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New Year Outlook: shares back in favour

Tom Stevenson

Tom Stevenson - Investment Director

Our quarterly Investment Outlook webcast yesterday attracted a record number of attendees and we received loads of excellent questions - thanks to Emma-Lou Montgomery for picking out a good selection of these as they flooded in during the online Q&A session.

My thanks to all who continue to support our flagship investment report. It seems to be striking a chord. If you missed the live event, don’t worry - you can watch it below or download the Investment Outlook report.

You might also like to listen in to the podcast which I recorded with Ed Monk straight after the webcast. We focused on the four fund recommendations which are a key part of the January edition of the Outlook each year. You can find the podcast here but, better still, why not subscribe via the Podcast app on your phone (search for Fidelity and then choose MoneyTalk Radio).

I’m not surprised that interest in the markets is high at the moment. After a stellar year in 2019, many investors are wondering whether the time has come for a correction. The events in the Middle East have only heightened those concerns.

I think the worries are overblown. Indeed, this quarter’s report is more positive on shares than it has been (even if I’ve turned more cautious on fixed income investments like bonds and property).

Why the positive view on equities? Principally because we expect a soft landing for the economy in 2020. Recession fears have been put to bed thanks to last year’s mid-cycle pause from the Federal Reserve, which cut interest rates in the US three times between July and September.

The upcoming Presidential election has also tempered Donald Trump’s enthusiasm for waging a trade war with China (and he clearly has no more interest in a real war with Iran either).

Around the regions

Not all stock markets are equal at the moment, however, and I remain a little bit cautious on the high-flying US equity market. This is the one region in the world where shares have become significantly more expensive.

We’re no worse than neutral on the US, though. End of cycle blow-offs tend to favour the winning markets and sectors so I wouldn’t be surprised if Wall Street and technology stocks in particularly stay out in front for a while yet.

Another market which did well towards the end of 2019 was Japan, and I’m also neutral on the Tokyo market for that reason. 2020 should put Japan in the spotlight, with the Olympics raising interest in the country, but longer term there are some real concerns about demographics and the country’s exposure to global trade in a de-globalising world.

In the other three regions we track in the Outlook, however, we are now positive. The UK faces ongoing challenges in striking a favourable trade deal with Europe this year, but shares are cheap and the economy is proving surprisingly resilient.

Europe’s economy is also in better shape than it looks at first glance. Monetary policy is also supportive and new ECB head Christine Lagarde is pushing for more Government spending too, which could be a positive for the region. Germany, in particular, looks good value.

Asia and emerging markets look attractive too. This will be particularly the case if the dollar weakens as it may with a more accommodative Fed. Stronger emerging market currencies are helpful, pushing down on inflation and interest rates. Meanwhile, corporate reforms and an ongoing structural consumption growth story support this investment class.

Oil and gold

There were unsurprisingly a few questions on the two key commodities, oil and gold, which have both benefited from renewed uncertainty in the Middle East.

Oil looks unwilling to rise too far and falls back as soon as there is any positive news that Iran and the US are looking to de-escalate matters. That makes sense to me. The fundamental supply and demand balance points to oil remaining in its current range between $60 and $70 a barrel.

Gold could potentially go further if uncertainty persists. A traditional safe haven at times of unrest, as well as being a hedge against both inflation and deflation, gold remains some way off its 2011 high of nearly $1,900 an ounce.

Fund recommendations

A key component of the January Outlook is the fund recommendations we always make at the start of the year.

Picking funds was harder this year because the market is starting from a much higher point than 12 months ago. For that reason, I have erred on the side of caution, sticking with two of 2019’s more defensive picks, the Fidelity Global Dividend Fund and the Fidelity Select 50 Balanced Fund.

I make no apology for this. There’s no reason to chop and change each year for the sake of it and I think a cautious approach makes sense this year.

The other two recommendations reflect my positive outlook for the UK and emerging markets. The Liontrust UK Growth Fund is a good middle of the road UK fund that should perform well regardless of whether the Growth or Value style prevails this year.

For emerging market exposure, we’ve gone for the Artemis Global Emerging Markets Fund, managed by, among others, former Fidelity analyst Raheel Altaf. This fund looks for growth at a reasonable price and seeks out shares where there is a catalyst for an upward re-rating.

Download the latest Investment Outlook report

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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