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Q4 Investment Outlook: Into the unknown

A hard landing looks increasingly likely due to tightening financial conditions, the soaring dollar, an energy crisis in Europe, and China’s weak economy.


  • Soft, hard, or crash landing: Hopes that the Fed would soon pivot away from its tightening path have been quashed. The central bank appears fully committed to getting inflation under control. Recession in Europe, meanwhile, appears more imminent.
  • China - all eyes on the Party Congress: Sentiment could improve further following October’s 20th party Congress. 
  • From monetisation to fiscalisation: Much now depends on how governments in Europe will try to support households and businesses over a winter of severely elevated gas prices.  


Originally published in October 2022

Written by Andrew McCaffery, Global CIO, Asset Management


Winter is coming. With it will arrive an energy crisis that will affect much of Europe as the ongoing war in Ukraine severely disrupts the region’s gas supplies. Interest rates in developed markets continue to rise, ushering Europe and increasingly the U.S., toward recession. The U.S. dollar continues to strengthen, draining capital from other regions, while the U.K. has nosedived into a gilt market accident on the back of unfunded tax cuts. Direct policy action to mitigate contagion from these developments is now becoming a reality. One potential bright spot is China, where the economic impact of zero-COVID policy and a struggling property sector may be mitigated by central bank and government support.

Three themes for Q4

Fidelity International’s Q4 Outlook highlights three key themes are which expected to dominate this quarter.

1. Soft, hard, or crash landing

Hopes that the Federal Reserve (the Fed) would soon pivot away from its tightening path have been quashed. In two consecutive meetings, the Fed hiked rates by 75bps and it has struck a consistently hawkish tone since Jackson Hole at the end of August. The central bank appears fully committed to getting inflation under control, even at the cost of significant demand destruction.

Nevertheless, economic data in the U.S. is proving relatively resilient. The labour market is still healthy and inflation remains high. Our future activity trackers improved in August, and the U.S. dollar continues to strengthen. Fidelity International has pushed out its expectations for a hard landing in the U.S. to mid-2023.

Recession in Europe, meanwhile, appears more imminent. The region faces a severe energy crisis that Fidelity International estimates could lead to a 4% to 5% hit to euro area GDP. High prices and threat of gas storage depletion are sapping consumer spending and hobbling industry. The ECB has hiked rates to 0.75%, but the window for further tightening is closing quickly given the deteriorating outlook.

2. China - all eyes on the Party Congress

While Europe and the U.S. wrestle with recession, Chinese policy is heading in a very different direction. China is continuing to loosen policy where most developed markets tighten, and it has room to go further still. Nevertheless, the country faces its own problems this winter. Its recovery from the economic downturn triggered by zero-COVID policy lockdowns has been mixed. Activity has improved, but recurring lockdowns and a worsening property crisis have left a dent in China’s economy. In response, China has ramped up both fiscal and monetary support. This support should improve the outlook for China as we head into Q4. Fidelity International also expects Chinese earnings to improve, as companies begin to enjoy a post-COVID recovery and lower commodity prices.

Fidelity International believes sentiment could improve further following October’s 20th party Congress. While President Xi is likely to retain all his leadership positions for an unprecedented third term, adjustments in other leadership ranks could offer clues for the forward path of economic policy and serve as a catalyst for a more progressive growth policy. Expectations heading into the Congress remain muted, meaning any positive news around leadership positions or zero-COVID policy could provide an immediate boost to sentiment.

3. From monetization to fiscalization

Europe faces a bleak winter. Much now depends on how governments, many of which face their own separate domestic challenges, will try to support households and businesses over a winter of severely elevated gas prices. The risk of fiscal largesse in an environment of high inflation and rates has been underscored by the U.K., where radical changes brought in by new Prime Minister Liz Truss, triggered a collapse in sterling and sharp rise in gilt yields necessitating BoE interventions. The ECB meanwhile is trying to normalize monetary policy, despite the near certainty of recession across Europe.

At the same time, there are reasons not to be too pessimistic. Governments are likely to up their fiscal support for households, many of which still have a pot of lockdown-induced savings to draw upon (though these are dwindling fast). Confidence across the region might be at rock bottom but retail sales are holding up for now and unemployment remains low, though deterioration in hard data looks to be in the pipeline.


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