In its latest midyear outlook, the global asset manager acknowledged that diversification is now “imperative” as global trade and capital flows are redrawn amid a slow-motion decoupling between the US and China. But it also cautioned that the US still holds an essential place in long-term portfolios.
“There is still room in a diversified portfolio for US equities,” said Fidelity’s Henk-Jan Rikkerink
and Salman Ahmed.
“The S&P 500 comprises many of the world’s biggest and most innovative companies, which are highly profitable and shareholder-friendly. It would be unwise to bet against the US entirely; but equally it is not the only game in town.”
Fidelity’s nuanced call comes as the US economy faces fresh headwinds. Effective tariff rates have climbed to around 14 per cent, which Fidelity believes could lift inflation to 3.5 per cent this year.
It assigns a 40 per cent probability to either economic reflation or stagflation taking hold.
“Rising tariffs and volatile trade policy will also bring US growth down to around 1 per cent this year. While an all-out recession is less likely if a de-escalation with China follows through, the picture remains uncertain. Were the effective tariff rate to rise to 20 per cent, recession would be back on the cards,” Rikkerink and Ahmed said.
This uncertain backdrop makes the US Federal Reserve’s job more complicated.
“Tariff relaxation and persistently sticky inflation mean the Fed is unlikely to cut rates this year,” the pair stated.
One likely consequence of these shifts, the pair noted, is a rebalancing of US assets in investor portfolios, with the US dollar – long buoyed by its status as the world’s reserve currency – now increasingly vulnerable as efforts to reduce America’s twin deficits gain momentum under US President Donald Trump’s trade and fiscal policies.
“The effectiveness of the US dollar as a hedge to equity risk is also coming under question,” it said. “But so long as the tariff picture remains unclear, so does the outlook for monetary policy.”
Amid these challenges, investors are being urged to “broaden their horizons”.
Emerging markets, European bonds, private assets and real estate may provide better relative value, particularly if the US dollar continues to depreciate, Rikkerink and Ahmed said.
“We think emerging market (EM)s are attractive. Debt will be buoyed by dollar depreciation – some countries such as Brazil and Mexico already offer very attractive yields. EM equities look relatively cheap. The market is underpinned by Chinese stocks, which have turned a corner following artificial intelligence breakthroughs in the country,” the pair said.
“Private assets including real estate offer further diversification potential … Likewise, investors may find alternative opportunities in real estate, especially through higher income yielding European markets which can protect against inflation, and through the value-add of ‘greening’ previously unsustainable buildings.”
Fidelity also flagged concerns around US fiscal policy, which it said was fuelling investor unease about long-term debt sustainability.
“The country shows no sign of stabilising its trajectory,” it warned. “It is running wartime-level deficits at a time when the unemployment rate is at cyclical lows.”
Still, Fidelity noted, while US Treasuries may face headwinds from increased issuance and rising term premiums, equity markets remain resilient.
“Capital outflows and a dollar depreciation mean index weightings will look very different in the future,” Fidelity said. “Those who get ahead of these structural trends may stand to benefit.”
In the meantime, investors are advised to remain globally diversified.
“Regional allocation will be more important as US assets experience heightened volatility,” the firm said. But, it stressed, abandoning the US altogether would mean forgoing one of the world’s most consistent sources of long-term growth.
