The potential impact of higher interest rates on businesses will be a key focus for the Fidelity European Fund and Fidelity European Trust over the coming year, explains co-portfolio manager Marcel Stotzel in the above video interview for Portfolio Adviser.
“If you think back to June 2020 and you were a CFO in the middle of Covid, what would you do?” he says to Portfolio Adviser editorial director Julian Marr. “With interest rates at near-zero, you would fill your boots with as much financing as you could get and fix it for four or five years. And why wouldn’t you? If you don’t need it, you pay it back early but having that in place would have been the prudent thing to do for 90% of companies.
“That being so, however – and similar to home loans – a lot of companies have not yet been hit by the impact of higher rates because they have been fixed for that four or five-year period. The rubber starts to hit the road there at the back end of 2024 so that is what we will be looking at. Who knows where rates will be but, if we are sitting here this time next year and they have not come down quite a bit, that will have important implications.”
Pricing power and leverage
In this interview, Stotzel also covers the importance of pricing power and avoiding leverage when selecting portfolio holdings, the unexpectedly solid performance of European equities over 2023 and why he and his colleagues are avoiding industrials while maintaining an overweight exposure to the diversified financials subsector. You can view the whole video by clicking on the picture above, while the timecodes for each question are set out below:
00:20 As we reach the end of 2023, how have European equities fared this year?
02:12 What have you changed within the portfolios this year as the investment backdrop has evolved?
05:10 Are there any sectors, regions or themes you are particularly interested in – or are avoiding?
08:46 Are there any specific developments you will be watching out for in 2024?