US double-dip unlikely, say Fidelity Portfolio Managers

Despite market fears that the US - and, indeed, most other major western economies - will experience a double-dip, US portfolio managers at Fidelity Investment Managers believe the probability of another recession is low.

Adrian Brass, Manager of Fidelity American Special Situations Fund, comments: "Economic growth in developed markets will slow from here but we must consider the context of that slowdown and why it won't necessarily lead back to recession.  We have seen a very sharp snap back in the economy from its low point in the autumn of 2008.  That pace of recovery was never going to be sustainable. Those who think the economy could continue to expand at the same pace are still blinkered by the artificially high growth experienced prior to the financial crisis. That growth was only possible because of leverage.  Now we are still in the middle of a period of deleveraging that will see lower spending and higher taxation."

So what does this mean for investors?  Brass continues: "As long as the perception of a double-dip remains, that will be an overriding force in the market.  Every data point will be scrutinised and the response exaggerated as it is seen to prove or disprove the bull or bear thesis.  However, as investors become more comfortable with the prospect of lower economic growth, they will start to seek out good-quality secular growth companies.  That is what I am looking for; my portfolio is now much more balanced and more driven by stock-specific opportunities than any top-down calls."

Looking at specific sectors, Brass believes technology spend will shrink in the most cyclical parts of the market and as a result his overweight in this area is mostly a result of positions in good quality companies with high barriers to entry - the sort of secular growth companies the market is likely to start to pay a premium for as it seeks growth in a low growth environment.  He cites companies such as BMC, Nuance Communications and Oracle in this camp.

Within the financial sector, Brass's preference is for larger banks as he believes their fundamentals are improving as the credit cycle progresses and valuations look very attractive.  Wells Fargo and Citigroup for example are both top ten holdings* although overall the fund is underweight financials.

Looking at the oil sector, the fall out from BP's disaster in the Gulf of Mexico proved a headwind for a number of companies, but the clean-up is progressing well so he believes the current moratorium on drilling stands a good chance of being overturned and should be able to start again next year. As a result of this, he has recently bought a small position in Cobalt International Energy, an E&P company operating in the Gulf of Mexico. It has seen its drilling operations cancelled but should be revalued once the moratorium is lifted.

Aris Vatis, Manager of Fidelity's American Fund, has been navigating the minefield of data coming out of the US economy and is encouraging investors to look behind the headlines.  Looking at key economic indicators, he comments:

Employment - Trends at first sight seem to be negative but the unemployment picture varies across sectors with unemployment among unskilled workers remaining high.  There has been an increase in hiring in some professional services with more people being employed in financial services and the temporary contract space so we could be seeing some stabilisation.

Housing - The weakness in the housing market is being taken badly but it is just an abnormality caused by the end of a tax credit for new buyers and a sustained downturn is unlikely to last.  Construction is likely to pick up again when the current excess inventory runs down.

Consumer - The outlook here is largely tied to the previous two points and should see some moderate growth.  The US consumer still needs to do more to improve their personal balance sheet but there are signs of stabilisation.  Whilst consumer spending is not expected to be as strong as it was during the boom years of the last decade there are certainly signs that it could pick up from current levels.

He says: "We must remember, the US market is about much more than just the US economy.  It truly is a global market.  Hundreds of US companies are also global leaders, offering exposure to both domestic and international trends."