Amit Lodha of Fidelity International’s Global Equities Fund has urged investors to consider the macro-climate in their investment strategies this year, as trade policy between US and China, global central bank policy driving US dollar liquidity, and a potential US fiscal stimulus will be fundamental to driving earnings and, as such, stock performance.
He highlighted the rapid share price drop experienced by Apple as an example of how trade issues will have a significant impact on company earnings throughout 2019.
As a result, Mr Lodha said it would be difficult for investors to head into the first quarter of this year on the global markets forthrightly positive, with earnings likely to be muted and margins feeling the pressure of rising labour costs and rising rates.
He advised investors to approach their portfolios tactically this year, ensuring a substantial margin of safety on stock valuations as well as forecast earnings and cash flow in a range of market outcomes.
“It is not going to be easy, but invest with a long-term view and continue to revaluate the investment thesis with diligence and higher-than-normal regularity and flexibility,” he said.
Despite his short-term cautionary outlook, Mr Lodha remained positive that the volatility created by such macro-events has largely been discounted by the markets in 2018, suggesting the markets have even discounted the potential of a 2020 recession in December.
He said underperforming markets in 2018 will work to increase the likelihood of a trade deal; promote a more dovish approach by the Federal Reserve in the US, along with potentially the ECB, and Japanese and Chinese central banks; and could inspire a fiscal stimulus bill that would drive capex spending in the US, all positive outcomes for markets long-term.
Key areas of opportunity
Throughout the first quarter, Mr Lodha has pinpointed six areas where he believes investors will experience both value and potential risk.
He proposed the following segments have the potential to deliver worthwhile returns for investors in 2019:
1) Emerging markets
2) Energy stocks
3) Technology, including some of the high-performing technology stocks
4) Cyclicals, in the scenario that US President Donald Trump and Congress negotiate a solid fiscal stimulus program
5) Stocks where the market has already discounted extremely bad outcomes, but where upside exists should such conclusions not eventuate
6) Companies across any sector whose growth is dictated by company-specific factors rather than macro-events, such as restructuring, product cycles and market growth
“The only way to look for uncorrelated return will be found in the mundane,” he admitted.
“Doing the work on a stock-by-stock basis with a focus on valuations-based earnings and cash flow under various market/macro scenarios.”
Mr Lodha advised investors to be wary, in particular, of stocks and sectors where both expectations and valuations are currently high.
“While scarce growth will still trade at a premium, however, if these companies miss expectations, the stocks risk a double whammy of both decline in multiples and earnings expectations – potential for significant capital loss,” he warned.
He said that moving forward, forecast market movements mean investors will need to consistently revaluate their investment allocations this year.
“Continue to revaluate the investment thesis periodically. Don’t forget to have a good margin of safety. And make sure you protect capital!” he advised.
“And if trade policy or central bank policy go the other way versus base case, or the credit markets fall out of bed, make sure you have your running shoes on – after all, it’s January!”