at which a rotation into bonds can sometimes happen.
While there have been few signs of a rotation – with managers instead setting a new level of 3.6 per cent before they rotate into bonds – it has had an impact on the market.
Source: St Louis Federal Reserve
“Rising yields pile the pressure on equities as investors use this as a higher discount rate to compare against their future cash flows,” said the Fidelity multi-asset manager.
“This is most relevant for growth stocks – names including Facebook, Amazon, Netflix and Google — where investors are betting not just on future cashflows, but cashflows increasing over time.”
Growth stocks have benefited from the accommodative conditions in financial markets since the financial crisis.
Indeed, over the past 10 years the MSCI World Growth index has generated a total return of more than 200 per cent in sterling terms, but McQuaker warned that this could come to an end.
He added: “For now, the market is confident that their strong underlying businesses make them immune to such considerations – but that may not last forever.”
The final US threat to markets, according to the Fidelity manager, is the US president himself.
Despite some welcoming the election of a more business-friendly administration, the populist president has alarmed markets with some of his more antagonistic policies.
The levying of tariffs on key allies such as Canada and the EU, the withdrawal from an international agreement lifting sanctions on Iran and the ambivalence towards established multilateral organisations have created greater uncertainty for investors.
“Whilst his policies both at home and abroad spark day-to-day volatility, the real risk is that US foreign policy loses credibility – and against the backdrop of a wavering global macro environment this could have repercussions for financial markets,” McQuaker said.
However, McQuaker noted that not all threats to international markets come from the US, with several other challenges for investors appearing on the horizon, such as rising oil prices.
“Conventional wisdom would suggest that with oil prices nearing three-year highs we may soon see some cracks appearing in equity markets,” the manager said.
Elsewhere, there have been additional pressures on markets from Europe, following the Italian general election which returned a coalition government of two populist anti-euro parties.
“With Italian support for the single currency the lowest among euro area states, the risk here is that Italian politicians stop following the rules of the euro or perhaps even seek to ditch the currency altogether,” he added. “This could spark a eurozone crisis greater than the one caused by Greece in 2010.”
Despite the challenges, however, McQuaker said markets have undergone a broad-based rally in recent weeks with the S&P 500 rising by almost 7 per cent since lows in February “suggesting investors are looking beyond these clear and widespread threats emerging in the global system”.
McQuaker was appointed sole manager of the £666m Fidelity Open World fund in January 2017 after joining the firm from Janus Henderson towards the end of 2016.
The multi-asset fund provides exposure to global markets, primarily through equities, and targets an average annual return of 7 per cent net of charges over a period of five to seven years.
Since he took over Fidelity Open World, it has delivered a total return of 12.16 per cent compared with a 13.63 per cent gain for its average IA Global peer.
Performance of fund vs sector under McQuaker
Source: FE Analytics
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.
Fidelity Open World has an ongoing charges figure (OCF) of 1.64 per cent.