Finding opportunities in volatile markets

Here's where our managers have invested as choppy conditions return.

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Key takeaways

  • Volatility has returned to financial markets after a long period of calm.
  • The recent return of volatility may feel startling because there has been so little of it for so long.
  • Fidelity portfolio managers see investment opportunities that may offer attractive returns even with the return of more historically typical levels of volatility.
 

Since 2012, financial markets have been remarkably calm by historical standards as central bank policies have kept liquidity abundant and most stock market indexes have marched steadily higher. After that long period of calm conditions and rising stocks, the recent abrupt pullbacks and rebounds in markets may seem startling to some.

But while the return of more historically typical levels of volatility may be unnerving, our portfolio managers have never lost sight of the fact that markets go down as well as up, and they have no shortage of investing ideas that seek to deliver attractive returns despite the return of volatility. With that in mind, Viewpoints asked some of our top managers where they have found underappreciated investing ideas.

Joel Tillinghast, Fidelity® Low-Priced Stock Fund (FLPSX)
I’ve recently found value among energy and utilities.

You need to shop carefully these days, but I still find pockets of value, such as the energy and utilities sectors. The fund is more heavily invested in several other sectors, most notably consumer discretionary, but I have added to the fund’s stakes in both energy and utilities in recent months. My increasing conviction in energy stems from healthy supply-and-demand trends for crude. The fund has a large out-of-benchmark stake in exploration and production company Murphy Oil (MUR), as of August 31, which has shed underperforming assets in recent years and has growth opportunities in the Eagle Ford Shale region, the Gulf of Mexico, and, longer term, in Canada.

One of the fund's larger utilities holdings as of the end of August was PG&E (PCG), which I consider a turnaround story. The stock, a non-benchmark holding, reached a multiyear low in early 2018 and retested that price decline in June before moving a bit higher. The California utility faces continued uncertainty and potential liabilities related to wildfires in the fall of 2017 that caused billions in property damage. I think PG&E could emerge from these challenges over a multiyear period, with the possibility of obtaining support from the state government.

Steve Wymer, Fidelity® Growth Company Fund (FDGRX)
I consider biotechnology an essential growth industry.

Whether markets are calm or volatile, we all care about our family members living long, healthy lives, which is why biotech is such a fundamentally important growth industry with a long-term future. I think it’s equally if not more important than traditional tech sectors. Biotech and life sciences investments carry notable risks because the majority of drugs introduced fail to get regulatory approval. For this reason, biotech stocks tend to have a wide range of potential returns. Yet the idiosyncratic risks tend to make the industry an attractive area for stock picking.

To help manage risk associated with any one holding, I generally take smaller positions in individual biotech stocks, especially in shares of companies that are valued on a single drug’s development. The fund’s largest biotech position as of August 31 was Alnylam Pharmaceuticals (ALNY), a firm focused on genomics-based drug discoveries that target diseases with no known treatments. The company’s market value is primarily derived from its pipeline, not treatments that are currently commercially available.

Arvind Navaratnam, Fidelity® Event-Driven Opportunities Fund (FARNX)
Real estate is a sector where I’ve found value I don’t think is obvious.

I often look for companies backed by valuable assets that don’t fully show up on their balance sheets, which is what I think I’ve found among several real estate securities.” Only the “book value,” or the purchase price, of real estate on a company’s balance sheet, not the current market value, which can be far greater. Companies can monetize this differential when they sell long-held real estate assets, which is part of the strategy of JBG Smith Properties (JBGS), one of the fund’s largest holdings as of August 31. JBG Smith has sold several long-held properties in 2018 in excess of book value.

Joe Wickwire, Fidelity® Select Gold Portfolio (FSAGX)
Here’s why I believe gold stocks may be near a bottom.

By the end of August, the price of gold corrected to a level I think presents one of the most attractive buying opportunities for the metal in more than a decade. Gold and many gold stocks had declined notably since April amid a period of global economic growth and reached an extreme level near the start of the third quarter.

It’s hard for the gold industry to make money when prices dip below $1,200 an ounce, similar to oil dropping below $45 a barrel, as the commodity’s price is lower than its cost of production. When this happens in any commodity-oriented industry, companies typically respond by cutting production until the self-correcting nature of the industry kicks in, demand begins to outstrip supply, and the commodity price rises. Mine supply already is expected to decline slightly in coming years, and I think it could drop even more than expected, possibly accelerating an increase in gold prices.

It’s also important to note that gold and gold stocks tend to do well when financial assets, such as cyclical stocks, do not, in the 1970s and the more recent “lost decade” in the 2000s. As of August 31, I boosted the fund’s exposure to gold bullion and gold stocks I think could outperform in the medium term and plan on using volatility in the space and market as an opportunity.

Next steps to consider

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