Improving outlook for global cyclical stocks
2017 could see higher rates and a weaker dollar, and that's good news for industrials and commodities.
Date: December 20, 2016
It’s been a wild year for investors, with an early January correction, Brexit and the surprise U.S. election results, but for those worried about what 2017 may bring, Fidelity Investments’ Patrice Quirion has a message: Relax.
“Don’t ignore these changes by any means, but it’s important to take a step back,” says Mr. Quirion, who runs Fidelity’s Global Concentrated Equity Fund, which has $78.8 million of assets under management.
These big global events, while still important to consider when making investment decisions, need to be put in perspective, says Mr. Quirion. Some countries may feel the impact of such events, such as the U.K. with Brexit, but nothing’s happened that will derail the current global economic cycle.
Last stage of the cycle
And we’re about to enter the late stages of that cycle, says Mr. Quirion. The first part started in 2009, when the markets began to recover after the recession. The mid-stage was the pickup in GDP growth. The last stage involves companies and economies starting to require more capital investment.
“This tends to be good for your industrial sector and commodities,” he says. “And we’re seeing commodities rebound, emerging markets rebound and more cyclical equities take over from tech and health care.”
This last part of the cycle, which was under way before the Brexit vote and the U.S. election, is happening in two stages, he says. The first stage, which is taking place now, has the U.S. dollar remaining stubbornly high, interest rates remaining at record lows and commodities, driven down by a higher dollar, also at depressed levels.
In the latter half of the last stage, the dollar will weaken, rates will rise and commodities will move higher. There are signs that this second leg is already here, he says.
Rising rates and inflation
The Federal Reserve is expected to raise short-term rates at its next meeting on December 13, but it’s rising inflation that could boost long-term bond yields. A tightening U.S. labour market, especially in lower-wage parts of the labour market, may drive inflation, which would then push up rates, says Mr. Quirion.
Donald Trump’s pro-growth policies could also trigger inflation.
“We can debate the merits of [President-elect Trump’s] policies, but the overall conclusion is that those policies are inflationary,” Mr. Quirion says.
If rates are on the rise, then investors may want to consider adding financial stocks, which benefit from increasing rates, he says.
Commodities should improve, too, as a weaker U.S. dollar, pushed down by rising rates, benefits the sector. But don’t jump into commodities just yet. Wait until there’s a clearer message as to whether rates will indeed rise before buying into this sector.
“Start when interest rate expectations become a bit more realistic,” he says.
For a geographic perspective, more cyclical and commodity-exposed parts of the world may do a bit better next year, which means people should take a closer look at emerging markets, Australia and even Canada.
Ultimately, though, don’t worry about short-term trends. Keep an eye on long-term signs instead.
“The arrows are pointing toward growth,” says Mr. Quirion. “Maybe it’s not fantastic growth, maybe it’s not what we got used to in prior cycles, but growth is still there.”
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