05 Dec 2023
Recession risks are rising and valuations in pockets of the equity market are starting to look stretched. In this environment, Fidelity Global Dividend Fund portfolio manager Dan Roberts outlines the benefits of valuation discipline and focusing on quality dividend-payers that have the resilience to weather a range of economic scenarios.
What is your investment outlook for 2024 given the prevailing macro environment?
High quality dividend stocks should continue to play a key role in investor portfolios in 2024, offering a number of attractive attributes that can help weather the uncertain market and macroeconomic backdrop.
Valuations appear vulnerable in some parts of the equity market, particularly in US growth orientated stocks which dominated performance in 2023. The disconnect between the rerating of the market vis-à-vis higher interest rates gives particular cause for caution. The valuation bias of our approach should offer some relative protection if valuations come under pressure and the typical relationship between higher rates and lower valuations reasserts itself. Dividend strategies can also offer diversification away from growth stocks whose valuations are most susceptible to higher rates.
From an earnings perspective, the risk of recession remains, which would put significant strain on company profits. Our focus on businesses with resilient earnings streams would also provide relative insulation in such a scenario.
Geopolitical events are a constant tail risk for all investors which are incredibly challenging to predict. As well as building portfolios that are well diversified from a regional and sector perspective, we remain focussed on what we can control, namely identifying good quality businesses that should prove resilient under a range of economic scenarios.
What do you think could surprise markets in 2024?
The share prices of the market’s leaders this year have been fuelled by excitement around the potential future benefits of AI to their business models. The market reaction implies the winners have already been identified but a great deal of uncertainty remains as to the true impact this technology will have. A reassessment of the size of the opportunity or the identity of the winners has the potential to surprise in 2024 by bringing into question the sustained dominance of the so-called ‘magnificent seven.’
More broadly, at a regional level, investors have become accustomed to US outperformance versus the rest of the world. A look back at history shows that regimes do change. With the valuation gap having widened significantly, a shift in regional performance trends could surprise investors and would prove beneficial to our strategies which hold a greater proportion of assets in European domiciled stocks relative to the global index.
What has worked well in your portfolio over 2023?
Although lack of exposure to mega-cap US tech has held back relative performance, we have benefitted from strong stock selection, particularly within the industrials sector. Information services provider RELX has supported portfolio performance given continued solid operating results, as well as a boost more recently from the potential benefit that AI could provide to their business model.
Elsewhere within the sector, our holdings in high quality capital goods businesses have contributed positively. These make up an important part of our cyclical holdings and here we target business with strong balance sheets, sustainable competitive advantages and long-term structural drivers of growth. This includes automation or energy efficiency that should allow them to grow ahead of GDP.
Where are the key areas of opportunity in 2024?
We’re able to find a number of attractively valued opportunities across a variety of sectors and regions, in businesses with the predictability and visibility of cash flows that we look for.
Financials continue to offer an attractive hunting ground with exchanges well aligned with the characteristics we favour. Our holdings here offer strong competitive moats, high margins, strong balance sheets and counter-cyclical revenue streams that provide important portfolio diversification benefits. Higher levels of volatility and rates boost their revenues, providing defensiveness when other parts of the equity market may be under pressure.
In terms of risks, we remain wary of hype within the market, whether that be AI within technology or obesity drugs in pharma and where this leads to valuations that bake in overly optimistic assumptions. Our focus instead remains on parts of the market less in the spotlight of investor excitement but where we can build confidence in the progression of underlying earnings at a reasonable valuation. We believe this sets us up for the best chance of success.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Fidelity Global Dividend Fund can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The fund takes its annual management charge and expenses from capital and not from the income generated by the fund. This means that any capital growth in the fund will be reduced by the charge. Capital may reduce over time if the fund’s growth does not compensate for it. Investments in emerging markets can be more volatile than other more developed markets. Changes in currency exchange rates may affect the value of investments in overseas markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only.