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A Strategic Allocator's Guide to Productivity and Profits
We have transitioned to a new, more volatile and inflationary regime. In this new environment, a deep understanding of productivity gains, and their links to profits and asset-class returns, could redefine strategic allocations and the investment decision-making process.
Strategic Investment Opportunities with X-Factors Tied to Geopolitics and Deglobalization
As the world's nations choose sides—or don't—new opportunities and risks will take shape as the global stage is reset.
- A need for innovation could drive productivity.
- Massive demand for machinery, automation, and construction materials, might arise.
- Second- and third-derivative investment ideas related to these massive trends might prove to be strong investments for the next 10 to 20 years.
In this commentary, Sammy Simnegar, a portfolio manager in our Equity division, discusses strong tailwinds he sees around a multiyear theme tied to deglobalization and geopolitics—namely, a megatrend that ties together manufacturing and technology.
Loosely defined geopolitical blocs may define the new era
Source: Fidelity Investments (AART), as of 2/28/23.
Gain Insights on the Trends and Drivers of the New Regime
Productivity is fundamental to the long-term economic and investment outlook, and a key source of profit opportunities.
- Productivity growth and profit growth have diverged.
- Can productivity regain momentum?
- Can profits continue to rise without productivity gains?
- Our research reveals what the road ahead may look like.
Download the full report to learn about all the relevant trends.
Will this trend continue?
Real productivity growth vs. real profit growth
Productivity is real GDP per hour. Profits are real S&P 500 earnings per share. Chart compiled using annual data. Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Standard and Poor's, Haver Analytics, Fidelity Investments (AART) as of 12/31/21.
Extrinsic X-Factors That Could Influence Corporate and Policymaker Behavior
Two secular trends are well established and likely to continue to gain momentum in the coming years.
- The physical risks from climate change represent rising costs to the global economy.
- Efforts to mitigate these costs and to transition to cleaner energy (decarbonization) represent potential opportunities.
- Efforts to address these risks and transition to cleaner energy represent potential opportunities.
There are many more extrinsic X-factors. Download the full report to learn what they are—and what they could mean.
Strategic Industries Will Likely Be More Influenced by Geopolitics
Source: Fidelity Investments (AART) as of 2/28/2023. Note: "Strategic Materials" refers to resources that could cause manufacturing disruptions in the event of supply shortages.
The Potential Return of Capital Investment
- We believe public investment and capex have the potential to rise from depressed levels, representing upside for productivity growth.
- Fading profit tailwinds from globalization, market concentration, and financial repression imply a slowing from the above-average pace of profit growth, with a potential rise in productivity growth to help offset that dynamic.
Higher Capex Could Boost Productivity Growth Above Baseline Expectations
Scenarios of Capex and Productivity Trends, 5-Year Averages
Productivity is real GDP per hour. Capex is aggregated across top 3,000 publicly traded companies (ex. financials and real estate). Scenarios are generated by a time-series model connecting capex to productivity. Chart compiled using annual data. Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Fidelity Investments (AART) as of 12/31/22.
About the Authors
Fidelity's Asset Allocation Research Team (AART) employs a multi-time-horizon framework that incorporates economic, policy, behavioral, and market research to produce multi-asset class investment recommendations. This framework helps asset allocators make strategic decisions for both the long and short term. Our approach accounts for the interplay of multiple dimensions of qualitative and quantitative research within portfolio construction design. By maintaining a disciplined process that helps avoid short-term market noise, we help investors identify impending market inflection points, find opportunities for excess return, and mitigate downside risk.
AART's work on the reconnection of productivity and profits explores factors we believe are contributing to a new long-term market environment.Learn More
- Diversification and asset allocation do not ensure a profit or guarantee against loss.