Equities will continue to deliver solid returns and shouldn’t be abandoned despite historic signals that a recession is on the cards, according to an asset investment specialist at fund manager Fidelity International.

Speaking at a media event in Sydney this morning, Anthony Doyle said while the bond market has flattened out recently – a trend which preceded recessions in 1991, 2001 and 2008 – he doesn’t believe the market is ready to dive again.

“While the US yield curve currently indicates the US economy is close to a recession, Fidelity International’s long-term projections suggest trend-like growth for the foreseeable future,” Doyle said (see below).

The strength of the labour market and rising rates are acting as bulwarks for the US market, Doyle explained. The risk is still there, he acknowledges, and Fidelity has recently gone underweight in developed market equities in an effort to de-risk. However, the manager continues to expect “good returns from being invested in the global equity market”.

“We wouldn’t advocate getting out of the asset class,” he said. “Equity markets historically have rallied during late cycle stages and they’ve rallied while the yield curve is flattening. And we think that’s going to continue.”

It’s too early to de-risk portfolios dramatically, he warned, as global economies perform well prior to economic contractions. He used a graph showing MSCI global returns over the last few decades (see below), which showed extensive ‘flattening’ periods before a downturn.

Doyle said Fidelity was particularly confident that emerging markets would continue to deliver better returns than other asset classes over the next five-years. “We’re overweight emerging markets, especially in Asia,” he continued.

Fidelity’s faith in the emerging markets is “for both structural and tactical reasons,” Doyle noted. “Tactically, a number of headwinds to returns have abated in 2019, while structurally long-term advantages like demographic trends and rising wealth remain intact.”

Doyle cited the development of Indonesian banking and Bangladesh manufacturing as examples of emerging market growth.

“There are pockets where investors can enjoy good returns in our estimation,” he said. “And the emerging market arena is one we think is particularly interesting at the moment.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at tahn.sharpe@conexusfinancial.com.au
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