Volatility update by Fidelity International

By Dominic Rossi, Global CIO for Equities at Fidelity International

Global equity markets are now battling the third wave of deflation since 2008.

The epicentre is not within the developed world nor the financial system but, this time, within the developing world and the global manufacturing sector, where capital allocation has been poor and where overcapacity is rife.

A crisis in emerging currency markets has been flagging these problems for 18 months. The catalyst, now, is the Chinese yuan which is working through a necessary readjustment.

A lower yuan will further deflate the demand for commodities and traded goods generally. A further downside adjustment to potential world output is now unavoidable.

Inflationary pressures will correspondingly remain tame to non-existent.

The ECB and BOJ will have ample room to continue with their ultra accommodative monetary policy, while pressure on the Fed or BOE to raise interest rates will surely wane.

The service sectors of the developed world, particularly in the USA and UK, are far better placed to withstand these deflationary pressures than before, and will offer investors a store of value during this period of volatility.

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