I’m Eugene Philalithis, Lead Manager of the Multi Asset Income franchise at Fidelity.
I have 20 years of investment experience, 10 of which at Fidelity, and I manage in excess of $18 billion.
In terms of my outlook for 2018, if we start from this year it’s been surprising how calm markets have been in the face of Federal Reserve raising rates, or lots of economic uncertainty and geopolitical uncertainty.
However, if growth continues to be strong we could see central banks starting to remove some accommodation and support for the economy.
If this happens in the context of strong global growth it will be good for growth assets like equities, especially if the earnings continue to come through, but asset classes like high quality government bonds could find this environment challenging and may underperform a bit.
Strong global growth will support the credit cycle further, and high yield could continue to deliver income-like returns, although with less potential for capital appreciation.
I think the one thing that could surprise investors next year is inflation.
The market is pricing quite a benign outlook for the Federal Reserve, based on a subdued inflation outlook, however if inflation does return, and we’ve seen the labour market in the US tighten, this could lead to wage inflation which could lead to goods’ price inflation.
If that does happen, then the market isn’t prepared for that, and this could affect high quality government bonds, US Treasuries, even European government bonds.
But the other impact is on the US dollar, and more rate hikes by the Federal Reserve will lead to a stronger US dollar, which could have an impact on local currency emerging markets in particular.
This could create some volatility around that type of environment, however we still think the fundamentals for local currency emerging markets look good next year.
In terms of where we see opportunities for next year, we will continue with our strategy of balancing growth assets and defensive assets in the portfolio.
On the growth side we particularly favour financial, such as banks, both on the debt and on the equity side.
This is a sector, an asset class that can perform well in an interest rate rising environment.
On the other hand, if we do see central banks react more aggressively to higher inflation or very strong growth, then this could have an impact on growth, and so the defensive assets in our portfolio will be there to balance that risk.
And we will continue to add to our defensive assets like US Treasuries or government bonds, opportunistically at good levels in case that scenario materialises.