Fidelity Live: CIO Briefing

With the rally in recent days we have seen some of the financial signals moving into more confident positions. So volatility has shown signs of easing, a general decline in credit spreads, funding costs improving and stabilising and this all allows acertain amount of pick up in risk taking. There’s also a degree of optimism around the curves of the covid-19 pandemic in many countries e.g. Austria halting some of their lock-down measures. So there is hope that some of the worst economic consequences might ease off in the coming weeks and markets are beginning to discount that slightly more favourable picture and hence the rally we have seen.

The next phase will be very challenging as markets look to properly assess the economic damage so far, how long the lock-down measures will persist and the impact. But also the effects of having moved through various shocks already -supply chain shock, oil price supply shock, the demand shocks by covid-19 and the liquidity problems. And one element to consider is how solvency will be addressed by government interventions and companies. So the situation is encouraging for now but there are still more hurdles to overcome as we wait to see the economic data and consequential company earnings feeding through.

The Fidelity investment teams are focusing on selecting the right companies, those that have moved quickly, shored up balance sheets and maintained strong underlying management. We are also looking to sovereign behaviour and how this will pan out for individual countries, as per the way Asia is seeing signs of early recovery and activity picking up.

We are also looking at credit markets and those companies with the ability to issue debt and well-positioned to manage the next phase, and we see some yield spreads look very attractive, especially in investment grade and high yield in Asia and parts of US and Europe.

It is still a mixed picture across Asia. China is starting to emerge from its lock-down with businesses reopening and people returning to offices. However for other parts of Asia e.g. Singapore and Hong Kong cases have rise again in the last few days as people return home and so some measures are being reinforced.

The one notable aspect is the lesser extent of the impact as a health emergency which could be attributed to the region’s prior experience with epidemics such as SARS that has changed public and policy response. Overall we think it is a reasonable expectation that economically Asia will lead the world out of this pandemic.