Fidelity Insights on the Dollar Debasement


Listeners of our weekly GWS market update webinars are accustomed to CEO John Gatewood, and myself hash out our views on the economy and financial markets. However, this week Analyst Christoper Arends and I had a chance to interview Dave Muscatello and Mehernosh Engineer. Mehernosh is a vice president of the Capital Markets Strategy Group (CMSG) at Fidelity Institutional Asset Management (FIAM), Fidelity Investments' distribution, and Dave is a regional director with Fidelity.


Here are Mehernosh Engineer's insights on the dollar debasement.


The Vaccines Should be Widely Available by 2H '21

The key focus of 2020 for the United States was managing two underlying risks: healthcare and politics. However, in 2021 the principle is the exact opposite. It's all about the reopening of global economies due to the vaccination process and the reputation trade.


It has been two months since the vaccines have been available; about 63 million doses have been distributed. The United States is still waiting for the Johnson and Johnson vaccine to be approved any day now. Mehernosh estimated that "about 125-250 million people would get vaccinated by the middle of this year. Globally the vaccine has been distributed with high-efficiency rates; therefore, we should look towards a much better economic investment scenario going forward."


Global Business Cycle in a Maturing Recovery

Approximately six months ago, each economy was in the recession phase due to COVID-19. However, with the vaccination in progress, Fidelity believes "every single major global economy is in the recovery phase, with the Asia-Pacific region leading the way."


Here the critical features of the fiscal stimulus that benefit consumers, according to Mehernosh:

  • Stimulus checks

  • Increase in unemployment benefits from $300 per week to $400 per week.

  • Child Credit; any child below six will receive about $300 per month or $3,600 per year. Children between the ages of six to 17 will receive $250 of credit per month or $3,000 a year.

  • Housing Credit; $15,000 of housing credit for anyone who's not bought a first home in the last three years.

  • Reducing the student loan burden

These lead to job creation, income growth, economic growth, and earnings growth, but they also come with budget deficits. Simply put, the U.S. treasury is spending more than it is taking in. The Federal Reserve buys the debt and issues newly printed dollars to the U.S. treasury, who spends it—in the domestic economy. This increases the supply of dollars, which leads to a weaker currency. We call that technical devaluation, or debasement of the money.


Long- Term U.S. Dollar Performance

The dollar weakened last year by about 9.5 %, and Fidelity is looking at something similar this year. Who benefits from a weak dollar? Emerging markets are the biggest beneficiaries as they were the best performing asset class for five consecutive years, 2003-2007 when the dollar was weak. However, if you look within the domestic economy, there are vital beneficiaries within small-capitalization companies, mid-cap, or middle capitalization companies. A weaker dollar favors cyclical assets, and those cyclical assets can be outside the United States or within it.


Secular Forecast: Slower Global Growth

Looking at Japan or Europe demographically, they are a disaster. The graph below shows the future growth of countries based on the underlying populations.


Sectors are aligned with demographics and with exports to the emerging markets. Fidelity underweights those sectors in portfolios because it is all about picking companies rather than countries. Also, a weaker dollar increases tourism very significantly. Fidelity expects that the second path of tourism will pick up soon. On the other hand, a weak dollar also increases the option in emerging markets.


Vaccine Rollout

Mehernosh touches on the vaccine rollout and how he sees it in the emerging market space. "When you look at China, they are above target when it comes to coming back to normalcy. He stated he wouldn't be surprised that in two quarters, international travel will open up and vaccinations won’t be a risk in emerging markets."


Disruptive Technologies and Innovations

“Growth” stocks encompass disruptive technologies and innovations. Keeping those two significant factors in mind, what are the designs that we are looking at? Mehernosh states:


"We have earnings from Microsoft and Amazon, a global 5G infrastructure being installed with driverless cars and telemedicine, increasing automation, robotics – manufacturing and entering the household, and the cost of mapping the human genome. Therefore, all of this to us is innovation."


Enabling Integrated Technology

One of the things that GWS talks about is to enable integrated technology within the wealth management world. Every company is essentially going to be a technology company and serve the market with whatever product they offer.


Mehernosh believes "the world is getting digitized, and you need to have an online and e-commerce presence with more marketing." Finding who your consumers are and how they are consuming your product is very important. Retail, utilities, and telecommunications are factors that are becoming more significant consumers of technology. Cloud computing is the first stage, followed by collecting the data, also known as data analytics.


Real Estate

Real estate is being talked about a lot, considering how people are working now. Mehernosh states that "working from home is not temporary; it's a paradigm shift creating relative winners and losers." The losers consist of residential and commercial real estate in significant urban areas.


Now there are specialized companies called data server bombs. Companies house data servers in the middle of nowhere, ultimately allowing telecommunications. However, we can't forget about demographics, including hospitals, nursing homes, assisted living, etc. They see a lot of demand, as well as real estate today, is about location.


Imagining Applications for 5G

What's the difference between 4G and 5G? Speed and energy consumption. 5G is about 25-30 times faster than 4G and uses a significantly lower energy amount.

5G allows cars to navigate and telemedicine to be put in practice, such as remote surgeries or remote robotic surgeries. Lastly, the most common application is drone deliveries.


Most investors underestimate the impact of 5G; however, according to Merhernosh and Fidelity, "it will be the third version of the internet and possibly the most potent deem-changing worship of the internet that you will see over the next decade."


Focused Emerging Markets

When you hear emerging markets, you're looking primarily in the Southeast Asia region. China and India dominate it, then the 15-17 countries in the Asia Pacific region, excluding Japan.


The Southeast Asia region is home to 4.5 billion people, the most significant trading block today, and the demographics are very young. So what is the difference between emerging markets and emerging Asia? What you're leaving out is essentially commodity producers, Russia, South Africa, Mexico, Brazil.


Fidelity's Take on the Valuation of the Market Today

The equity valuation is in the U.S. is on the higher side of things, so you must be careful of what you're buying. Valuations outside the U.S. in developed and emerging markets are cheaper from that perspective. When you hear increase allocation to equities, you see the domestic market by the neglected cyclical sectors and an increase in funding to international and emerging markets.


Biggest Risks in 2021

Merhernosh thinks the critical risks of 2021 would be "inflation increasing, the Middle East as one of the most prominent unstable regions of the world, and in the U.S., not passing bills as some Democrats will cause hurdles throughout the process." There also is a significant amount of risk in passive investing, not just from a market structure factor but also from a performance perspective.


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Thank you, Fidelity, Mehernosh, and Dave, for your time!


GWS will keep everyone up-to-date on our Daily 3x3s and Wednesday Weekly Market Insights. Tune in daily at 5 p.m. CT and Wednesdays at 3:30 p.m. CT.


For this week's full market update, including investment themes updates and risks in 2021, be sure to check out the recording on our YouTube channel.


Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.


All indices are unmanaged and may not be invested into directly. The economic forecasts outlined in this material may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.


All investing involves risk, including the possible loss of principal. No strategy assures success or protects against loss.

Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.


International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.


Mehernosh Engineer and Fidelity is not affiliated with or endorsed by LPL Financial and Gatewood Wealth Solutions.

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