This content was correct at the time of publication and is no longer being updated.
Listen to James Bateman explain his 'braver for longer' approach in July 2017's edition of Fidelity's asset allocation podcast, Rich Pickings:
Risk assets have been in a bull market since March 2009, a remarkably long period for such a run. The simple fact of time would suggest we are approaching the late cycle of this bull market.
Global economic data, specifically our proprietary leading indicator, has ebbed and flowed since the financial crisis but the global economy has continued to grow over this period. While growth momentum has improved following a minor slowdown in the past six months, there appear to be few catalysts for a major upswing in global economic conditions. This reinforces the point that we are approaching a late cycle stage.
I’m convinced you have to be braver for longer, you have to stay in equities and you have to ride that last wave of positive momentum.
Why do I think that positive wave will come? Well, so far this has been a dull economic cycle. Quality and income stocks - everything that has been safe and secure - have been the main driver of markets. The scars of the financial crisis have forced investors into safer stocks that provide a decent dividend yield. This is unlikely to continue. Irrational exuberance typifies late cycle investing - we will not see this in high-quality, dividend-paying stocks.
When we think about how to position for late cycle, we therefore begin to tilt away from stable stocks and into more cyclical and value areas of the market that could re-rate substantially in the last leg of a bull market.
Outside of equities, there are areas of fixed income that still offer value. We like two in particular: emerging market local currency debt, and hybrids and CoCos.
Emerging market local currency bonds could benefit from a re-rating of sentiment towards emerging markets and still offer a very large yield cushion. We like CoCos and hybrids because unlike most other fixed income products, they can perform well in a rising-rate environment.
So however uncomfortable it might seem, being braver for longer is the only investment strategy that pays as we approach a late cycle environment.