Fidelity Europe Quality Income UCITS ETF EUR · XETR:FEUI
Fidelity Europe Quality Income UCITS ETF EUR — Fidelity International — Q4 2023 Earnings Presentation
45 slides from Fidelity Europe Quality Income UCITS ETF EUR's earnings presentation, October 2023
Slide 1: Q4 2023 Investment Outlook
Q4 2023 Investment Outlook Resilience, refinancing, and recession risk FIL Investment Management October 2023 For investment professional use only and not for general public distribution
Slide 2: Resilience, refinancing, and recession risk
Resilience, refinancing, and recession risk Three themes for Q4 2023 ▪ The economy is proving resilient, and expectations of a soft landing are rising. But positive headline data conceal a more nuanced picture. Reported inflation has started falling but our analysts are expecting both labour and non
Slide 3: Global Macro
Global Macro Fidelity
Slide 4: US consumer supports growth while Euro Area industry is in recession
The US consumer continues to provide strong support to growth, while Euro Area industry is already in recession US and EA Current activity trackers US and EA Future activity trackers 1.5 2.0 1.0 1.0 0.5 Z-Score Z-Score 0.0 0.0 -0.5 -1.0 -1.0 -1.5 -2.0 Apr-21 Apr-22 Apr-23 Apr-21 Apr-22 Apr-23 Oct-20
Slide 5: Effects of policy tightening coming through lumpily across US financial system
The effects of policy tightening are coming through in a lumpy, disaggregated manner across the US financial system Effective interest rates paid on corporate …but smaller companies are starting to Bank loan interest rates generally bonds showing very little pass-through… feel meaningfully higher in
Slide 6: Flow of credit showing effects of tightening, particularly in Euro area
The flow of credit is also showing the effects of tightening, particularly in the Euro area Bank loans & leases monthly flows – sector components Euro area - Bank lending monthly flows 200 200 150 150 100 100 50 50 EUR Billion USD Billion 0 0 -50 -50 -100 -100 -150 -150 -200 -200 Mar-20 May-20 Jul-2
Slide 7: US household excess savings have nearly depleted
US household excess savings have nearly depleted, removing this shock absorber Aggregate personal savings versus the pre-pandemic trend Aggregate excess savings following onset of recessions 2.5 2.0 1.5 $ trillions 1.0 0.5 0.0 -0.5 -1 2 5 8 11 14 17 20 23 26 29 32 35 38 41 44 47 Months since start o
Slide 8: Moderately rebounding activity in China led by manufacturing
Moderately rebounding activity in China led by the manufacturing sector China activity indicator (CH-AI) China activity indicator - components 3.0 4 3 2.0 2 1.0 1 Z-Score Z-Score 0.0 -0.3 0 -1.0 -1 -2 -2.0 -3 -3.0 Jun-2008 Aug-2009 Dec-2011 Jun-2015 Aug-2016 Dec-2018 Jun-2022 Aug-2023 Apr-2007 Apr-2
Slide 9: China fiscal and administrative easing ~0.7% of GDP in 2023
China fiscal and administrative easing has added up to ~0.7% of GDP in 2023 Category Policy action Details ▪ Benchmark interest rate (1Y MLF) cut ▪ 25bps cut (10bps in June, 15bps in August) ▪ Reserve requirement ratio cut ▪ 25bps cut in March and September Monetary ▪ Deposit rate cut by commercial
Slide 10: Bank of Japan: expectations for yield curve control tweaks building
Bank of Japan: expectations for further tweaks to yield curve control are building, but rates are unlikely to be adjusted any time soon The path of YCC Japan OIS and 10y nominal yield spread 1.2 0.6% 1 1.0 0.9 0.5% 0.8 0.8 0.4% 0.7 0.6 0.6 0.4 0.3% 0.5 % 0.2 0.2% 0.4 0.0 0.1% 0.3 -0.2 0.2 -0.4 0.0%
Slide 11: Global Investment Research
Global Investment Research Fidelity
Slide 12: Management sentiment appears neutral…
Management sentiment appears neutral… Weighted average of responses 1.00 0.80 0.60 0.40 0.20 0.00 -0.20 -0.40 -0.60 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 Feb-23 Apr-23 Jun-23 Aug-23 Leading indicators Management sentime
Slide 13: Significant regional divergences; Japan roars ahead
… But there are significant regional divergences; Japan roars ahead while EMEA/LatAM languishes Region Sector Sentiment Sentiment Sentiment Sentiment decreasing increasing decreasing increasing Utilities Global Telecoms Materials North America Information technology Japan Industrials Healthcare Euro
Slide 14: Analysts' expectations for costs swung upwards over the last quarter
Our analysts’ expectations for costs swung upwards over the last quarter 1.20 1.00 0.80 Costs 0.60 Increasing 0.40 0.20 0.00 Costs -0.20 Decreasing -0.40 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Total
Slide 15: Sectors still face significant supply chain bottlenecks
Sectors like industrials and communication services still face significant supply chain bottlenecks - beware hidden inflation pressures Region Sector Utilities Global Materials North America Information Technology Japan Industrials Healthcare Europe Financials EMEA / Latin America Energy Consumer St
Slide 16: Analysts anticipate higher capex costs, though telecoms buck the trend
Analysts continue to anticipate higher capex costs, though telecoms companies buck the trend Region Sector Capex Capex Capex Capex decreasing increasing decreasing increasing Global Utilities Telecoms Materials North America Information technology Japan Industrials Europe Healthcare Financials EMEA/
Slide 17: Most analysts expect slowdown, but not a deep recession
Most analysts expect an economic slowdown over the next 12 months, but not a deep recession. Will inflation be enough to support the top-line? Region Sector Global Utilities Materials Information Technology North America Industrials Japan Healthcare Europe Financials Energy EMEA / Latin America Cons
Slide 18: Bounce back in growth expected from next year
We expect a bounce back in growth from next year, though remain slightly below consensus expectations Global Growth forecast Fidelity vs Consensus YoY Growth % 10.8% 10.8% 10.2% 7.2% 7.0% 7.2% 4.8% 2.6% 0.3% -0.9% -1.2% -1.5% -2.4% -1.2% -2.0% Sales growth (%) Operating profit growth (%) Net income
Slide 19: Multi Asset
Multi Asset
Slide 20: Multi Asset: Key takeaways
Multi Asset: Key takeaways Key view Thesis Investment implications ▪ Companies are refinancing at higher coupon rates. Cracks are emerging in ▪ Cautious on equity and credit the markets in leveraged loans, private debt, commercial real estate ▪ Favour IG over HY Corporate debt High rates create stre
Slide 21: High rates create stress and positioning looks extended
High rates create stress and positioning looks extended Underweight equities and credit, prefer IG to HY Impending maturity walls in HY and high refinancing rates likely Company earnings will stay under pressure. Cyclical risks to be a headwind for the asset class remain, credit stress is building f
Slide 22: DM central bank rates to plateau; some EMs already easing
DM central bank rates to plateau; some EMs already easing Prefer Gilts over JGBs, allocate to EM FX carry trade Weaker economic outlook for the UK and already-high yields Peak US rates should encourage a ‘low volatility’ regime that offer good entry point for UK Gilts. supports carry trades. EM fund
Slide 23: Even more cautious on Europe
Even more cautious on Europe Tilt away from Europe equities, especially consumer discretionary and industrials A number of profit warnings in European industrial segments Bank earnings mask underlying weakness in the broad market and broad softening of economic data support an underweight to Europea
Slide 24: Looking for value in rich markets
Looking for value in rich markets Favour Japanese equities, banks, and select EM countries Japan’s positive earnings momentum and relatively cheap Select EMs have positive growth outlooks and trade on valuations make it an attractive equity market attractive valuations 21 8 25 20 6 23 19 4 21 18 2 1
Slide 25: Key asset allocation views at a glance
Key asset allocation views at a glance Prefer defensiveness and emerging markets Equity regions Government bonds View Change Rationale View Change Rationale The market is no longer pricing for a recession in 2023 and is We enter a synthetic long breakeven trade by moving underweight US - rec
Slide 26: Equities
Equities
Slide 27: Concentration in US equities continues; correlation flips back
Concentration in US equities continues; correlation flips back S&P 500 performance dominated by AI-related stocks; stock-bond correlation back to positive Two-thirds of S&P 500 return this year from "magnificent-7" Stock-bond correlation moves back to positive in Q3 stocks US stock-bond correlation
Slide 28: Contrasting fortunes in Europe and Japan
Contrasting fortunes in Europe and Japan Europe looks gloomy while Japan looks bright Europe services sector trending down and equities may follow Upswing in sales and earnings growth in Japan 65 ¥400tn ¥30tn 2200 60 2000 ¥25tn ¥380tn 55 1800 ¥20tn 50 ¥360tn 1600 45 ¥15tn 1400 ¥340tn 40 ¥10tn 1200 3
Slide 29: China has further room to ease; India benefitting from flows
China has further room to ease; India benefitting from investor flows China has capacity for stimulus; Investors very negative on China but risk-on in India China monetary policy response benign Alibaba selling at IPO price 9 years ago, Strong inflows to Indian equities this year vs other DMs but EP
Slide 30: Equities: Investment implications
Equities: Investment implications We remain cautious on global equities Divergence between regions becoming increasingly stark ▪ Many of the trends from the last quarter continue in this ▪ Europe – facing macro headwinds with anaemic growth quarter. and stubborn inflation. Activity is slowing and th
Slide 31: Fixed Income
Fixed Income Fidelity
Slide 32: The US continues to have a debt problem
The US continues to have a debt problem A larger deficit in the US means higher supply of treasuries, which will place further pressure on yields The US deficit is predicted to continue widening Treasury supply is expected to rise by 30% next year -1250 3500 -1300 3000 -1350 2500 -1400 2000 -1450 15
Slide 33: Heavy issuance could weigh on duration but demand will win out
Heavy issuance could weigh on duration in the short term but demand will win out We expect core yields to eventually decline China and Japan reducing holdings of UST… … and Fed selling. Households stepping in China and Japan UST holdings, $bn Treasury flows, $bn 1400 -2000 -1000 0 1000 2000 Househol
Slide 34: Higher rates are putting high yield companies under pressure
Higher rates are putting high yield companies under pressure With a large maturity wall upcoming, this will only get worse Debt is going to have to be refinanced at very high rates We are already seeing the impacts of this in smaller companies 400 80 $bn 350 70 300 60 250 50 200 40 150 30 100 20 50
Slide 35: Fixed Income: Investment implications
Fixed Income: Investment implications Inflation has fallen fast yet policy is still tight Continuing to take a defensive approach ▪ Inflation has retrenched but Fed’s bias is still hawkish. ▪ We are overweight USD and EUR duration ▪ We believe monetary transmission mechanism is delayed ▪ US duration
Slide 36: Private Credit
Private Credit Fidelity
Slide 37: European senior loan and CLO yields still compelling
European senior loan and CLO yields still compelling The yields provided by European loans and structured credit remain relatively attractive. Despite the recent tightening in spreads, yields remain above historical averages due to much higher interest rates implying a very attractive income return
Slide 38: Issuers well-supported as pressures rise
Issuers well-supported as pressures rise Private equity sponsors have plenty of dry powder available to support portfolio ….this promises a supportive backdrop that should help to contain the default rate firms – more than twice the amount of capital that they had going into the Global outlook. Spik
Slide 39: Excess spreads compensate for default, harvesting a liquidity premium
Historically, excess spreads above risk-free rates more than compensate for default, allowing investors to harvest a very compelling liquidity premium with low duration Western European Loans - Widening in Discount Margin leads Losses by c. 8-12 months ▪ As of August 31 2023 the discount and compens
Slide 40: Private Credit: Investment implications
Private Credit: Investment implications An in-built resilience A strong vintage for returns and terms ▪ The lagged impact from higher rates should lead to a ▪ Current yields offered by private credit are difficult to ignore, weakening economic backdrop and increased pressure on risk delivering outsi
Slide 41: Real Estate
Real Estate Fidelity
Slide 42: Real estate values are stabilising as interest rates near peak
Real estate values are stabilising as interest rates near peak But starting to see fragmentation in the market as sentiment weighs against offices and commodity space European markets further through re-pricing in this cycle Sector level performance is diverging as sentiment weighs against “commodit
Slide 43: Relative pricing makes real estate vulnerable to higher for longer
Relative pricing of real estate makes it vulnerable to higher for longer scenario Occupier market resilience supports rental value growth, but vulnerable if bankruptcies continue to rise Rising interest rates exerting pressure on real estate pricing Prime rents continue to grow as a result of supply
Slide 44: Real Estate: Investment Implications
Real Estate: Investment Implications Re-pricing provides attractive entry point for investors Sustainability delivers opportunities & fragmentation ▪ Values are stabilising after falls of c.15-25 per cent in year ▪ Weak demand for ‘unsustainable’ buildings is creating a to Q2 2023; power has shifted
Slide 45: Important Information
Important Information This document is for Investment Professionals only and should not be relied on by private investors. This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other p
Fidelity International — Q4 2023 Earnings Presentation on 6ix