Strategies for navigating through today’s market conditions

Strategies for navigating through today’s market conditions
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Fidelity managers discuss where they have been finding opportunities.

After an 8-year bull market, US stock valuations are above long-term averages. Meanwhile, Fidelity’s director of asset allocation research, Lisa Emsbo-Mattingly, says she has been seeing some signs that the late cycle may be on the horizon, in the US and globally.

Are there still opportunities in stocks? Viewpoints, Fidelity’s digital publication of market insights, caught up with a few Fidelity stock fund managers to discuss the sectors and strategies where they have found opportunities in this market.

Of course, any investment decision should be based on your individual investment time horizon, financial circumstances, risk tolerance, and goals. If your investment plan includes individual stocks or stock mutual funds, here are some ideas to consider.

The potential benefits of stable earnings growth and healthy cash flow

Sammy Simnegar, Fidelity International Capital Appreciation Fund

Over the last year, the outlook for global growth has improved markedly. We are experiencing a synchronized global upswing for the first time in a decade and the threat of global deflation seems less likely now. I don’t expect a return to the global boom we had in the last cycle, but I do think we could see an attractive mix of global growth, low interest rates, and relatively stable commodity prices and currency exchange rates.

I see plenty of opportunities at the company level among firms I believe can prosper in this environment, even against a backdrop of subpar economic growth.

Given what I see as the potential for tepid global growth, I remain focused on companies known for their stable earnings growth and healthy cash flow. Consequently, consumer staples—where many companies fit this description—was one of the fund’s largest sector overweightings at the end of July 2017. The fund also had sizable overweightings in the industrials sector.

In terms of changes, I have also been increasing the fund’s exposure to technology firms, including software companies with high recurring revenues, and e-commerce firms.

The risk of lower-quality companies

 Matthew Friedman, Fidelity Value Strategies Fund

While I continue to find cash-generative businesses trading at less than their intrinsic value, I’m cognizant of the market’s strong performance in 2016 and 2017, and that we are roughly 8 years into a bull market. Some of the best-performing stocks since May 2016 are ones that historically have struggled to earn their cost of capital; their strong performance came mostly from multiple expansion—investors paying more for the same earnings—rather than earnings growth. In my view, this is not sustainable over the longer term.

I think equity valuations overall are starting to get expensive, but I’ve found pockets of opportunity among real estate, utilities, and consumer staples, where I think the valuations of stocks have been attractive. These have historically been more defensive sectors, and I expect their earnings to be less cyclical than what I might expect among companies in growth sectors.

In addition, I’ve been making a concerted effort to avoid lower-quality companies—based on industry structure, long-term returns, and balance sheet—that may appear cheap just because the market is expensive. If the market goes through a correction, these firms’ earnings should decrease significantly and performance may suffer.

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to discover where other Fidelity managers are finding opportunities.

This article was written by Fidelity Investments and not by the Quartz Editorial Staff. Fidelity is not affiliated with Quartz.

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