Market focus revolves around two key themes: corporate earnings resilience and the extent of policy accommodation. Although inflation remains above the long-term targets of major central banks, the trend continues to moderate, which has not altered the Federal Reserve's relatively accommodative policy stance; coupled with robust support for growth and employment from many governments, overall financial conditions remain loose. Admittedly, a cooling U.S. labor market and shifts in wage momentum pose potential risks, but within a dovish Fed structure, the impact is relatively manageable. Concurrently, downside risks have diminished compared to earlier periods; however, many positive factors are already reflected in asset prices, significantly elevating the importance of stock selection and precise positioning.
In the equity market, a positive yet cautious stance is maintained, with a preference for deploying capital in phases during market pullbacks. Corporate earnings reports have generally exceeded expectations, providing ongoing support for stocks. Regarding U.S. equities, despite the elevated valuations of large-cap stocks, their corporate profitability, productivity gains, and robust balance sheets form a crucial defense. The Fidelity team maintains an 'overweight' rating on U.S. stocks and continues to favor growth and quality stocks, with related investment opportunities also expanding beyond the large-cap tech sector.
European equities are demonstrating positive momentum, with a revival in corporate earnings dynamics and improved market structure, making them worthy of investor attention. In the credit bond space, the overall attitude remains cautious. High-yield bonds, underpinned by solid fundamentals, particularly those with short durations, continue to offer attractive interest income; in contrast, investment-grade bonds offer limited risk-adjusted return potential. Recent isolated default events remind investors to be mindful of asset selection, but their impact on systemic risk in the overall credit market is limited.
For emerging market debt, a neutral allocation is maintained overall, but there is a relative preference for local currency bonds. In government bonds, a neutral stance is generally maintained for developed markets. The Fidelity team is more focused on the impact of interest rate volatility and policy changes on bond performance. Among these, UK government bonds remain attractively rated with gradually improving fundamentals, warranting a structurally positive view. Japanese Government Bonds (JGBs) may face upward pressure on yields due to rising fiscal needs and the Bank of Japan's rate hike process.
U.S. government bonds still require attention to inflation risks and Fed policy uncertainty in the short term, potentially leading to more volatile performance. Within emerging markets, there is a preference for local currency bonds from countries with high real interest rates and room for rate cuts, such as Brazil, Mexico, and South Africa. Overall, government bonds continue to play a role in diversification and stability within a portfolio; allocations should remain flexible and be dynamically adjusted according to market conditions.
Finally, regarding cash and currency allocation, a relatively neutral stance is maintained on the U.S. dollar in the short term, primarily reflecting that current interest rate levels still provide support, and market expectations for the Fed's policy path continue to have room for adjustment. In the medium term, as the Fed gradually initiates a rate-cutting cycle, capital structures adjust, and U.S. economic momentum slows, the risk of dollar weakness requires careful consideration. Comparatively, the Euro holds some appeal as the European Central Bank has nearly halted rate hikes and French political risks are largely priced in; the British Pound, however, faces pressure due to rising uncertainties. Simultaneously, certain emerging market currencies remain favored.
As for gold, the long-term fundamental outlook remains favorable, but after the price increase, taking moderate profits is a reasonable strategy. Facing an environment where some positives are already priced in but fundamentals remain optimistic, the firm recommends investors adopt a 'core-satellite' structure for equities: a core allocation to large-cap stocks with quality and stable cash flows, supplemented by satellite positions in select mid-caps and emerging market sectors. For bonds, the focus should be on 'short-duration yield and selective spread opportunities' to enhance portfolio cash flow and downside protection. In foreign exchange, reduce USD exposure, increase allocations to the Euro and select emerging market currencies, and use futures or options to manage volatility risk. Maintain a strategic holding in gold, taking profits in stages after prices reach new highs. Overall, employing a strategy of global diversification and dynamic rebalancing allows for flexible risk management and the capture of a new round of structural opportunities.
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