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Fidelity ventures into 'eye of the storm' amid turmoil
Paras Anand says that, unlike previous slumps, this market sell-off presents opportunity to seize on beaten-up areas of the market.
by Daniel Grote on Feb 12, 2016 at 13:07
Fund group Fidelity is venturing into stocks caught 'in the eye of the storm' of the heavy market sell-off, believing the long bull run for 'defensive' stocks at the expense of 'cyclical' companies more exposed to the economic cycle could be drawing to a close.
Paras Anand, head of European equities at Fidelity, said the fund group was eyeing those sectors of the market most heavily hit by the market sell-off for the first time 'in a long time'.
While the group has broadly responded to previous market slumps by adding to defensive names – those stocks better able to weather economic pressures – Anand said that extremely low valuations in 'cyclical' sectors had compelled the group to examine those areas.
'For the first time, we are starting to consider, and to invest in, some of the parts of the market in the eye of the storm,' he said. 'Some of the most interesting things we are seeing are companies in the sectors which are hardest hit.'
Anand did not discuss specific stocks, but said the fund group was eyeing the banking sector following its sustained sell-off since the turn of the year.
'The difference between the price on the screen and what we see as being the true fundamental strength of the business has got to such an extreme level,' he said. 'We do not have a structurally weak banking sector at the moment.'
Another focus was on some of the hardest-hit areas of the consumer-facing sector. 'We think the outlook for the consumer remains positive and is actually strengthening,' he said.
The industrial sector, another area of heavy weakness during the market sell-off, is another area the group is looking at. 'Parts of the construction and the industrial part of the sector have been very heavily hit. But it is now discounting no recovery for the foreseeable future,' he said.
Anand added that domestic infrastructure was a particular area of focus, given the prospects of a brighter future due to increased government spending.
Defensive rally draws to end
He argued that markets could be entering the closing phases of a drawn-out rally of defensive stocks over cyclicals. 'This represents a culmination of what has been an extended flight to safety,' he said.
'Even before this recent sell-off, I had often described to the market environment we were in to clients as a market that was driven by fear rather than by greed,' he said.
'People had a relative enthusiasm for equity markets but the type of companies they were buying were really the more secure companies, the either very visible growth companies or the companies with very dependable dividend yields and there was an aversion to anything which had any degree of short-term volatility and was reliant on the macroeconomic cycle,' he added.
'It feels to us a little bit more like the end of a trend than the beginning of a trend.'
Anand's call comes amid a growing debate over whether 2016 could see a shift in investment style to 'value' oriented strategies, which focus on buying out-of-favour stocks when they are cheap.
His relative bullishness amid the sell-off is founded on confidence in the prospects for the UK economy. Even the referendum on the UK's European Union membership, viewed as a big risk for investors stung by the volatility in the run-up to the Scottish independence referendum, could provide a boost, he said.
He said he believed the UK would vote to stay in, arguing an EU exit did not have the emotional pull of Scottish independence, and was unlikely to spark a late surge in support for the 'no' campaign similar to that enjoyed by Scotland's independence supporters.
A vote in support of remaining in the EU could, he said, represent 'a significant galvanising event for the Conservative party', which he argued was effectively still governing as a collation due to its Europe divisions. 'It would allow the party to put more pro-growth policies in place and could see economic growth accelerate,' he said.
This bullishness feeds into Anand's view on the prospect of interest rates. Unlike most parts of the market, he thinks the Bank of England may begin to raise rates at a quicker rate than they have previously suggested, due to the broadening out of the UK's economic recovery.
'Within even a six- to nine-month period, I can see a scenario where the Bank of England totally revises its outlook for the timeframe over which it raises interest rates relative to its most recent statement and where the consensus positioning is now, which is no rate rises for the next 18 months,' he said.
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