2013 Outlook

Stockholm, December 24, 2012:
Fidelity pursues an active investment style based on deep and comprehensive fundamental research. There is no ‘house view’ and no house-wide ‘buy’ and ‘sell’ lists imposed on portfolio managers; rather they are afforded flexibility to manage their portfolios in their own individual styles. Here, we provide an insight into a range of our portfolio managers’ views on their outlook for 2013. Please see full report attached.

GLOBAL EQUITIES
Amit Lodha, portfolio manager of the FF Global Real Assets Securities Fund and the FF and Fidelity Global Focus Funds, comments:
“Despite the uncertain backdrop and the recent slow patch of growth, I continue to believe there are interesting investment opportunities to be unearthed. For instance, my conviction in long-term growth opportunities resulting from the urbanisation and industrialisation of emerging markets has not waned. Other structural trends such as the growth of e-commerce and rapidly evolving demographic shifts also offer significant growth potential, as does innovation aimed at increasing capital efficiency.

While there are opportunities, the bad news obvious to any reader of the financial press is that sovereigns in the western world continue to struggle. The Federal Reserve is now on its third leg of quantitative easing (QE) or money printing. Given the open ended nature of the current programme, some commentators are calling this ‘QE Infinity’. The European Central Bank has launched a similar programme to protect the Euro. With money printing on such a scale, while the timing of a pick-up in inflation remains unclear, the outcome in my mind is fairly certain.

In an environment where inflation is part of the solution, equities continue to look attractive relative to most other asset classes. This is especially true for equities that are backed by real assets, which cannot be printed on a printing press. From investors’ perspective, wealth generation and protection will be a function of finding those companies (in both emerging and developed markets) that have either the pricing power or uniqueness of assets to grow earnings, cash flows and dividends. Operating with a healthy balance sheet increases the probability of companies achieving these goals.” 


EUROPEAN EQUITIES
Matt Siddle, portfolio manager of FF European Growth Fund and FF European Larger Companies Fund, comments:
“The recent policy initiatives from the European Central Bank and the Federal Reserve’s announcement of further quantitative easing have significantly improved financial market conditions and confidence. However, the problems affecting European economies are deep-rooted and require serious, structural changes in order for peripheral nations to regain competitiveness and drive sustainable economic growth. This is, of course, easier said than done as the pain of more flexible working conditions and potential wage cuts, or job losses is immediate. Plus, the benefits of companies building new factories, distribution centres or offices, takes time to come online and create new jobs. While we are beginning to see some positive signs of rebalancing - relative unit labour costs in the eurozone have at least started to move closer to German levels - this process has much further to go.

Investors should expect both economic performance and equity market performance to remain volatile in the near term. I am cautious about corporate profitability and earnings over the next 12 months given the continued deterioration in the global economic environment. However, European equities continue to trade at compelling valuations versus history and other asset classes. It is also important to make a distinction between the European corporate sector and the European economy. There are many high-quality multinational businesses with solid franchises, strong business models and robust balance sheets, which are well positioned to benefit from consumption growth in emerging markets. Lastly, it is important to stress that companies with the pricing power to pass price increases onto consumers have the potential to deliver attractive real total returns.

In terms of sectors, the consumer discretionary sector, and especially the media segment, offers several opportunities to invest in highly cash generative businesses, trading at attractive valuations relative to their long-term history. The energy sector benefits from a strong demand outlook that is set against a backdrop of increasingly complex production. Many of the newly-discovered oil and gas reserves are located in shale deposits or in deepwater areas, which require a significantly greater level of engineering in their extraction. This supports a higher oil price and is favourable for oil equipment and engineering companies. The consumer staples sector has some attractively valued high quality companies with strong market positions.”

US EQUITIES
Adrian Brass, portfolio manager of FF America Fund and Fidelity American Special Situations Fund, comments:
“I remain relatively cautious in my outlook. Politicians have yet to thrash out a compromise to address the fiscal cliff - a daunting combination of tax increases and federal spending cuts totalling 4% of GDP, which are due to kick-in on the last day of December. Due to the deep political divisions amongst the Republicans and Democrats and the split within Congress, resolution could take place right at the end of the 2012.. .

Beyond a resolution, the problem of the US government’s indebtedness (and in fact the Western world’s) will remain an acute problem. The need to raise taxes and cut spending is likely to hold back economic growth for years to come.

That being said, there are pockets of growth and recovery especially in the housing sector. Looking into 2013, consensus estimates are still forecasting earnings growth in the early teens for the S&P 500. This is against the backdrop of already high margins and low economic growth – in my view these valuations for the market are just fair. Out of market volatility and fear, opportunities present themselves, and I continue to find lots of attractive stock specific ideas.”


EMERGING MARKETS EQUITIES
Nick Price, portfolio manager of FF Emerging Markets Fund, FF and Fidelity EMEA Funds, and FAST Emerging Markets Fund, comments:
“With the recent appointment of the new Chinese executive committee, and the significant influence that the direction of the Chinese economy has on its trading counterparties, 2013 is likely to be characterised by a much greater focus on the approach adopted by the Chinese government.
More liberal spending policies on areas such as healthcare, minimum wage, and reduced income disparity will be indicative of a government that appears willing to drive the rebalancing of the Chinese economy in favour of the consumer, and away from fixed asset investment.
Indeed, we hope to see increased acceptance that excess capacity needs to be rationalised in order
to improve productivity and long-term economic viability within the Chinese industrial sector. Accordingly, any such change of emphasis will have significant ramifications for economies reliant on the export of industrial commodities.

Elsewhere, subdued demand from the developed world, with their excessive debt burdens and inferior economic growth rates, will weigh on economies reliant on the export of investment goods.
It is possible that, barring any unforeseen political shocks, reduced investment demand coupled with new capacity coming online may result in downward pressure on commodity prices. With much of the emerging world spending a large proportion of their income on food and energy, limited inflationary pressures will be welcomed by many developing economies.
In this more subdued global environment, we continue to focus our efforts on identifying businesses that can maintain a strong competitive position in their local markets, and which benefit from structurally positive tailwinds such as population growth, rising levels of disposable income, and increasingly sophisticated consumers who aspire to join the world’s middle classes.”

ASIAN EQUITIES
Raymond Ma, portfolio manager of the FF China Consumer Fund, comments:
“Just as I had expected at the start of 2012, the Chinese economy bottomed by the third quarter, thanks to ongoing monetary easing. Recently, signals such as rising PMIs (Purchasing Manager Indices) and fixed asset investment, coupled with stabilising housing activity, indicate that the Chinese economy is gradually improving and is on track for a modest recovery in 2013.

Looking forward, exports growth is likely to pick up given that US economic growth seems to have gained a more solid footing. The recent acceleration of credit growth domestically should also lead to a recovery in investment, particularly relating to infrastructure. A recovery in investment demand, together with stronger policy support, should help drive industrial production after destocking.

Following China’s leadership transition, a series of reforms are likely to be pushed through to reshape China’s economic landscape. In particular, deregulation across a range of industries such as financials, telecommunications and energy are expected to break the monopoly of state-owned enterprises and set the stage for fairer competition in order to revitalise private sector. In addition, more focus will be placed on the acceleration of urbanisation and income re-distribution. Overall, a more pro-consumption policy is expected to be in place to stimulate domestic demand and consumer sectors will continue to benefit from this.”

FIXED INCOME
Andy Weir, portfolio manager of the FF Global Strategic Bond Fund and FF Global Inflation-linked Bond Fund, comments:
“In the year ahead the fixed income asset classes will be unlikely to repeat the stunning performances of the last few years. Yields fell pretty much universally as a result of concerted short rate cuts and quantitative easing. I feel government yields are now too low compared to any long term fair value measure. However, I do not see an immediate increase in yields and subsequent underperformance of the asset class, just yet. The Fed has told us interest rates are on hold for at least two years and they look certain to continue their quantitative easing programme for some time to come. My best estimate is that bonds earn their yield, with any slight pick up in yields being compensated for by the roll down on steep yield curves.

Within the fixed income family, I think credit does best as corporate fundamentals are strong with relatively low levels of leverage and new issuance likely to fall. The dominant technical factor that has driven cash investors both along the maturity curve and down the credit scale in a search for yield probably continues and compensates for any small back up in government yields. As QE continues, the fear of inflation will persist and I feel inflation linked bonds will continue to see large inflows and outperform nominal governments in all but the most bearish growth outcomes.”

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