A combination of economic, policy-driven, and corporate fundamental dynamics is underpinning recessionary concerns in the U.S., which, in turn, has driven a modest shift away from domestic stocks and toward international equities, according to Fidelity's Avishek Hazrachoudhury.
"We think equity markets abroad currently offer better value than the U.S., in addition to the fact that stocks in both foreign developed and emerging economies may stand to benefit should the U.S. dollar weaken," highlights Hazrachoudhury, who, alongside Geoff Stein, co-manages Fidelity Advisor Asset Manager® Funds.
While we have made significant progress on the inflation front, it remains higher than the U.S. Federal Reserve's mandate, increasing the odds of a "higher for longer" posture on the interest rate front, possibly creating a challenging environment for risk assets in the intermediate term, contends Hazrachoudhury.
Furthermore, he and Stein think bottom-up company fundamentals have softened in most major global markets but remain collectively better than investors' expectations.
Consensus estimates for earnings growth over the coming year remain robust, with corporate balance sheets in good health, Hazrachoudhury points out.
"I believe markets are increasingly depending on a rosy earnings picture unfolding to justify the substantial rally that has taken place this year," says Hazrachoudhury.
He adds that rising nominal yields have moderated the valuation gap between equities and bonds. Specifically, the equity risk premium, which measures the excess returns expected by investing in equities compared with bonds, has declined to low levels.
As a result, this has modestly increased the relative attractiveness of fixed income compared with equities, according to Hazrachoudhury.
The Funds' assets are divided among several specialized Fidelity central funds, and the managers of these portfolios seek to add value chiefly through security selection. Meanwhile, Hazrachoudhury and Stein make asset allocation decisions and have the flexibility to make moderate shifts around target mixes—including investing in "extended" asset classes—to try to capitalize on ever-changing market conditions.
Each of the co-managers believes a global slowdown is increasingly likely, so it will be more a matter of the relative severity and impact of such an event, both in the U.S. and overseas.
Considering these factors, Hazrachoudhury and Stein are maintaining a balanced asset allocation stance—with a modest overweight to defensive sectors of the equity market—while remaining mindful of opportunities to tactically vary exposures as needed, though they do not currently plan to significantly increase the degree of overall risk in the Funds.
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