Resource stocks holding the line: Fidelity

Resources is one pocket of the market with a positive outlook and attractive valuations, according to the head of Fidelity in Australia

‘Fiscal policy has to remain supportive … because there is virtually no other buffer in the system,’ Fidelity’s Alva Devoy says. Picture: Hollie Adams

The rapid rebound in Australian equities is a significant risk as the nation battles through the COVID-19 crisis, but the resources sector is one pocket of the market with a positive outlook and attractive valuations, according to the head of Fidelity International in Australia.

A wave of government spending across the major economies will trigger a mini up cycle in resources, Fidelity managing director Alva Devoy told The Australian in an exclusive interview.

But any premature pullback in JobKeeper or support from the banks would threaten the economic recovery, she warned, as she flagged the property market — apartments in particular — as one of her big concerns.

On Wednesday the major lenders announced an extension to their mortgage repayment holidays until March 31 on a case-by-case basis, but a period of distressed selling could be the next shock to the system, according to Dr Devoy, with anecdotal reports coming through that banks are encouraging stressed property investors to reduce their holdings.

“Just think about that: we’ve lost the normal renters who would use apartments, be they short-term visa holders, students and tourists, right as we’ve got an oversupply of apartments,” she said. “And now we’re going to have some selling through that as well, and possibly forced selling.”

“What that all tells me is that fiscal policy has to remain supportive. It just absolutely has to because there is virtually no other buffer in the system.”

For the up cycle in the res­ources sector to eventuate, fiscal policy also will need to remain supportive in China and the US, while Europe will need to bring on stimulus in some form, she said.

“I find myself quite interested in the resources sector. If I’m looking at sectors that could be a good counterweight to the (risks to the economy), then resources are really interesting at the moment,” she said. “If you sit and look at the large cap (mining) heavyweights on the ASX, they’re actually at OK valuations. It’s not like they’re being overbought at the moment.”

Fidelity, with $600bn in assets under management, is still positive on the Australian sharemarket because there are still places to invest within it, but active management and portfolio positioning are becoming more important, Dr Devoy warned.

“We’ve had a big turn in risk appetite, certainly in markets. We’ve been pushing forward in markets, but the sectors that continue to be most at risk are rebounding. And so we’re going to have to be conscious about that in terms of our positioning going forward.”

Aside from resources, Fidelity is also advising clients to consider a position in gold.

“It will sound counterintuitive to recommend a gold position while it’s run the distance, but it’s going to be an extremely important hedge against a second wave of COVID-19,” Dr Devoy said.

“We won’t see the same rate of increase in the gold price or gold stocks that we’ve just seen, but it will be a good diversifier and it fits inside the resources space.”

Dr Devoy expects health and technology stocks to continue posting gains despite having already run hard. Valuations in the buy now, pay later sector in particular had probably run ahead of the default risk, she warned. “It’s a little bit like high yield and junk bonds running hot and you know the default cycle will come around at some point in time.”

Following the sharemarket’s more than 30 per cent recovery from its March lows, Fidelity is telling clients to get active with their portfolios and avoid overbought sectors.

Dr Devoy urged investors to seek advice through the pandemic, not just for the financial benefits but for their mental health too.

New research from the asset manager has found that advice significantly reduced people’s concerns about their financial wellbeing.

Close to 53 per cent of unadvised people surveyed said they worried about money daily or weekly, but this fell to one in three for those who are advised. Similarly, almost half of those not seeking advice said their mental health had suffered as a result of COVID-19, compared with one in three of those currently advised.

“The pandemic has changed the way many of us live and work,” Dr Devoy said. “For the more fortunate, this might provide opportunities to save or spend in a more considered way. For many, it is causing significant worries from job security to the impact of market volatility on savings.

“While we cannot predict how this current crisis will develop, there are steps individuals can take to mitigate the impact on their own finances, reduce their worries and improve their overall wellbeing. Taking a long-term view will be key.”