Three themes Fidelity is watching in Q2

Following a turbulent start to 2022, Fidelity has outlined the three themes it expects to influence markets over the coming few months.

Big as-yet-unanswered questions such as how to resolve the conflict in Ukraine and how central banks could get a grip on soaring inflation were some of the themes that Fidelity thought investors should keep an eye on in 2022’s second quarter.

The year’s first quarter saw markets rocked by events such as Russia’s brutal invasion of its neighbour, inflation climbing to multi-decade highs and central banks starting to raise interest rates.

With this in mind, strategists at asset management giant Fidelity highlighted the three themes they expected to dominate sentiment in Q2. 

The duration of the Russia/Ukraine war

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The timeline of the war in Ukraine would influence economic outcomes around the world and would continue to shape the near-term outlook for global economies – but especially those in Europe, Fidelity’s strategists pointed out.

The ultimate outcome over the coming three months hinged on the time taken to reach a resolution to the war and any easing of trade disruptions caused by the conflict and the sanctions levied on Russa.

While the conflict continued, there was little hope of any moderation in the energy price and supply-chain disruptions that were being felt around the globe. These would continue to hold back economic growth and add to already high inflation.

“This paints an extremely complex picture, both for policymakers and the markets,” Fidelity said. “We believe the market has yet to reflect the full range of possible outcomes, which span extreme left and right tail risks. We advocate nimbleness and the use of hedges, where appropriate.” 

How central banks manage inflation

The second theme that the asset management house was watching in the second quarter (and the rest of 2022) was how central banks attempted to dampen inflation against the new challenging geopolitical and economic backdrop.

The three major developed markets central banks – the Federal Reserve, the Bank of England and the European Central Bank – had “turned decisively to a hawkish narrative”, Fidelity analysts noted. The Fed appeared to have copied the stance of its past inflation-taming chair Paul Volcker when it kickstarted a series of interest rate hikes at its monetary policy meeting in March.

“While we expect the Fed to front load hikes and the ECB to continue its hawkish tone, we believe the war-induced growth shock and the need to maintain negative real rates will lead to dovish pivots by mid-year,” Fidelity added.

“All this could make for a challenging quarter for developed market risk assets. We advocate positioning for the high likelihood of stagflation in developed markets, with a base case of recession in Europe. Careful positioning in risk assets is critical at this stage.”

Looking to China

Against this backdrop, Fidelity argued that China could be “a useful diversifier”. China was distanced from the Russia/Ukraine conflict both geographically and economically, had the capacity to embark on further monetary and fiscal easing, and offered investors more attractive starting valuations.

But despite these positives, the firm cautioned that “uncertainty remains high” and while conditions appear to support China’s outperformance, “this is not 2008” when the country unleashed a massive stimulus program that buoyed the rest of the globe.

These days, on the other hand, China’s policy goals centred on deleveraging, property sector reform and sustainable growth.

“In this regard, its outlook now looks less straightforward than it did in 2008 during the Global Financial Crisis,” Fidelity’s strategists finished. “We don’t expect China to repeat its previous role as the ‘fiscal put’ that dislodges the global economy from its stagflationary trajectory.”