11 October 2018, 17:09 GMT
Our proprietary Fidelity Leading Indicator (FLI) is edging up towards the ‘top-left’ quadrant, which suggests that a trough could be approaching as we near year-end. Indeed, that things are broadly no longer getting worse has translated into the first positive FLI ‘bet’ for risk assets since February. This could suggest a window for risk to perform in Q4. However, it is still in the ‘bottom-left’, implying that activity is still heading below-trend, and likely decelerating. Take your pick between qualified optimism and qualified pessimism.
Source: Fidelity International, October 2018
The FLI’s creeping march towards the top-left quadrant where growth is negative but improving is a positive sign but given it remains in the bottom-left, we must still be cautious. OECD industrial production - which the FLI is designed to lead - has contracted over the past three months. The year-on-year FLI signal, which we discuss less and less, but can still be a handy indicator for markets, just dipped negative for the first time since H1 2015. By far the most positive FLI sector, global trade, is quite possibly experiencing a temporary front-loading effect as global supply chains race to get ahead of the impact from tariffs.
It’s not necessarily a surprise that global activity could be stabilising - the shocks in the global system have not been enough to totally reverse the strong growth we saw as we entered 2018. Nonetheless, the three key headwinds - US-driven monetary conditions, China slowdown, and higher oil prices - are yet to dissipate.
A small move into risk assets
The FLI ‘cycle tracker’ remains in the ‘growth below-trend and decelerating’ area for a seventh month. This is not a good sign, and suggests poor ‘optics’ for many economic indicators for some time. That said, the cycle tracker did post another steady tick towards the top-left (growth accelerating), and this incremental improvement, with all sub-sectors having finally stopped deteriorating, is leading the FLI bet to suggest a small overweight to risk assets.
Two of the five sub-sectors comprising the FLI have escaped the bottom-left quadrant. Global trade has positively surprised by remaining in the top-right quadrant since June, however front-loading activity could be artificially boosting indicators in the near-term. Consumer/labour finally moved into the top-left, with growth marginally accelerating driven by US data, in particular by strong consumer confidence.
The other three sub-sectors remain stuck with below-trend, decelerating growth, although industrial orders have at last been improving driven by an improving Japanese inventory/sales ratio. German new foreign orders remain very weak, but even here there are tentative signs of stabilisation. The data helps confirm the ongoing stabilisation seen in business surveys where marginal improvement came from beaten-up European bellwether surveys. Commodity-related components remain the weakest. If they can join the nascent upswing in coming months, that would certainly be a bullish sign.
Headwinds still in place
Despite some incremental stabilisation in the FLI, the key headwinds to global growth are yet to reverse. Primarily, tightening global financial conditions led by US monetary policy appear set to continue. The recent increase in real treasury yields only exacerbates this and the pressure on emerging market economies is unlikely to abate any time soon. China continues to show signs of a material slowdown and tentative easing measures appear insufficient to arrest the decline. Oil prices, which continue to move higher on supply constraints, are a large headwind to activity. From here, it is crucial to monitor how effective Beijing’s recent easing measures are, and how far they escalate. Any signs of the Fed relenting - perhaps slowing its tightening as we enter next year - would be reassuring. Conversely, the impact of tariffs, European political events, and second-order effects from EM weakness provide commensurate downside risks.
While the FLI bet has turned positive it is still pointing to further downside in global activity. This is true for quarter-for-quarter readings, and even more so for year-on-year data - with the yoy FLI dipping below zero for the first time in over three years. It is still likely that we will see slowing global growth in the coming months, however, barring a major external shock, the improvement in FLI momentum strengthens the possibility of growth plateauing around the turn of 2019. In summary, despite the small positive FLI bet, the overall picture still suggests caution, but if momentum manages to continue on its current course a little longer, perhaps we could even see outright optimism in 2019.
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results.
These materials are provided for information purposes only and are intended only for the person or entity to which it is sent.
These materials do not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities or investment product.
Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. They are valid only as of the date indicated and are subject to change without notice.
This material was created by Fidelity International. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
This content may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organisation that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice personal recommendations based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG, authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German institutional clients issued by FIL Investments International – Niederlassung Frankfurt.
In Hong Kong, this content is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road, Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C. Customer Service Number: 0800-00-9911#2.
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.