Hello, and welcome to Fidelity’s Outlook 2018, our thoughts on the year ahead, and I'm joined by our Chief Investment Officers for Fixed income, Multi-asset and Equities.
And I’ll start with equities, and Dominic Rossi.
It feels like it might be particularly difficult to make forecasts this year, am I right?
I think – well, let’s remind ourselves, 2017 was a vintage year for global equity markets, they’re pretty much up 20% in dollar terms across the board.
So I think it’s going to be a much tougher environment for equities in 2018 in terms of valuations.
I think we’ll be lucky to see positive returns from equities this year.
That doesn’t suggest there’ll be a bear market or anything like that, I just think we’ve had a good time, and I think equity markets will drift.
Well James, let me turn to you, so, I mean, your message throughout 2017, it seems, has been braver for longer.
Is that still the case then?
It is broadly, I think I share Dominic’s concerns over equity valuations, but what I do think is that there’s a reasonable chance of a small dip in equity markets and then a large move of cash into equity markets that rallies them up another notch.
So am I looking for great double digit growth in equities in 2018? No.
Do I think they might be the best performing asset class? Yes, I think they might be, and therefore it is a case of being braver for longer.
That typically late stage in a bull market you either move to fixed income or cash, fixed income isn’t particularly attractively valued, we’re early stages of a rate rising cycle.
Cash is guaranteeing a return well below inflation, therefore why would you want that, so where do you go?
You stay in equities.
Charles, you’re head of fixed income, it’s obviously your bread and butter, do you agree?
Well, I think it’s going to be a very interesting environment in 2018 for fixed income, because we are facing quite significant challenges.
You know, we have a challenge now that, on the face of it central banks are clearly looking to normalise monetary policy – when they talk about normalising monetary policy it’s about choking off some of the quantitative easing that’s been going on within markets, and of course looking to raise interest rates.
So you’d think to yourself well that’s not a great environment for fixed income, however we must bear in mind as to the pace of those interest rate changes.
And I think every single central bank has been very clear that any interest rate rises that we’re going to see is going to be very slow, very muted, and very controlled.
Because the last thing they want to do is upset what is still quite a fragile recovery.
You have different views on this, about the pace.
One of the features of capital markets for the last four years has been – the markets have always called the central banks’ bluff, right?
Markets have always declared you’re not going to be raising interest rates as hard as you think.
And frankly, the central banks have been wrong and the markets have been right in that each time.
And 2018, I think, is the year when frankly, the central banks are going to be right.
And I think the central banks are going to deliver on their interest rate rises in 2018, and the markets are still betting that they’re not.
What about liquidity, Charles, as QE begins to be unwound, in some markets, anyway.
Well I think this is going to be a fascinating feature in 2018, because nobody really knows, it’s sort of unwinding in a, you know, a new experiment, if you like, from the central banks.
What it means is that we just need to be much more careful about the consequences of this.
Now already, the concern within certain parts of fixed income, certainly, for example, the valuations are already quite a stretch, because we’ve had this very strong hunt for yield dynamic within the fixed income markets.
And that hunt for yield dynamic is still very, very strong, but of course what we have now is, frankly, the marginal buyer, being the central banks, not being so active within fixed income markets, and therefore investors need to pay more attention on some of these over-valued propositions within the credit market.
My big concern is you see a liquidity lock up in fixed income that leads to a panic in equity markets, and I think that is a plausible scenario that causes the end of this bull market.
So you go from a world in which there’s reasonable liquidity across all markets to one in which fixed income creates contagion in equities, and then you see a real re-rating of risk effectively.
Charles, fixed income world, if you’ll forgive me, is usually glass half empty, in the way that you view things, but what’s keeping you awake at night?
As a fixed income investor, there are always two things that we’re always worried about. First of all there’s a real pick up in inflation, and secondly perhaps a big increase in defaults.
As far as inflation is concerned, the big quandary really is about wage inflation, despite unemployment being very low, we haven’t really seen a pick up in wage inflation.
And as far as defaults are concerned, defaults are actually extremely low at the moment.
But if there is an increase in that area, that obviously will be a concern for fixed income investors in the year ahead.
So if I could characterise all of your thoughts about the coming year, it’s that you’re sort of quite gentle about the prospects for 2018, and yet that’s not particularly what investors, what I suppose many of our clients are thinking, they’re rather more nervous about the coming year.
Dominic, why is that?
I think it’s been one of the characteristics of this equity bull market, which started in 09, that it’s been totally unloved, so one of the reasons why I am more sanguine about the potential around downside risk in the equity market is you don’t have the level of exuberance that is typically associated with tops.
You would have to change your interest rate expectations quite dramatically before you would argue for a very severe move down in markets, or indeed a recession, and I really can’t make a very strong case for either of those, currently.
So it’s always nice to be, from a journalistic point of view, to have a dramatic story to convey, but it doesn’t necessarily mean there has to be one.
Okay, well thank you very much indeed, Charles, James and Dominic, and thank you very much indeed for watching.