Hello, and welcome to the Morningstar series,
“Why Should I Invest With You?” I’m Emma Wall and I’m joined today by Sonja Laud, Head of
Equities for Fidelity. Hi, Sonja.
Hello. So, we are in December now and it’s always
about this time of the year that we have a look over the last 12 months and we see what
has done well and what has not. And in the broad remit of Head of Equities, which stock
markets have done best in 2017? I think, to start, it’s probably worth mentioning
that it’s not only equities that have done well, but literally all asset classes. And
I think if there’s one surprise, then probably it’s been the strength of asset markets around
the world that has taken investors by surprise. If you look at equity markets, we had a broad
positive picture everywhere. Looking at the underlying though, I think it’s been Europe
and Japan that have surprised us positively in terms of the economic fundamentals, really
providing a positive boost to the positive picture regardless that we have seen around
the world. I think that’s an important point to make
because if we were sitting here this time last year and forward-looking in 2017, I don’t
think you’d be quite so bullish across globally but equally across all asset classes, would
you? Yeah, it’s true. And I think to me the core
is with the inflation picture. If you think back at the end of last year, there were already
big debates around wage inflation, we had the US labour market being so strong, we had
positive surprises already starting to emerge in Europe. So, the big question was, okay,
are we going to see inflation finally coming back and hence central banks reacting to it.
Because we should not forget that it’s the liquidity provided by central banks in particular
that have provided an extra boost to asset markets around the world.
So, we are here looking forward into 2018, can we expect such a rosy picture for the
next 12 months? That is the very important question because
investors have to assess whether this goldilocks scenario can continue, i.e., will we see a
continuation of this very positive growth backdrop while inflation stays as tame as
it has been over the course of the past 12 months or so. And I think this is what investors
should be aware of, that it is this inflationary picture, if that were to change, it will have
repercussions for the central bank reaction function and as such, higher interest rates
and potentially obviously a withdrawal of the excess liquidity could have quite meaningful
implications for equity markets and other asset classes around the world.
And I think commentators are quite divided on this. Many people think that actually rates
are going to stay this low for a very long time and Mark Carney has indicated as such
here in the UK. But the inflation is the unknown which may force the hand of central bankers
regardless of what they would like to do, they may not have a choice?
Absolutely. I think the big question here is, if you weigh the medium to long-term outlook
versus the very short-term potential pressures within inflation. Because I think there’s
general broad agreement that if you look at demographics, the debt overhang and other
more structural forces, that they will provide a formidable headwind to growth and inflation.
And such, there’s this expectation that real yields will remain relatively benign. But
you quite rightly said already what if there’s inflationary pressures emerging then definitely
we will have to move away from this extremely accommodative monetary policy.
Lots of markets, as you said at the beginning, across the globe have risen in 2017, but emerging
markets in particular have done well. What can we expect on a, kind of, regional and
sectoral level over the next 12 months? Clearly, emerging markets have been in the
sweet spot for various factors. One, I think, we have highlighted already with the benign
central bank backdrop and the benign dollar environment that obviously supports emerging
markets. But secondly, we have seen a dramatic improvement on the ground. Macroprudential
factors have been much improved, and we have seen, obviously, economically the picture
going up quite dramatically as well. Though I would always put a slight caveat. Emerging
markets are individual countries. They no longer have to be seen as one homogeneous
group. And so, for investors again, if we talk about emerging markets, you still have
to look for the individual winners and losers. And so, pick one market that is going to do
best in 2018, if you can? I still would stay not with emerging markets
but with the developed world. I think Europe and Japan have surprised us very nicely this
year and this is really fundamentally driven. So, the economic surprises have been strongest
in Europe and Japan and if you then look at the equity markets, then I think there’s still
some room to go. One word I would like to add is that given
the difficulties we have just highlighted, active management really is a very important
tool for next year, because if you consider how excess liquidity has lifted all boats,
we believe that we have come to an end of this and hence you really would like to pick
the best opportunities, but you have to use active management for that.
Sonja, thank you very much. My pleasure.
This is Emma Wall for Morningstar. Thank you for watching.