Global equity markets unlikely to make significant progress in second half of year but earnings growth to pick up in 2017, says Fidelity International
Hong Kong, 20 June 2016: Global stock markets are expected to record only moderate growth during the second half of 2016 on the back of intense political risks, however, earnings growth in 2017 should provide ample buying opportunities, says Dominic Rossi, Global Chief Investment Officer, Equities at Fidelity International.
“Uncertainties surrounding a potential departure of the U.K. from the European Union – ‘Brexit’ - and the outcome of the US presidential elections will continue to grip markets in the months ahead”, said Mr Rossi. “The economic fundamentals in certain developed markets are however improving, with industrial production and domestic consumption edging up, boding well for global growth prospects. European industrial production has been surprisingly resilient and has recently accelerated and a modest rise in manufacturing surveys has also been observed in both the US and China.”
"At the same time, domestic consumption patterns in the developed world have held up pretty well,” Mr Rossi said. “Employment growth continues with signs that wages are gradually ticking up in the U.S. Increases in the minimum wage across a number of states will give further support to consumption. The personal savings rate is still elevated as much of the boon from lower oil prices has been saved thus far. In Europe too, unemployment is steadily falling and retail sales ex-autos are accelerating."
“The uptick in economic growth stemming from certain parts of the developed world will not have meaningful inflationary consequences, allowing the Federal Reserve to adopt a relatively dovish approach to monetary policy, with possibly one or two rate hikes this year,” noted Mr Rossi. "This gradualist approach should arrest the recent weakness in the dollar, without triggering a fresh leg higher which would be highly damaging. As we suspected, once the US dollar stopped appreciating, financial market conditions in credit markets eased immediately, allowing all risk assets including equities to recover in the second quarter of the year."
Market environment more supportive of earnings growth in 2017
While the first half of 2016 had proved a challenging year for US corporates, 2017 is likely to provide an environment much more conducive to earnings growth. "S&P 500 earnings have been basically flat for the last two years, as the US corporate sector had to contend with the dual headwinds of a strong dollar and weak commodities,” said Mr Rossi.
Commodities markets suffered heavy losses in 2015 as concerns about a slowdown of the Chinese economy – a major commodities consumer – intensified. Commodities markets and the dollar also have historically had a tendency to move in opposite directions. “Since global financial markets and commodities are priced in dollars, the upward move in the dollar meant that the value of the same assets priced in stronger dollar had to fall,” he added. "Both headwinds have now abated, potentially fostering a much more favourable outlook for earnings growth in 2017."
"By the end of the year, the focus on earnings growth in 2017 should provide a good chance for markets to consolidate, which may offer good buying opportunities,” concluded Mr Rossi.
Innovations will become China’s key growth driver in the next decade
“While China’s macro data remains weak, investors should keep an eye on innovations, the new growth driver over the next decade,” said Raymond Ma, Portfolio Manager at Fidelity International.
“An abundance of college graduates in China is key to the country’s growth in the coming years. Over eight million college graduates join China’s labour market each year. The huge supply of college graduates has produced a large pool of highly-educated but relatively low-cost engineers, which has formed a solid base for China to evolve from the world’s factory into an innovation powerhouse in the years ahead,” elaborated Mr. Ma.
“Numerous highly innovative products and technological breakthroughs have emerged in China in recent years. The growing number of low-cost engineers, China’s rising commitment to R&D, the rapid development of China’s internet ecosystem, as well as the establishments of supply chains of global leading IT companies in China will speed up and open up new fronts in the area of innovation. I believe this will serve as China’s main growth driver in the next decade,” concluded Mr. Ma.
Mr. Ma continues to remain biased towards the “New China” sectors – consumer-related and services as well as industrial upgrading sectors. In particular, he expects companies that have strong technological knowhow and innovative products to witness the highest growth in the foreseeable future.
About Fidelity International
Fidelity International offers world class investment solutions and retirement expertise. We are a privately owned, independent company, with the commitment and resources to provide the investment expertise, technology and service innovation needed to help our clients achieve their financial goals. We invest USD $272 billion globally on behalf of clients in Asia-Pacific, Europe, the Middle East, and South America. Our clients range from pension funds, central banks, sovereign wealth funds, large corporates, financial institutions, insurers and wealth managers, to private individuals. In addition to asset management, we offer investment administration and guidance for employer benefit schemes, advisers and individuals in several countries. We are responsible for USD $83 billion in assets under administration. (Data as at 31 March 2016)
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