Head of Asset Management, Asia Pacific
Investors should pay close attention to what the result may portend for the dollar’s strength, the global pivot to prioritising fiscal policy and contrarian signals on the inflationary outlook.
First, as the immediate rally in the pound suggests, this could be another signal that the long period of US dollar outperformance in the context of currency markets is coming to an end. Uncertainly over Brexit has led to a long period of sterling weakness in particular - but the US dollar has also been supported by America’s tighter stance towards monetary policy and stronger underlying economy relative to rest of the world. Weaker economic data over recent months and an uncertain political outlook has led to the Fed coming under pressure to keep monetary policy loose. This serves to support the economy but also the stock market, which appears to be seen by US President Donald Trump as a referendum on his performance as leader. The dollar also looks stretched to us from a valuation perspective. If we are indeed at a tipping point in the dollar’s long outperformance this will have meaningful consequences for global markets, and in particular emerging markets. While global markets have performed well in recent years led by strong US equity markets, emerging markets have been more volatile.
Second, it is likely that, Brexit aside, this Conservative victory in the UK will represent things coming full circle from David Cameron’s defeat of the Labour Party in 2010, when he largely ran on a campaign of austerity. By contrast, all parties in the current campaign cycle have talked about the need for more spending on areas such as healthcare. Johnson, in particular, has a track record of supporting investment in larger scale infrastructure projects. This aligns with a global trend we expect to continue in the coming months, one of government’s finding recourse in fiscal policy rather than monetary policy to support economic growth. Indeed, over the last week, we have seen the announcement of a meaningful new program of spending in Japan. While these campaigns are clearly focused on supporting domestic growth, it is important for investors to consider the cumulative impact of this global shift in economic strategy.
Third, both of the above points - and arguably the process of Brexit itself - could spell a change in the outlook for inflation. We have seen a number of inflation measures move higher over the past year, but when we look at bond markets across the world, it would be fair to say that a pick-up in inflation is being accorded a very low probability at current prices. Give the number of ‘false alarms’ over inflationary upticks in recent years, it is likely that central banks will position themselves behind the curve, which could, in sharp contrast to consensus, lead to inflation overshooting on the upside over the medium term.
At first glance, the outcome of a snap election in the UK should have little bearing for global markets. But considered in the context of what could prove to be more meaningful turning points in economic policy and market leadership, investors would do well to pay closer attention.
About Fidelity International
Fidelity International offers world class investment solutions and retirement expertise. As a privately owned, independent company, investment is our only business. We are driven by the needs of our clients, not by shareholders. Our vision is to deliver innovative client solutions for a better future. We invest £252.5bn globally on behalf of clients in 26 countries across Asia-Pacific, Europe, the Middle East, and South America. Our clients range from 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 £88.3bn in assets under administration. Data as at 30 September 2019.Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances, other than when specifically stipulated by an appropriately authorised firm, in a formal communication with the client. Fidelity International refers to the group of companies which form the global investment management organisation that provides information on products and services in designated jurisdictions outside of North America. This communication is not directed at, and must not be acted upon by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required.Unless otherwise stated all products and services are provided by Fidelity International, and all views expressed are those of Fidelity International. Fidelity, Fidelity International, the Fidelity International logo and F symbol are registered trademarks of FIL Limited. The Key Investor Information Document (KIID) is available in English and can be obtained from our website at www.fidelityinternational.com. The Prospectus may also be obtained from Fidelity.Fidelity Funds “FF” is an open-ended investment company (UCITS) established in Luxembourg with different classes of shares. "
This material is for Investment Professionals only, and should not be relied upon by private investorsThe value of investments and the income from them can go down as well as up so you/the client may get back less than you/they invest.This fund invests in overseas markets and so the value of investments can be affected by changes in currency exchange rates.The Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time.Investors should note that the views expressed may no longer be current and may have already been acted upon. CC19/94