Quarterly Outlook: Between resilience and fragility
Hopes of a soft landing have all but vanished. Andrew McCaffrey, Global CIO, Fidelity International, believes a recession is coming, but perhaps not for some time. For now, we oscillate between resilience and fragility.
Originally published on June 23, 2023 by Fidelity International
Written by Andrew McCaffery, Global CIO, Asset Management, Fidelity International
Highlights
- Resilience now, fragility later
- The long game in China
- Corporate sentiment stabilizing
For the previous two quarters, my colleagues and I have been trying to navigate our way through the “polycrisis” – a confluence of pressures which we believe could force central banks into overtightening and trigger sharp recessions. That polycrisis has now left markets oscillating between resilience and fragility: abundant liquidity and robust labour markets on the one hand, and the lagged effects of policy and tightening lending standards on the other.
Resilience now, fragility later
The “best-flagged recession in history” still isn’t upon us. Excess savings accrued during the pandemic, as well as continued tightness in labour markets, mean that financial conditions are taking longer than expected to bite. But that recession will come when the lagged effects of policies eventually take hold. Resilience now is sowing the seeds for fragility down the line.
A cyclical recession, in which unemployment in the U.S. rises to 4.4%–6.5% over the next 12 months, is the most likely outcome. A soft landing now looks beyond reach.
The long game in China
After a bumper start, China’s rebound since the end of its zero-Covid policy is underwhelming investors. Earnings estimates are on a downward path, youth unemployment is at record highs, and Chinese consumers haven’t resumed their zeal for spending.
This does not mean China’s rebound has run its course. It is perhaps no surprise that consumer confidence is muted after three years of severe restrictions. And there are positives elsewhere, including accommodative monetary and fiscal policies and an improving regulatory backdrop. Further stimulus measures may arrive soon. Meanwhile, the disjunct between the market’s expectation and the reality of the recovery has left Chinese equities trading at a significant discount.
Corporate sentiment stabilizing
Earlier in the year Fidelity International analysts had observed the mood at the companies they follow worsening, prompting us to ask whether corporate sentiment was stalling, or merely resting. An uptick in June suggests the latter, especially as a full-blown financial sector meltdown seems to have been averted.
Nevertheless, we view improving corporate management sentiment as a possible sign of complacency given the policy lags. Persistently high wage cost pressures throughout developed markets suggest that central banks are far from done, even if non-labour costs are likely to turn deflationary this quarter. The majority of Fidelity International analysts still anticipate recession over the next 12 months.
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.
This article has been provided by Fidelity Investments Canada ULC (Fidelity) and is for information purposes only. It comprises, among other things, examples of sustainable investing activities across Fidelity and FIL Limited (Fidelity International) only, current as of March 31, 2023. The article may refer to ESG considerations that Fidelity and Fidelity International may take into account as part of their research or investment process, and is not necessarily reflective of the approach of any other Fidelity Investments company or sub-advisor, such as Fidelity Management & Research Company LLC, FIAM LLC, Geode Capital Management, LLC, and State Street Global Advisors Ltd., to ESG research, stewardship and sustainable investing, either specifically or generally.
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.
©2023 Fidelity Investments Canada ULC. All rights reserved.
