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.
Issued by Fidelity Investments Canada ULC (“FIC”). Unless otherwise stated, all views expressed are those of Fidelity International, which acts as a subadvisor in respect of certain FIC institutional investment products or mandates.
For institutional use only.
This document is for investment professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without the prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorized or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at and must not be acted on by persons inside the U.S. and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorized for distribution or where no such authorization is required. Fidelity is not authorized to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisors.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third parties which are supplied by companies that are not affiliated with any Fidelity entity (third-party content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
©2022 Fidelity Investments Canada ULC. All rights reserved.