Investment Themes 2019 Q1€¦ · Stocks High Yield Commodities Investment-Grade Bonds Asset Class...
Transcript of Investment Themes 2019 Q1€¦ · Stocks High Yield Commodities Investment-Grade Bonds Asset Class...
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Investment Themes Q1 2019
It’s probably all about Trade
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U.S. and global business cycles continue to mature
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Note: The diagram above is a hypothetical illustration of the business cycle. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one.Source: Fidelity Investments (AART), as of 9/30/18.
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Source: Fidelity Investments (AART)
What is Late Cycle? (Macro)
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Source: Fidelity Investments (AART)
What is Late Cycle? (Asset Markets)
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Late Cycle: Less Favorable Risk-Return Profile but still potentially positive!
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TIPS: Treasury Inflation-Protected Securities. Past performance is no guarantee of future results. Asset class total returns are represented by indexes from the following sources: Fidelity Investments, Morningstar, and Bloomberg Barclays. Fidelity Investments source: a proprietary analysis of historical asset class performance, which is not indicative of future performance.
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Stocks High Yield Commodities Investment-Grade Bonds
Asset Class Performance in Mid- and Late-Cycle Phases (1950–2010)
Mid Cycle: Strong Asset Class Performance• Consider economically sensitive assets• Broad-based gains
Late Cycle: Mixed Asset Class Performance• Consider inflation-resistant assets• Gains more muted
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How long does the growth phase of the economy last until the next recession?
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… it probably all depends on how the trade uncertainties unfold
Scenario 1: Full Blown Trade War
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Tariffs increase Inflation
Which leads to higher Interest
Rates
Uncertainty Increases Less Investments Less Hiring
China Round 2: 25% on $94BChina Round 3: 10% on $138BChina Round 3: 25% on $205B
High likelihood of an Economic Slow Down in 2019 & Possibility of a Recession
???$90B
2018 Tariffs 2019 Tariffs(China Only)
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Potential Retaliation & Expansion beyond China
7Source: Strategas . As of 12/10/2018
How likely is this? Presidents have usually enacted pro-growth policies in the third year of the Presidential Cycle (in an effort to get reelected)
Source: Strategas, 12/10/2018Past performance is no guarantee of future results. It is not possible to invest directly in an index. All market indices are unmanaged. Index performance is not meant to represent that of any Fidelity mutual fund.
On average, the S&P has been up 15% in the 12 months following midterm elections
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Jan 17 Apr 17 Aug 17 Nov 17 Feb 18 May 18 Sep 18 Dec 18
WTI Crude Oil ($/bbl) - Price
Scenario 2: With permanent trade truce, business cycle could elongate as the consumer is in a strong position to spend
Unemployment is historically low… …U.S. Consumers will likely benefit from lower oil prices and…
…from higher tax refunds in 2019 Personal savings has improved
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Source: U.S. Bureau of Economic Analysis – Nov 2013 – Nov 2018
Source: Factset – January 2017 – December 2018
Source: Strategas, 11/30/2018
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A trade resolution could be much more beneficial to the rest of the world
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Taiwan
Canada Exports to U.S.
Exports to EU
Exports to EM ex. China
Exports to China
Exports to Other
UK
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Japan
U.S.
EXPORTS AS A SHARE OF GDPGOODS & SERVICES EXPORTS, 2017
Source: Strategas / International Monetary Fund (IMF) DOTS As of 09/30/2018
Russia
Brazil
China
India
Mexico
South Africa
Recent correction has actually made equities much cheaper while earnings have still been growing
U.S.: S&P 500 DM: Developed Markets, MSCI EAFE. EM: Emerging Markets, MSCI EM. NTM: Next 12 months P/E: Price to earnings ratio.Source: Factset, as of 11/30/18. Past performance is no guarantee of future results. It is not possible to invest directly in an index. All market indices are unmanaged. Index performance is not meant to represent that of any Fidelity mutual fund.
EPS NTM Growth Expectations (%) NTM P/E
EM 9.73 10.74
US 9.72 15.75
DM 7.35 12.54
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Source: Strategas, 08/07/2018Past performance is no guarantee of future results. It is not possible to invest directly in an index. All market indices are unmanaged. Index performance is not meant to represent that of any Fidelity mutual fund.
1985 & 1995 Could be the Right Analogy for 2019As 2018 very much resembled 1984 & 1994 (range-bound markets despite strong growth)
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Source: Factset as of 12/31/2018Past performance is no guarantee of future results. It is not possible to invest directly in an index..
Long term we are still in a secular bull market that started in 2013
Peak to Next Secular Bull 1929–1942
Peak to Next Secular Bull 1969–1982
Peak to Next Secular Bull
2001–2013?
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1900 1905 1910 1916 1921 1927 1932 1937 1943 1948 1953 1959 1964 1970 1975 1980 1986 1991 1996 2002 2007 2012 2018
DJ Industrial Average
Source: Factset, 12/07/2018. Past performance is no guarantee of future results. It is not possible to invest directly in an index. All market indices are unmanaged. Index performance is not meant to represent that of any Fidelity mutual fund.
Whose path resembles equity bull markets of the 50s & 80s
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Risk On - A resolution of the uncertainties regarding future trade policy could lead to a resumption of global economic expansion.
Risk –Off – A full blown trade war or prolonged uncertainties could lead to an economic slowdown or even a recession (other issues to worry: Fed Policy, China slowdown)
But for now, to fit both dynamics into your portfolio construction a "Barbell" approach may be worth considering
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Active Management Might be more Competitive than you think
WHICH CATEGORIES OF ACTIVE MANAGERS HAVE BEATEN BENCHMARKS?Excess Active Returns with Fee and Rating Filter Applied
Batting Average 62% 57% 53% 52% 59% 56% 57% 55% 51% 59% 49% 57% 47% 55% 63% 49% 58% 54% 57% 53%
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Past performance is no guarantee of future results. The chart does not represent actual or future performance of any individual investment option. Batting Average: Percentage of months in which equal-weighted one-year return of active funds exceeded average of equal-weighted one-year return of passive funds. See appendix for important information and methodology details including the filters applied as well as the start date and benchmarks representing x axis for each category. Source: Morningstar Direct, as of May 31, 2018. See page 26 for more information.
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Strategies and funds to consider
Fidelity Advisor New InsightsFNIAX
Fidelity Advisor International Capital AppreciationFCPAX
Fidelity Advisor Total Emerging MarketFTEDX
Fidelity Advisor Total BondFEPAX
Fidelity Conservative Income BondFCNVX
Fidelity Advisor Intermediate Municipal IncomeFZIAX
OFFENSE DEFENSE
Please see slide 24 for important fund disclosures.
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Worthwhile “Satellite Strategies” to consider to complement portfolio
Income with low correlation to interest rate risk
FIDELITY ETF Dividend ETF for Rising Rates (FDRR)*
FIDELITY ADVISOR Real Estate Income (FRINX)
FIDELITY ADVISOR Biotechnology Fund (FBTAX)
FIDELITY ADVISORHealth Care Fund (FACDX)
Low equity market correlation sectors with lots of innovation at attractive valuation levels
Please see slide 25 for important fund disclosures.
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Appendix
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U.S. Equities vs. Global ex-U.S. Equities At some point reversion to the mean should occur
Source: Morningstar as of 06/30/18. Past performance is no guarantee of future results. It is not possible to invest directly in an index. US equities are represented by the S&P500. Global equities ex-US is a custom Global Financial Data World Index. See page 26 for methodology
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$100,000
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$1,000,00012/1972
04/1974
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S&P 500 MSCI World ex US
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Source: BofA Merrill Lynch Global Research, BIS, Bloomberg. Note: Dotted line denotes Bloomberg forecasts for 2018–2020.
U.S. Twin Deficits (Current Account Deficit Plus Fiscal Deficit) Leads the U.S. Dollar by Two YearsThe gap has widened and is challenging the strong USD view for the elevated USD
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CURRENCY
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Investment Grade Bonds have provided insurance historically
Source: Morningstar EnCorr, Fidelity Investments (AART).Past performance is no guarantee of future results. It is not possible to invest directly in an index.. Diversification does not ensure a profit or guarantee against loss. Bond returns represented by the performance of the Bloomberg Barclays Aggregate Bond Index from January 1976 and by a composite of the IA SBBI U.S. Intermediate-Term Government Bond Index (67%) and the IA SBBI U.S. Long-Term Corporate Bond Index (33%) from January 1926 through December 1975. Stock returns represented by the performance of the S&P 500 Index.
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S&P 500 Investment-Grade Bonds
When Stocks Fall, Bonds Tend to Stabilize Portfolio ReturnsBond Returns in Years when Stocks Were Down, 1926–2015
CALENDAR YEAR TOTAL RETURN (%)
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How much has that insurance cost historically?
Source: Bloomberg, as of 12/31/16. Bond returns from 1940 to 1975 are based on Fidelity Investments’ “Synthetic Aggregate” represented by 67% intermediate government bonds and 33% long-term corporate bonds. Investment-grade bond returns are represented by the BBgBarc U.S. Aggregate Bond Index from January 1976 and by a composite of the IA SBBI U.S. Intermediate-Term Government Bond Index (67%) and the IA SBBI U.S. Long-Term Corporate Bond Index (33%) from January 1926 through December 1975. Past performance is no guarantee of future results. It is not possible to invest directly in an index. All market indices are unmanaged. Not intended to represent the performance of any Fidelity fund.
-0.2% -0.6%-0.3%-2.6%
-1.6% -0.6% -1.0%-3.2% -2.9%
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1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Annual Return 10-Year Treasury YieldAVERAGE ANNUAL RETURN: 5.6%
Negative Annual Return
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Important InformationUnless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, act as an impartial adviser, or to give advice in a fiduciary capacity.
Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.
These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security, sector, or investment strategy.
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets.
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation, credit, and default risks for both issuers and counterparties. (Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.) Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
The FA Total Bond, Fidelity Conservative Income Bond, and FA Intermediate Municipal Income funds can invest in securities that may have a leveraging effect (such as derivatives and forward- settling securities) that may increase market exposure, magnify investment risks, and cause losses to be realized more quickly.
Fidelity Conservative Income Bond - Changes in government regulation, interest rates and economic downturns can have a significant effect on issuers in the financial services sector, including the price of their securities or their ability to meet their payment obligations. Prepayment of principal prior to a security's maturity can cause greater price volatility if interest rates change. The fund is not a money market fund and will have a fluctuating NAV.
FA Intermediate Municipal Income: The municipal market is volatile and can be significantly affected by adverse tax, legislative, or political changes and the financial condition of the issuers of municipal securities. Income exempt from federal income tax may be subject to state or local tax. All or a portion of the Fund’s income may be subject to the federal alternative minimum tax. Income or fund distributions attributable to capital gains are usually subject to both state and federal income tax.
Fidelity Dividend ETF for Rising Rates: Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. The securities of smaller, less well-known companies can be more volatile than those of larger companies. There is no guarantee that a factor-based investing strategy will enhance performance or reduce risk. Before investing, make sure you understand how the fund’s factor investment strategy may differ from more traditional index funds. Depending on market conditions, fund performance may underperform compared to funds that seek to track a market-capitalization weighted index. The return of an index ETF is usually different from that of the index it tracks because of fees, expenses and tracking error. An ETF may trade at a premium or discount to its Net Asset Value (NAV).
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Important Information
FA Real Estate Income: Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.
FA Biotechnology: The biotechnology industry can be significantly affected by patent considerations, intense competition, rapid technological change and obsolescence, and government regulation.
FA Health Care: The health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. S&P 500 Index is a market capitalization-weighted index of 500 widely held U.S. stocks and includes reinvestment of dividends. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC.Dow Jones Industrial Average, published by Dow Jones & Company, is a price–weighted index that serves as a measure of the entire U.S. market. The index comprises 30 actively traded stocks, covering such diverse industries as financial services, retail, entertainment, and consumer goods.MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid-cap stocks in developed and emerging markets, excluding the United States.Bloomberg Barclays U.S. Aggregate Bond is a broad-based, market-value-weighted benchmark that measures the performance of the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market; sectors in the index include Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS. Bloomberg Barclays U.S. Credit Index comprises the U.S. Corporate Index and a non-corporate component that includes foreign agencies, sovereigns,supranationalsBloomberg Barclays U.S. 1-3 Year Government/Credit Index is a market value-weighted index of investment-grade fixed-rate debt securities with maturities from one to three years from the U.S. Treasury, U.S. Government-Related, and U.S. Corporate IndicesIA SBBI U.S. Intermediate-Term Government Bond Index is an unweighted index that measures the performance of five-year maturity U.S. Treasury bonds. Each year, a one-bond portfolio containing the shortest non-callable bond having a maturity of not less than five years is constructed.IA SBBI U.S. Long-Term Corporate Bond Index is a custom index designed to measure the performance of long-term U.S. corporate bonds.
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Slide 16 Methodology
Performance of equal-weighted average rolling one-year returns of active funds (with both fee-filter & rating-filter), passive funds, and benchmark were calculated in the same way as indicated in methodology for slides 7, 9-13, 15, 16. Then, excess return was measured as performance of active funds (or passive funds) over the performance of benchmark. Foreign mid/small growth asset class was omitted because no passive fund qualified the search criteria (i.e. oldest share class with U.S. as the exchange country, excluding enhanced index funds). Starting dates of analysis, noted along with benchmark below, was determined by the existence of continuous returns for all three – active funds, passive funds, and benchmark. Ending date was May 31, 2018 for all asset-classes. Benchmark returns represented by: Intermediate Term Bond - Bbgbarc US Agg Bond TR USD (Jan. 1987); High Yield Bond - ICE BofAML US High Yield TR USD (Feb. 2011); Bank Loan - S&P/LSTA Performing Loan TR (Apr. 2011); Emerging Markets Bond - JPM EMBI Global TR USD (Nov. 2007); Large Growth - Russell 1000 Growth TR USD (Dec 1992); Large Blend - S&P 500 TR USD (Sept. 1976); Large Value - Russell 1000 Value TR USD (Dec. 1992); Small Growth - Russell 2000 Growth TR USD (Jun. 1998); Small Blend - Russell 2000 TR USD (Jun. 1992); Small Value - Russell 2000 Value TR USD (Jun. 1998); Foreign Large Growth - MSCI EAFE Growth NR USD (Sept. 2005); Foreign Large Blend - MSCI EAFE NR USD (Oct. 1993); Foreign Large Value - MSCI EAFE Value NR USD (Dec. 2002); Foreign Small/Mid Blend - MSCI EAFE Small Cap NR USD (May 2007); Foreign Small/Mid Value - MSCI EAFE Small Value NR USD (Jul. 2011); Diversified Emerging Markets - MSCI EM NR USD (Jul. 2002); Energy - MSCI USA IMI/Energy NR USD (Jan. 1999); Health Care - MSCI USA IMI/Health Care NR USD; Technology - MSCI USA IMI/Information Tech NR USD (Jan. 1999); Real Estate - DJ US Real Estate TR USD (Apr. 1998).
Important Information
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Slide 20 Methodology
Global Financial Data has calculated world excluding the US and Europe indices back to 1919. We have weighted each country according to theirrelative Gross Domestic Prodngzdf v/'ngdz .;nzdg ucts and Stock Market capitalizations. GDP and stock market capitalization data are not available back to 1919, so we have approximated what these relative values would have been. We have chosen not to rebalance the indices with different weights because we feelthis would create greater fluctuations in the indices' values. Since the Morgan Stanley World index was not calculated before 1970, an index has been put together to simulate how a World Index would have performed had it been calculated back to 1919. The indices were weighted in January 1919 as follows: North America 44% (USA 41%, Canada 3%), Europe 44% (United Kingdom 12%, Germany 8%, France 8%, Italy 4%, Switzerland 2.5%, Netherlands 2.5%, Belgium 2%, Spain 2%, Denmark 1%, Norway 1% and Sweden 1%), Asia and the Far East 12% (Japan 6%, India 2%, Australia 2%, South Africa Gold 1%, South Africa Industrials 1%). It was assumed that the country weights did not change until 1970. The EAFE, Europe, and Asia indices use the same relative weights. Capitalization weightings are used beginning in 1970 using the same countries that are included in the MSCI indices. In several cases, such as Germany or Japan, hyperinflations caused their stock markets to lose over 90% of their value. Rebalancing the portfolio would have created a ten-fold or greater adjustment in an investor's weighting of that country in their portfolio. To simplify matters, we have taken a true buy-and-hold approach, setting the country weights in 1919, and leaving them unchanged until 1970. We have taken the total return series for Australia, Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Spain, the United Kingdom and the United States to extend the total return indices back to December 1925. The world index divided between North America (50%), Europe (40%) and Pacific (10%). Europe's weightings are France 25%, Germany 25%, Italy 12.5% and the United Kingdom 37.5% from 1925 through 1950; Europe's weightings are Belgium 7.5%, France 17.5%, Germany 17.5%, Netherlands, 7.5%, Spain 7.5%, and the United Kingdom 30% from 1951 through 1969. The Pacific region's weights are Australia 50% and Japan 50% from 1925 through 1950, and Australia 30%, Japan 70% from 1951 through 1969. The United States represents all of North America from 1925 through 1933. From 1934 through 1969, the United States represents 90% of North America and Canada 10%. From 1970 on, the indices are capitalization weighted and include the same countries as are included in the MSCI World Index.
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Past performance is no guarantee of future results.
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