US stocks’ resilience is not certainty given the real headwinds for those sectors that are sensitive to interest rate rises, according to Fidelity International’s Bill McQuaker.
Veteran investor McQuaker – who runs the Fidelity Multi Asset Open portfolio range alongside Ayesha Akbar – said the team continues to watch those sectors that are more sensitive to Federal Reserve policy.
“Interest rate-sensitive sectors have benefitted from artificially low rates created by loose monetary policy [which is continuing to be unwound] despite president Donald Trump’s claims that the ‘out of control’ Federal Reserve was to blame for the recent sell-off,” said McQuaker.
As the manager noted, throughout most of 2018 the US has outperformed the rest of the world in terms of both GDP and stock market performance.
Indeed, after growing at a moderate rate of 2.2 per cent during the first quarter of the year, GDP growth accelerated to 4.1 per cent for the second quarter.
The near-doubling of real GDP growth between the first and second quarter was driven by strong corporate profits, healthy market conditions, and accommodative monetary and fiscal policies.
Performance of indices YTD
Source: FE Analytics
As the above chart shows, the S&P 500 is also leading the pack so far this year, up by 6.61 per cent – in sterling terms – compared with a 4.02 per cent loss for the TSE TOPIX, 5.14 per cent for the FTSE 100 and a 5.69 per cent fall for the MSCI AC Europe index. Furthermore, the MSCI Emerging Markets index is also down by 12.28 per cent.
In recent years, returns in the world’s largest economy have mainly been driven by a small group of growth stocks including the FAANGs: Facebook, Amazon, Apple, Netflix and Google-parent Alphabet.
Despite the country’s standout performance, McQuaker noted when looking outside the S&P 500 – the largest US firms by market capitalisation – the picture is not so rosy.
“When commentators refer to ‘US markets’, the tech-heavy S&P 500 is the most commonly-used proxy,” the multi-asset manager explained.
“Thus far in 2018, the S&P 500 has strongly outperformed the rest of the world and remains close to neutral for the year despite a recent sell-off.
“However, the more broad-based NYSE Composite index is much further into negative territory following the recent sell-off, indicating that outside [the S&P 500] the picture is not so positive.”
He noted sectors like housebuilders and automobiles, which are sensitive to interest rate moves have been “hit hard” and are “firmly into the red” so far in 2018. Given that real rates are at their highest level since 2010 and mortgage rates are at five-year highs, Fidelity’s McQuaker believes this is “hardly surprising”.
Performance of NYSE Composite index YTD
Source: Google Finance
While keeping a close eye on interest rate-sensitive sectors, the multi-asset manager said there are other issues at play in the world’s largest economy.
“Retail sales growth is still strong, but is starting to slow meaningfully, with Q3 annualised figures falling to 5.1 per cent from 7.3 per cent in Q2,” he said.
“A 30 per cent decline over a single quarter is not something to ignore. While the short-term picture has been helped by home appliances and vehicle sales, inventories have jumped meaningfully, and may be the result of demand driven by fears of prices spiking when the trade tariffs with China begin to hit.”
Notwithstanding the not-so-rosy outlook for the US, he noted said he Fidelity Multi Asset Open team funds still likes the defensiveness built into it compared with other markets.
As such, and to maintain that exposure while being defensive, they have been underweighting the FAANG stocks, with their four US equity managers having a bias towards more defensive value stocks.
He added: “In some of our funds we have also decided to short semi-conductors, which are a key component in technology devices and often a ‘canary in the coal mine’ for the direction of technology stocks, in order to further reduce our technology exposure.”
Reducing exposure to the innately cyclical energy sector in order to buy into utilities, which are less tied to economic growth and tend to be stronger performers in times of uncertainty, has also been a key decision the team made over the summer months.
McQuaker concluded: “With the cracks in the strong performance of the US beginning to show, we are positioned defensively against the very real vulnerabilities in the global economy.
“The US has been the standout so far in 2018, but when we look under the hood we see the US is not immune from tighter financial conditions and may just be beginning to show that its resilience is not a certainty.”
The multi-asset range McQuaker has overseen since 2017 consists of four funds: the £116.2m Fidelity Multi Asset Open Strategic, the £127.5m Fidelity Multi Asset Open Growth, the £14m Fidelity Multi Asset Open Defensive and the £21m Fidelity Multi Asset Open Adventurous.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Over three years, the four FE Crown-rated Fidelity Multi Asset Open Strategic fund has delivered a 19.75 per cent total return compared with a gain of 14.77 per cent for the average fund in the IA Mixed Investment 20-60% Shares sector. It has an ongoing charges figure (OCF) of 1.35 per cent.