Feels like dot-com days again: Fidelity

Singapore

AS capital continues to gain an edge over labour and profit margins stay high, the bull market in stocks, notably the US, shows no sign of stopping, said Dominic Rossi, Fidelity's global chief investment officer for equities.

The danger is that stocks will rise sharply, he said at a press briefing on Friday. "It's another dot-com era. This feels like the 1990s. That's my biggest worry ... that equity markets will melt up, not melt down."

Mr Rossi remains bullish on the US stock market, saying it has several more years to run.

Despite profit margins being at historic highs, they can go much higher.

"Organised labour doesn't have the power that it had in the past. Profit margins are structurally higher, not cyclically higher ... the distribution of wealth between capital and income is favouring capital," he said.

The US dollar will stay strong because the economy is improving on both its trade and fiscal positions. The trade-weighted US dollar is still low by historical standards, he said.

While the strong US dollar will keep commodity prices low, he said markets will eventually recognise this as a positive, especially as consumer confidence picks up.

Earnings multiples will get pushed up further as domestic savings pile into stocks, like what happened in the late 1990s, Mr Rossi said.

The oil price crash and the weak euro will benefit European stocks, he added.

Meanwhile, bonds might have another year of positive returns despite yields at record lows, said Andrew Wells, Fidelity's global chief investment officer for fixed income, real estate and solutions.

The 2014 trends of low inflation and accommodative central banks have not changed, he noted. "Don't expect the US to raise rates until end-2015 or early 2016 unless wage inflation picks up," he said.

In Europe, government bond yields continue falling as the European Central Bank unleashed a bond-buying programme earlier this month to support its economy.

Yet Fidelity continues to get mandates from Asian and European investors to invest in European investment-grade corporate bonds, Mr Wells said.

This is because they expect government bonds to trend towards zero yields, he said. Falling government bond yields mean wider spreads with corporate bonds, resulting in more leeway for capital gains.

In fact, investors are even buying sovereign bonds that yield negative rates - essentially paying to lend money to governments.

Swiss government bond yields turned negative after the central bank removed the Swiss franc's ceiling against the Euro. Investors still bought them because they can get gains on the Swiss currency that far exceed the negative yields, Mr Wells explained.

"As soon as you get your mind over the fact that you can go through (zero yields) substantially, there's clearly a lot of value still left," Mr Wells said.

"As a fixed income investor you always get taught when you're very young, you don't fight central banks, they tend to be more powerful than the individual investor. They desire to get to zero, they'll do everything in their power," he said.

Mr Wells sees opportunities in inflation-linked bonds and emerging market high-yield bonds.

Ultimately, markets are in a strange situation because too much capital is chasing too little income growth, said Mr Rossi. As a result, returns on capital will decline.

"This is a curious world where bond investors are investing for capital returns and equity investors are investing for income."