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Fidelity: Prepare for a 2020 Recession

Bond yields are indicating the US will slip into recession in 18 months - but before the slowdown equity investors will profit from a final market surge

Emma Wall 27/11/18

fidelity says prepare for a recession bull and bear market US stocks equities bond yield curve

"The global economy is slowing down, and the bond market is forecasting a US recession - and the yield curve has never called it wrong," warns Fidelity's David Buckle. 

But it's not all bad news; before the US economy collapses, shareholders are likely to benefit from a last hurrah as equity prices surge before the slump. 

"Equity markets do well in the lead up to a recession. Historical data suggests now is not the time to abandon stocks - it's too soon to exist equities," Buckle said in Hong Kong last week. 

Thanks to the recent sell-off in equity markets across the globe, it is actually a good time to buy equities urges Buckle - even those listed in the US, counter to many other multi-asset investors' views. 

Buckle says the US market is trading just below fair value, and European stocks are well below their fair value. "It is not the time to exit," he repeats emphatically. 

Opportunities in Emerging Markets

But where Buckle particularly sees opportunity is Chinese stocks, and says that the price earnings multiple and the future earnings potential look attractive. Many investors have been scared off emerging markets, and in particular Asian equities, by the recent downturn. However Buckle maintains there has been a loss of perspective.

"This year's movements are normal. Historically this is not a large correction in markets; the drawdown has been a normal length and size. If we trust the data we should now be due an uptick in markets."

The strong US dollar has placed downward pressure on emerging markets this year, but Buckle says it would be unusual for the US dollar to continue to strenghten given the current interest rate cycle. 

"I am relaxed about equity markets," he said. "Yes, there will be a material slowdown in global GDP but there will be reasonable equity performance."

Where in Emerging Markets?

Buckle's colleague Dhananjay Phadnis added that while there were plenty of headlines to be nervous about, it was exactly for that reason savvy investors should be jumping into markets.

"Risk appetite is low at the moment - similar to levels seen in the global financial crisis," he said, referring to the Credit Suisse Global Risk Appetite Index, which reveals investors are officially in 'panic' mode.

global risk appetite is at panic level Credit Suisse recession stock market

"Panic zones are a good time to buy if history is any guide," says Phadnis. "It pays to take a contrarian view."

The fund manager says it is important to exercise discretion however – emerging markets as a whole are not offering the best opportunities, rather select stock markets.

“Russia, Brazil, South Africa and Argentina are no good,” he says. “Whereas in Asia excluding Japan the underlying drivers of the market are compelling.”

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Emma Wall

Emma Wall  

Emma Wall is Editor for Morningstar.co.uk