Fidelity director of asset allocation Trevor Greetham on why the scene may be set for a multi-year upswing in developed market equities.
"The economic upswing that began in the summer of 2012 has lasted more than a year and there is a very good chance it lasts well into 2014. The US is leading the world expansion with strong business confidence, rising home prices and a resumption in bank lending.
Japan’s economy is picking up on all fronts and optimism continues to rise in Europe and the UK. Inflation pressures are muted and no major central bank is likely to tighten policy for at least six months.
With corporate earnings growing and liquidity plentiful this is a bullish backdrop for stocks. We have been overweight equities in our multi-asset funds for more than a year and we maintain this position as our highest conviction call.
Investors will have to become more selective than they have in recent years. We are bearish on bonds, property, commodities and the emerging markets as a combination of rising interest rates, dollar strength and a slowdown in China take their toll.
We see similarities with the bull market of the 1990s when Japan went ex-growth, commodity prices fell and a global recession had created spare capacity in labour markets.
This time it is the structural slowdown in China that is pushing commodity prices down and boosting real incomes elsewhere in the world. Disinflationary forces against a strong global growth backdrop are positive for stocks, not negative as they were in the risk on/risk off period of 2010-12, but there will be losers as well as winners in this environment.
Rate hikes are not an immediate threat but the gradual normalisation of US monetary conditions over the next few years, dubbed by some the ‘Great Exit’, will be a persistent headwind for bonds and interest rate-sensitive property shares.
Dollar strength and slower Chinese growth are also likely to hamper returns from commodities and the emerging markets. We continue to tilt multi-asset funds towards stocks, particularly in the US and Japan, developed markets that stand to benefit from a strong US economy and a strong dollar.
After three years of stop-start monetary policy and short risk on/risk off cycles we are seeing a welcome return of the long economic cycle. The outlook for the major equity markets is good and could remain so for longer than many appreciate. Inflation will ultimately trigger tighter policy and a slowdown but spare capacity is plentiful and there is no sign of it yet.
If the structural slowdown in China and trouble in the emerging markets triggers further commodity price weakness the upswing in developed market equities could last for years."
Trevor Greetham (pictured) is director of asset allocation at Fidelity Worldwide Investment
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