Hello, and welcome to the Morningstar series,
“Why Should I Invest With You?” I’m Emma Wall and I’m joined today by Bill McQuaker, Multi
Asset Manager for Fidelity. Hi, Bill.
Hi, Emma. So, I thought we’d start by having a look
at the outlook for the global economy, because it’s pretty promising, isn’t it?
Yeah. I think the global economy is in good shape. If you look back over the last 12 months,
we came into 2017, people were a bit worried about China, a bit worried about Europe. And
as the year has gone by, those concerns have dissipated. And as we get to the end of the
year, Europe is – frankly, European growth is on fire. The European economy hasn’t grown
as quickly as at the moment for at least half a decade. China has held together and at worst,
it might slow a little in 2018. I don’t think there’s going to be the hard landing that
people have worried about over the years. And United States has ticked along at 2.5%.
Probably the black spot is here in the UK where because of Brexit and the impact that’s
had on the confidence and sentiment growth has been a bit slower and of course, the currency
devaluation has impacted on people’s spending power. That’s been a headwind.
You run a range of portfolios based on sort of risk appetite. But looking at your, kind
of, base case, your middling fund, how do you translate your outlook for the global
economy and your understanding of what GDP is going to kick out in the various regions
into an investment portfolio? Well, the starting point is – we’ve just
discussed half the starting point. The starting point is, what’s the outlook for growth and
then alongside that how are the world’s central banks likely to respond as that growth picture
unfolds, because we do have to worry about the level of liquidity in markets and the
level of interest rates. So, as we stand today, looking into 2018,
I think the growth picture, as we just discussed, is quite robust. Where I’ve got some more
concerns is with regards to the central banks and whether next year we’ll see them having
to move policy in a way that’s a little less friendly to markets. Now, when I put those
two influences together, it adds up to an environment where I think it’s still right
to take some risk. So, to your question on portfolio construction,
for a middle-risk portfolio, I think, equities have still got to be the foundation stone
of that portfolio, and perhaps, we’ll come to the shape of that, the equity portfolio,
in a moment. But we do also need some assets that are going to diversify risk and hedge
risk because this year has been a quite unusual one, really a very unusual one and as much
has been very, very few setbacks in markets and have been very small. That’s abnormal.
A more common place is for us to get a month or two, even a quarter or two where things
don’t look rosy. And at those points in time, investors want to see some robustness in the
portfolio and we get that is by having some assets that perform better when the mood music
in the world is not so cheerful. And that takes you to things like government bonds,
high-quality credit and safer commodities or hedging commodities like gold. And we are
mixing those together in hopefully a judicious way to deliver the risk and return that our
investors are looking for. With that important caveat in mind looking
then at that equity portion of the portfolio you touched on it there, where do you think
regionally are the best opportunities? Well, right now, I’ll start with the UK. People
live here in the UK in terms of your audience and there’s something of a home country bias.
I have to say that I think the UK looking into 2018 probably not the best place for
people to be banking on in generating returns. There’s a lot of uncertainty about Brexit;
the economy is quite weak and likely to remain so. So, I am not a big fan of the U.K.
Amongst the lower-risk markets, I prefer the U.S. It’s a more expensive market. There’s
no question about that, but it does have the likelihood of a tax break for the corporate
sector next that I think will be quite important to U.S. earnings. That could add as much as
10% or 15% to U.S. earnings and I think that’s likely to be quite helpful to the performance
of the U.S. And of course, the famous FANGs are to be
found in the U.S. They have done well this year. We are getting towards the end of the
economic and market cycle. And sometimes, momentum is quite important in financial markets
and the FANGs have certainly got momentum behind them at the moment. So, I think, that’s
an interesting area. Another place, and this isn’t a geography.
I’ve just given you an argument for going with areas of the market that are already
working. But there are one or two areas that haven’t done as well in 2017 I think could
be good places to earn money in 2018. One is the energy sector. The oil price is now
up on the year, but the energy sector has stubbornly lagged behind the oil price. The
gap is wide. And I think we could see quite a good catchup in the performance of energy
equities next year, both in the U.S. and in Europe. So, I like that. That’s part of the
portfolio. And another place that’s interesting in Europe
is Spain. Spain has had some issues around Catalonia and the stock market has certainly
taken a hit. The most recent news suggests that the Government in Madrid is interested
in trying to find a peaceful conventional mechanism to resolve this problem. And in
particular, there are one or two reports that the Spanish government is willing to devolve
taxation powers to Catalonia in the same ways they have done to the Basque region in years
gone by. I think that could be quite powerful in ending
the cessation fear. And if that’s right, then we could see a normalisation in the behaviour
of Spanish equities which should be a nice catchup against the rest of Europe.
Bill, thank you very much. Pleasure.
This is Emma Wall for Morningstar. Thank you for watching.