Fidelity International Has Doubts on U.S. Rebound, Favors China

(Bloomberg) -- U.S. and European equity markets may struggle to replicate the recent recovery seen in Chinese stocks because prolonged lockdowns could hobble the two regions’ ability to quickly restore economic growth, according to a senior money manager at Fidelity International.

“This situation is unprecedented because nobody before has shut down an economy and attempted to restart it,” Stuart Rumble, a Hong Kong-based investment director in the multi-asset team at Fidelity International, said in a phone interview. “So there’s a big question mark over whether the U.S. and Europe can ramp up the activity to the same extent that the Chinese have done.”

While a raft of monetary and fiscal measures to limit the fallout from the deadly pandemic have been announced, the duration of lockdown measures in the U.S. and Europe and the full extent of the damage to the economy remain unclear. As some Americans start receiving their stimulus checks this month, Rumble said there’s concern whether this aid is going to translate into consumer spending and boost growth.

For now, the multi-asset team at Fidelity International, a company that manages $419 billion for clients, is underweight European and U.S. equities, while seeing opportunities in Chinese stocks as the world’s second-biggest economy managed to contain the virus. The Shanghai Stock Exchange Composite Index is only down 8.8% in 2020, while the S&P 500 Index has tumbled 22% and the Stoxx Europe 600 has dropped 25%.

“Until we start to see more evidence of the virus being contained and the potential to be able to return to normality and some of the support measures filtering through to the real economy, it’s really too early to be able to say that markets can rebound to the same extent that we’ve seen in China,” he said.

Fidelity International analysts predict earnings downgrades at Chinese companies will be more limited than in the rest of the world, and they expect further government support measures as economic activity is almost certain to contract deeply in the first quarter. China’s central bank has recently cut short-term rates by the most since 2015.

“The Chinese market has outperformed global markets but it has a better valuation and we expect earnings to remain better than the rest of the world, and there’s potential for China to provide more stimulus,” said Rumble. “So while we’re cautious in our overall outlook on equities, this is the part of the world where we see opportunities.”

Fidelity International is owned by management and members of the Johnson family, which also owns Boston-based Fidelity Investments. The two companies are separate.

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