Semi-Annual Report and Accounts - chartbook.fid-intl.com

Fidelity
Funds
Investment Manager’s Report*
Performance Overview - 6 months ended 31 October 2012
Global equities rose over the six months ended 31 October 2012. Weak economic data and consequent concerns about global growth coupled with
persistent speculation about Greece exiting the eurozone and anxiety about Spain’s banking system weighed on markets in the initial months. Equities,
however, recovered after an agreement by eurozone leaders to relax conditions for recapitalising banks and central bank stimulus measures aimed
at boosting money supply in order to support faltering growth. The European Central Bank (ECB) announced a new, conditional sovereign bond-buying
programme and the US Federal Reserve (Fed) extended its “Operation Twist” where it sold short term securities to buy longer term debt to push down
long term borrowing cost, and launched a third round of quantitative easing (QE3). Moreover, the Bank of Japan and Bank of England (BoE) expanded
their asset purchase programmes. Separately, Chinese authorities announced an infrastructure investment programme. Stock markets lost some ground
towards the end of the period due to resurgence of concerns about global growth and company earnings. Uncertainty about the upcoming US
Presidential election and impending fiscal cliff also kept investor sentiment subdued.
Equities in Europe ex-UK rose the most in US Dollar terms over the period, closely followed by those in Pacific ex-Japan. The UK and the US rose by
smaller margins whilst emerging markets and Japan declined over the period. At a sector level, health care, telecommunications and financials
generated the best returns, outperforming the information technology and materials sectors. Returns in US Dollar terms were hurt by its appreciation
against the Euro, Sterling and the Yen.
110
105
100
95
90
85
Apr 12
May 12
Jun 12
Jul 12
Aug 12
MSCI World Global Bonds
Sep 12
Oct 12
MSCI EUROPE EX-UK
MSCI PACIFIC EX-JAPAN
Global Bonds
MSCI UK
MSCI World
MSCI USA
MSCI EM
MSCI JAPAN
Source: Datastream, Total Returns in USD rebased to 100, 30.04.2012 – 31.10.2012 Source: Datastream, Total Returns, USD, 30.04.2012 – 31.10.2012
European equities advanced over the period, though stocks remained volatile. There were concerns about the spread of the debt crisis and the
possibility of Greece exiting the eurozone. However, healthy corporate results and accommodative policy actions by global policymakers provided
support. ECB President Mario Draghi’s pledge to do “whatever it takes” to save the Euro also proved positive. Sentiment improved further after the
ECB agreed to launch an unlimited bond purchase programme to lower borrowing costs for some indebted eurozone nations. As a result, financial
stocks surged over the period. Overall, the health care and utilities sectors performed well, whilst consumer discretionary and telecommunication
services lagged.
The UK stock market rose mainly due to encouraging policy announcements by global central banks. The BoE increased its asset purchase facility to
£375 billion. There was encouraging news on the economic front, as the UK emerged from recession over the third quarter of 2012, supported by the
Olympic Games. Concerns about the eurozone credit crisis, which caused significant volatility in April and May, also subsided somewhat after
authorities approved several policy measures to recapitalise banking systems in troubled countries. Financials, technology and consumer related firms
were among the notable gainers during the period, whilst there was a rotation out of defensives. Returns from the resource sectors were weak due to
growing concerns about demand, especially from China.
US equities gained following aggressive policy intervention at home and abroad. Lacklustre economic data and weak jobs growth early in the period
prompted the Fed to launch an aggressive QE programme linked to a recovery in the jobs market. Continued consolidation in the housing sector and
policy interventions in Europe also supported sentiment. Nevertheless, the uncertainty surrounding the outcome of the US Presidential election
restrained gains. On the corporate front, many businesses lowered their earnings expectations citing a weaker demand outlook and corporate profits
were expected to decline. Most businesses had sound balance sheets and remained cash rich. Valuations were cheap on a free cashflow basis and
fair on a price-to-earnings basis.
After rallying strongly at the start of 2012, the Japanese market started to lose momentum by the second quarter. As developments overseas escalated,
the rate of decline in Japan accelerated. Below consensus economic data in China and the US, and deteriorating conditions in the eurozone resulted
in renewed risk aversion globally. Statements from monetary authorities raised expectations of coordinated easing and stocks recovered some ground.
However, gains were short lived. Uncertainty about the outlook for global growth, particularly in China and Europe, contributed to a surge in the Yen.
Improvements in US economic data provided a subsequent boost to sentiment, but Japanese stocks lacked direction. The latest wave of central bank
stimulus measures lifted Japanese equities, though tensions with China and negative earnings revisions capped gains.
Asia Pacific ex-Japan equities edged higher over a period that was characterised by fears over slowing growth in China. Cyclicals ended lower, whilst
defensives advanced strongly. Consumer discretionary was the worst performing sector in US Dollar terms, driven by a slowdown in retail sales and
subdued consumer confidence in the developed world. Materials and energy shares also succumbed to flagging economic growth prospects. On the
other hand, high yielding stocks within the telecommunications and utilities sectors surged. Financials also performed well, particularly following the
announcement of liquidity enhancing measures by leading central banks around the world.
Emerging market equities declined over the period. Stocks in the larger emerging economies, such as China, South Korea, Brazil and Taiwan, fell amid
flight to safer assets and data releases from the US and China that suggested a slower pace of economic activity than expected. Conversely, in the
Emerging Europe, Middle East and Africa (EMEA) region, equities in South Africa and Turkey rose on the back of improving investor sentiment and
macroeconomic data. Nevertheless, the uncertainty over the US Presidential election, leadership change in China and the slowdown in Chinese
economic activity remained a prime concern for investors.
*The information stated in this report is historical and not necessarily indicative of future performance.
4
-6.75
-1.01
2.16
2.08
1.92
2.56
5.91
6.28