Doubling down on valuation amid elevated uncertainty

With the U.S. economy in the late-cycle expansion phase in early 2023, Fidelity’s Ramona Persaud is newly cautious amid the dynamic investing backdrop, heightened uncertainty, and the potential for a descent into a recession.

“Based on the many unpredictable variables I see, my bar for stock valuations is even more stringent than usual, especially given my focus on minimizing downside capture,” says Persaud, portfolio manager of Fidelity^® Equity-Income Fund (FEQIX).

In managing the diversified domestic equity strategy since 2011, Ramona seeks reasonable income, while also considering the potential for capital appreciation.

She views the early-2023 backdrop as a logical progression of earlier phases going back to 2021, when she began to see valuations as less attractive and started to de-risk the portfolio in anticipation of the economy moving from early cycle to mid-cycle.

“Valuation spreads appear quite narrow and intra-sector spreads in many high-beta, riskier sectors are tight, offering lower opportunity for successful stock picking among higher-risk names,” Persaud says.

Additionally, she says, data indicates there is a good amount of concern in the market regarding company earnings and profitability, given potentially peaking demand and costs that inflated significantly since the peak of the pandemic.

What is more interesting to Ramona, however, is that valuation opportunity based on book value, or the equity on a company’s balance sheet relative to the security’s price, doesn’t appear to be reflecting this concern, meaning there’s some potentially long-term risk that is not reflected in current valuations.

At the end of February, the fund was positioned defensively versus the benchmark Russell 3000^® Value Index, according to Ramona, with notable overweights in the consumer staples and health care sectors.

Ramona’s conservatism and, in many cases, stocks lacking dividends, have led her to avoid some sizable benchmark components, including insurance-focused conglomerate Berkshire Hathaway (BRK/B), energy giant Chevron (CVX), Facebook parent Meta Platforms (META), and drugmaker Pfizer (PFE).

“After evaluating all the data, I have strengthened my conviction that current valuations aren’t attractive enough for me to consider adding risk to the portfolio,” Persaud says. “As always, I am focusing on my ultimate objective of achieving appealing long-term returns over a full economic cycle.”

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