How does David Buckle know that the recession in the US is coming?
“The bond market is saying recession,” explains Fidelity’s head of investment solutions, referring to the pattern of historical bond data. “It has called the last three recessions and it is calling another one now. The bond market is never wrong.”
But before you rush to sell your risky assets such as shares, you still have a year or two of good equity market performance before the recession hits.
“It is too soon to get out of equities and too expensive to get out,” says Buckle.
He says that investors are likely to do well in equity markets in the lead up to the recession. This has been the historical data pattern in the past when bond markets flatten.
Thanks to recent sell-off in the US sharemarket and lower US share prices, the long run forward price earnings in the US are below fair value, says Buckle. This is counter to other investment managers such as Russell Investments who believe that US valuations are looking stretched and there is heightened uncertainty.
Buckle says European markets are even further below fair value than the US and are actually cheap.
“Equities aren’t too expensive,” he points out. “Earnings have been rising and equities are actually cheap.”
What does the US recession mean for the Australian sharemarket?
Certainly there are plenty of headwinds for Australian equities such as the rising US dollar strength and late US cycle fears. Australian credit squeeze fears, post royal commission, is impacting on housing-related companies and bank shares.
But Australia is a low beta economy, meaning it is a “nice safe place to hide” in a recession, explains Kate Howitt, portfolio manager of Fidelity Australian Opportunities Fund.
“Australia, on a relative basis, has done well,” says Howitt.
But there will be plenty of volatility among Australian equities. Some of the traditional sectors such as REITs and utilities will be in demand but it is hard to generalise about certain sectors.
“Some scary companies are not so scary,” says Howitt.
For example Howitt says that while banks are under pressure, she likes the Commonwealth Bank because it has a powerful franchise that is still delivering.
While insurance groups have been under pressure, Howitt likes insurance group QBE because the group’s systematic business turnaround process is now gaining traction and she doubts there will be any ugly surprises.
The strong US dollar has triggered a sell-off in emerging markets this year, but Buckle says it would be unusual for the US dollar to continue to strengthen given rising US interest rates.
“I am relaxed about equity markets,” he said. “Yes, there will be a material slowdown in global GDP but there will be reasonable equity performance.”
Buckle sees opportunities in Chinese stocks which look “bang on fair value” and have been reasonably stable. He says broadly speaking investors don’t have enough exposure to Asia.
Of the debt markets, Buckle says he likes emerging market debt over other debt. He is wary of high yield corporate bonds because corporate debt levels are high because interest rates are low.
He predicts there will be more defaults as slower growth and rising interest rates kick in.
“We will be moving from lower levels of defaults to average levels of defaults. Increasing defaults isn’t going to be so good for high yield debt.”