Fidelity Sees More Global Stock Gains on M&As to Spinoffs

The rally in global stocks is set to continue as increased corporate activity including mergers, acquisitions and spinoffs improves prospects for earnings, Fidelity Investments said.

“Equities are generally in good shape, we are positive,” Steven Edgley, London-based investment director at Fidelity, said in an interview in Budapest yesterday. “Executives are deploying their cash for productive purposes and to improve the quality of their businesses, which is all positive.”

The MSCI World Index has gained 12 percent in the past year as central banks took steps to support economies and the U.S. recovery showed signs of gaining momentum. Deals such as London Stock Exchange Group Plc’s takeover of LCH.Clearnet Group Ltd. in 2013 signal “corporate confidence has come back,” according to Edgley, who helps manage $17 billion in assets at Fidelity’s global equities group.

Investors are weighing how the Federal Reserve’s decision to rein in economic stimulus could affect the rally in global equities. The Standard & Poor’s 500 Index has closed at new highs 33 times in 2014, data compiled by Bloomberg show.

Fidelity is “broadly” overweight on U.S. and Japanese stocks, Edgley said. The investment company may raise its recommendation on European equities from “marginal” underweight if European Central Bank President Mario Draghi’s efforts to revive the euro area prove successful, he said.

Spin-Off Index

The Bloomberg US Spin-Off Index, which tracks 42 stocks over $1 billion that were spun-off from U.S. companies, is trading near a record high, signaling stronger “value-creating behavior,” Edgley said.

Pharmaceutical company AbbVie Inc., which was split off from Abbott Laboratories last year, has the heaviest weighting on the gauge at 21 percent and is up 12 percent in 2014.

“There is normally a delay before merged companies and spinoffs go into indices,” Edgley said. “It gives active managers a unique opportunity before all the index money comes in, supporting valuations.”

The MSCI World Index trades at 18.1 times profit, compared with 19 at the end of last year and 11.3 in late 2011. “Equities have re-rated aggressively, but earnings haven’t kept up,” Edgley said. Any potential market correction could mean “equities become good value again,” he said.

Fidelity takes an “agnostic” approach when looking at developed versus developing-country stocks, Edgley said. The MSCI Emerging Market Index has gained 6.1 percent this year and trades at a multiple of 13.3 times earnings, compared with 12 at the end of 2013.

“A year ago it looked like emerging markets presented an opportunity because of the divergence of valuation between” the MSCI developing-country gauge and advanced-nation stocks, Edgley said. “That gap has closed somewhat.”

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