Fidelity's Rossi: Five reasons to start buying equities

6 August 2012 | By Gary Jackson

Fidelity’s Dominic Rossi has eased his bearish stance on equities after identifying five reasons to be “cautiously optimistic” in the world’s stockmarkets.

Rossi, the asset manager’s global chief investment officer for equities, has been bearish for the past 18 months as concerns such as the eurozone debt crisis caused investors to flee to safe havens like US and German bonds, leaving stockmarkets subdued.

“Previously, I said the key risks to equity markets were bank deleveraging, policy inaction and political risk related to the eurozone crisis, and commodity prices,” he says.

“Encouragingly, these risks have been recognised and either mitigated by a growing acceptance among policymakers to undertake the right actions, or priced into equity valuations or, in the case of commodity prices, risks have subsided due to a mix of demand and supply factors.”

Rossi highlights five factors as supporting the argument for increasing confidence in equities.

Interest rates have been declining for some time across the globe, which tends to make the stockmarket a more attractive place to invest from a risk-return perspective. Furthermore, expansionist monetary policy from major central banks have caused longer-term bond yields to fall dramatically.

The commentator argues that these two factors mean equities now offer significantly higher dividend yields than their respective bond markets, while recent drops in equities have taken place with reduced levels of volatility.

In addition, Rossi says the leadership seen in rallying equity markets has been “encouraging” as stockmarkets are not being led by higher-beta names in commodities or banking sectors.

Rossi says this last point is especially noteworthy: “Rotations in market leadership are historically associated with market turning points.

“Recently, market leadership has shifted to companies in the consumer, healthcare and technology sectors. Unlike commodities, these stocks offer a store of value with a dividend stream, and this preference makes us more confident that investors are buying equities for the right reasons.”

Rossi argues that equities have moved into a more constructive phase as markets are moving upwards as investors buy stocks for “right reasons” such as income and security, despite the risks that will persist over the coming six to nine months.

“With the prospect of significant downside in equities receding, I think markets now have an opportunity to build on what appears to be a consolidating platform,” he concludes.

“A lot of the reasons for not owning equities have become well-established and well-embedded within current valuations. I think the time has come to stop thinking about selling equities and to start thinking about buying them.”

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