Fidelity Expects A Hard Landing, But These Opportunities Are Braced For It

Fidelity Expects A Hard Landing, But These Opportunities Are Braced For It
Jonathan Hobbs, CFA

over 1 year ago5 mins

  • Fidelity thinks a recession is likely in 2023, and its severity would hinge on whether the Fed and other central banks raise interest rates too quickly.

  • Fidelity’s cautious overall, and sees stocks and commodities as higher risk while government bonds and US dollars are lower risk.

  • Finally, Fidelity sees longer-term opportunities in Asia-Pacific stocks (especially Indian and Indonesian stocks), high-quality corporate and government bonds, and eco-friendly real estate.

Fidelity thinks a recession is likely in 2023, and its severity would hinge on whether the Fed and other central banks raise interest rates too quickly.

Fidelity’s cautious overall, and sees stocks and commodities as higher risk while government bonds and US dollars are lower risk.

Finally, Fidelity sees longer-term opportunities in Asia-Pacific stocks (especially Indian and Indonesian stocks), high-quality corporate and government bonds, and eco-friendly real estate.

Fidelity just released a 56-page outlook report for 2023, but you don’t need to read all that: I’ve summed up the key takeaways and – most importantly – where the opportunities lie.

What does Fidelity think the economy will do next year?

In short, the asset manager says central bank policy will probably cause some kind of a recession – or a “hard landing” – in 2023. Here’s why: the US Federal Reserve (the Fed) underestimated so-called “transitory” inflation last year, so it’s been playing catch-up to try and contain the problem this year. The Fed’s been aggressively hoisting interest rates to tame what’s actually been “sticky” inflation, but if it keeps raising them too high and too fast, that could worsen the economic slowdown.

Everything hinges on what the Fed does next, but there’s a risk it’s relying too heavily on backward-looking data' to guide its decisions. See, the effects of rising interest rates take time to filter through the economy, meaning what the Fed does today will only move the needle sometime next year. So if the Fed keeps hiking until inflation hits its 2% yearly target, a “standard” recession could turn into something far more sinister.

And while Fidelity thinks a recession is likely in the US, it says one’s “near certain” in Europe and the UK. That’s mainly because they’re battling bigger energy crises: those higher energy prices could keep pushing inflation up, and any last-resort energy blackouts or rationing could drag on business growth. But since early indications from Europe’s Weather Centre and the UK Met Office suggest we could be in for a warmer winter, the disastrous latter situation is that bit less likely.

All things considered, Fidelity sees an 80% chance of a global recession in the next twelve months. That’s split between 25% for a “deep” recession (think 2007 to 2009) and 55% for a “shallow” recession (more early 2000s-esque).

Source: Fidelity 2023 Investment Outlook
Source: Fidelity 2023 Investment Outlook

Where does Fidelity see opportunities?

Bearish Fidelity’s playing defense in the short-term to protect – rather than grow – wealth: it’s holding less in stocks and commodities than usual as it sees them as higher risk, and it’s putting more weight behind dollars and government bonds because it believes they’re lower risk. But for more attacking long-term investors, here’s where Fidelity sees opportunities in stocks, bonds, and real estate.

1. Stocks

Fidelity thinks a hard landing would hurt companies’ profit more than most analysts expect. That’s why it’s playing it safe with stocks, especially European ones. Mind you, there could be opportunities further afield. China seems to be gearing up in the wake of relaxed Covid policies, plus it’s investing in green technologies and infrastructure – and that could all be good for Chinese stocks in the long run. You can check out the iShares MSCI China ETF (ticker: MCHI, expense ratio: 0.57%) for a big basket of Chinese stocks, or get more tactical with Russell’s tailored solutions over here.

Fidelity expects Asia-Pacific companies – especially in India and Indonesia – to have the highest potential for earnings, since they have growing populations with rising incomes that could drive their economies forward. If you're looking to play the India earnings story, you can check out the WisdomTree India Earnings Fund (EPI, 0.83%). I’ve also written about why I personally like Indian stocks right here. And since Indonesia’s a net energy exporter, it’s been one of the few countries to do well from rising energy prices: the iShares MSCI Indonesia ETF (EIDO, 0.57%) is an easy way to play that story.

Source: Fidelity 2023 Investment Outlook
Source: Fidelity 2023 Investment Outlook

2. Bonds

Bonds are basically loans: when you’re investing in a bond, you’re lending money to whichever country or company issues that bond. And now that interest rates are on the up, you can earn more from the interest on those loans. That’s partly why Fidelity’s finding bonds more attractive again – plus, they offer higher yields than the dividends you get from stocks.

Still, with so much debt in the system, Fidelity estimates there’s a higher chance of bond issuers defaulting on interest payments than what the market’s letting on – especially in higher yielding, riskier bonds. But there are some safer bets: Fidelity prefers “investment-grade” bonds from companies with strong balance sheets, and likes government bonds because they have lower risks of defaults and should do better in a hard landing scenario. You can look into the iShares Global Corp Bond UCITS ETF (CORP, 0.2%) for a global spread of higher-quality company bonds, or the iShares Global Govt Bond UCITS ETF (IGLO, 0.20%) for a portfolio of developed countries’ government bonds.

3. Real estate

Fidelity believes it could be a tough year – especially the first half – for real estate. Because bricks and mortar aren’t as liquid as stocks and bonds, property tends to drop off later down the line as landlords and buyers negotiate property sales. But it’s not expecting a 2008 repeat: there are still plenty of buyers out there, and big investors like to own property to stay diversified. And even though prices might dip lower, it's already a buyers' market in some locations right now – especially for office space in hotspots like London and Paris.

Source: Fidelity 2023 Investment Outlook
Source: Fidelity 2023 Investment Outlook

Here’s a compelling idea from Fidelity: investing in energy-efficient buildings. There’s some weight to that: higher energy costs will swell demand for buildings that need less power to run, and regulation’s moving the goalposts on property sustainability standards. That’ll not only make non-compliant buildings less appealing, but will likely increase the “green premium” for the few compliant ones. If that sounds interesting, the Invesco MSCI Green Building ETF (GBLD, 0.39%) tracks global real estate companies that are jumping on the green bandwagon.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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