A Newsletter from Fidelity International, Nordic Region #1 2016
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6 177 analysts on trends and opportunities in a new economic landscape
Multi asset solution in a SEK-hedged share class
Asset allocation: Improving data, tighter policy?
This newsletter is for investment professionals only and should not be relied upon by private investors
Focus: ”New China” vs ”Old China”
UPDATE
EDITORIAL
THIS YEAR, it has been 20 years since Fidelity opened up its first office in Stockholm covering the Nordic region. It has been great journey and we would like to celebrate this with our clients and partners who have contributed to our growth and mutual success during an inspirational afternoon and evening on September 22. We will share some highlights from the past but the main focus will be on future trends – how technology and innovation will influence us as individuals and the industry as a whole. Reserve your seat already today at www.fidelityanniversary.com Speaking about future trends and digitalization, this issue of Perspective will be the last printed edition. In the fall, we will launch a brand new, digital newsletter. We will continue to deliver the latest insights and market trends but also provide more interactive content such as video interviews and webinars. THE FEATURE ARTICLE in this issue is our Annual Analyst Survey. The survey gives a unique bottom-up perspective from Fidelity’s equity and credit analysts based on 17,000 company interviews. It’s a temperature check on geographies and sectors built entirely from the bottom up. As always, our Solutions team provides its monthly asset allocation perspective based on where we are in the investment clock. You can also read more about a fund that the Solutions team manages, which aims to generate consistent and regular income at a low volatility. China has been a main concern during the last year. Raymand Ma who manages our FF China Consumer Fund has been very successful in capturing the investment opportunities in the “new China”. Don’t miss the interview with him where he explains the reasons behind the fund’s success and his thoughts on the Chinese market on the last page.
Stefan Blomé Head of Sales, Distribution
Fidelity strengthens its sales team AXEL NORLUND JOINED the Fidelity sales team in Stockholm on April 1. In his role as Sales Director, Axel will work closely with the fund selectors across the Nordic region in order to provide investment sparring and support to Fidelity’s wholesale clients. Axel brings more than 15 years’ of experience in the financial services sector, most recently as Portfolio Manager, External Products, at Nordea. “With his broad experience, in-depth technical skills and strong market knowledge, Axel will be a great addition to the team”, says Stefan Blomé, Head of Sales at Fidelity. Axel Norlund
Photo: IBL
20-years anniversary
Diversified multi asset solution – now available in a SEK-hedged share class The Fidelity Funds Global Multi Asset Income Fund aims to deliver a stable and predictable income to investors within a low volatility framework. Now the fund is available in a SEK-hedged share class. ALL INVESTMENT is based on one key question: how can we use markets to achieve financial goals? In recent years, the investment industry has become more explicitly focused on building ‘solutions’, responding to growing investor demand for comprehensive strategies to meet their investment needs. These can include a sustainable income, capital preservation, protection against inflation or steady capital appreciation within a low volatility
framework. Multi asset investing can play an important role in meeting these needs, with its ability to harness the long-term characteristics of asset classes. Allocating to a range of asset classes can also diversify risk and deliver a more consistent set of outcomes over the long term. THE FIDELITY Funds Global Multi Asset Income Fund is a highly diversified multi asset solution that aims to deliver a
Production Baluba Branded Content Editorial Council: Petter Edwinson (Fidelity), Petra Broman (Fidelity), Fredrik Arvidsson (Baluba) Design: Martin Kindgren (Baluba)
is a newsletter from Fidelity International.
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stable and predictable income to investors within a low volatility framework. The target yield is 5 to 5.5% annually from natural income. The fund also aims to provide an effective balance between stability of income, capital growth and capital protection during times of market stress. The fund’s total assets under management stood at $3.0 billion at the end of February 2016. The fund is now also available as a SEK-hedged share class per March 2016.
UPDATE
Janet Yellen, Chair of the Federal Reserve.
Asset allocation perspective:
Improving data, tighter policy? Stocks have rallied strongly from their February lows on the back of a dovish Fed and an improvement in Chinese data. THE NEXT FEW months are critical. The Fed should take solace from the improvement in economic and financial conditions and it will be telling if they start to guide the market to a June hike or stay dovish. Equally, while Chinese data looks better at a headline level, there is significant seasonality in the data and coming releases should give a better indication of the underlying trend. CLOCK WISE: The Investment Clock model which is a key input into Fidelity’s asset allocation process suggests a positive stance on risk assets at the margin. The growth leading indicator picked up over the
month, with improvements in the US and UK more than offsetting some deterioration in European data. Trend indicators remain positive. The inflation reading was a touch softer over the month despite a tick higher in the leading indicator. The recent increase in commodity prices is likely to put upward pressure on our inflation measure in the coming months. POSITIONING: Despite an improvement at the margin on the global growth picture, Fidelity’s Solution Team maintained a broadly neutral stance on risk assets as uncertainty clouds the picture. With stocks at the top of their
recent range the team switched some exposure out of equities and into commodities. Expectations for further Fed easing have been pushed out again. The team think this is unwarranted and have deepened its underweight. While there has been some better data out of China the underlying trend is weak and our underweight to EM is the largest position at the regional level. In sectors the team took some profit in Utilities and Staples although it continues to maintain its negative stance. The US dollar remains preferred currency to be overweight and is balanced with underweight positions in the Australian dollar, sterling and Japanese yen.
OVERWEIGHT USD, EQUITIES AND DISCRETIONARY ++
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Photo: IBL
The Morningstar house award.
Fidelity wins presigious house awards For the third consecutive year, Fidelity wins Morning star awards in the Nordics. AT THE MORNINGSTAR AWARDS ceremonies in Helsinki and Oslo in March, it was announced that Petter Edwinson Fidelity International has won several prestigious house awards. The Morningstar Awards are designed to help investors around the world identify the year’s most exceptional funds and fund managers. The house awards recognize fund management companies that have delivered sustained outperformance on a riskadjusted basis across their fund line-ups. “We are proud and grateful for these awards and that we are being awarded across equities, fixed income and multi-asset. This clearly demonstrates the breadth and depth of the offering at Fide lity and that we have strength across the board. It’s above all important and encouraging that our active management approach has delivered value to our investors”, says Petter Edwinson, Head of Marketing and Business Development at Fidelity. NORWAY
Financials Materials
Utilities Staples Discretionary
Swiss Franc
Australian Dollar Sterling Japanese Yen
Best Fund House: Equity Best Fund House: Multi Asset FINLAND
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Best Fund House: Equity Best Fund House: Fixed Income Best Fund House: Multi Asset
ANALYS
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OVERALL, ANALYSTS EXPECT leverage to remain at last year’s levels but this masks a divergence that sees rising levels in EMEA, Latin America and the US driven by the energy and commodity sectors’ woes. This reflects the regions’ balance sheet health: on average now seen as about right in Europe and the US (no longer as cautious) but stretched in EMEA and Latin America. As the credit cycle in particular matures, default rates are expected to pick up everywhere except Japan, but mostly in China, EMEA/Latin America and the US. Energy, materials and industrials firms are reeling from a year of capacity reductions and will have to adjust their operations and their planning further, as more heavy expenditure cutting is in the pipeline. Much of this capacity reduction will not be reversed The consumer will be easily (or quickly) even if the price the incremental driver of oil or other commodities bounces of growth this year. significantly.
But this broad-brush picture tells only part of the story. Looking at the detail, we found some key trends that look set to define the year. One of the survey’s strongest findings is the growing gap between emerging and developed markets. This gap continues to widen, not only because developed markets’ fundamentals are holding up reasonably well, but also because the headwinds in emerging markets are intensifying considerably. Last year, the survey predicted that company fundamentals would be supportive of growth across developed markets, but it warned strongly of gathering storm clouds over commodity-heavy emerging economies. This year, several emerging markets at the centre of these storms appear to be facing gale-force winds, requiring careful navigation on the part of investors. THE GAP BETWEEN the manufacturing and service sides of the economy is also set to continue. The consumer will be the incremental driver of growth this year, supporting ongoing innovation that is changing the face of technology and healthcare in particular. Meanwhile, financials are emerging from years of regulation-driven belt-tightening in better health than is often assumed. In all of these trends, we find opportunities, underlining the value of Fidelity’s analysts’ detailed ‘on-theground’ research. Persistently low prices for oil and other commodities have triggered dramatic cuts in capital expenditure in the energy and materials sectors that are not easily reversed. Initially, many companies tried to weather the storm through careful cash flow management, but only the very strongest, most diversified and vertically integrated companies can still do so. As a result, both maintenance and planned new investment has been scaled back drastically. Over time, this will addPhoto: Shutterstock
ILL 2016 MARK a break from the trends of recent years? Fidelity’s annual analyst survey comes at a timely point, when many investors are questioning the direction of travel for companies and economies. The results undoubtedly point to a maturing cycle with rising risk and an increasingly complex investment climate. Fidelity’s analysts see increased weakness in company fundamentals overall and are generally less optimistic or more pessimistic than last year. This comes through in all the key indicators across the survey. On balance, industry returns are now expected to slide a little from last year as management confidence is predicted to ease, capital expenditure is likely to be cut further and dividend expectations are adjusted significantly in energy, materials and utilities.
Old versus new
Old
New Energy Materials Utilities
The gap between the manufacturing and service sides of the economy is set to continue. Excess capacity in old economy sectors will persist, driving further painful adjustment and curtailing returns. New economy sectors are faring much better, boosted by consumer resilience and ongoing innovation. Rising macro risks are offsetting some of the improvement in financials’ fundamentals.
Industrials Financials Consumer discretionary Telecoms Healthcare Consumer staples Information technology
COOLING SEGMENT
WARMING SEGMENT
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ANALYS
Regional conclusions
Photo: All Over Press
ress the issue of excess capacity that plagues both sectors. In energy, Fidelity’s analysts expect this to happen in the second half of the year but elsewhere the adjustment in capacity may last longer. A year of energy and commodity companies scaling back their activities has left its mark on other sectors, too. Sentiment for both industrials and utilities has switched from confident of further growth last year, to concerned about deteriorating prospects this year. We can see this in Fidelity’s analysts’ views on management confidence, capital expenditure plans and industry returns. Energy capital expenditure accounts for a large part of global capital expenditure, so reductions in energy capital goods orders have a significant knock-on effect on those industrial firms that make equipment, as well as energy and commodity firms’ suppliers. But we are also witnessing increasingly capitallight growth in what is often termed the ‘dematerialised’ economy. Many firms need less and less equipment to produce more and more output; new technologies are boosting productivity without the need for heavy equipment. In addition, compared to other goods, investment goods are becoming cheaper. In previous cycles, lower investment would have dragged the profit share down but in this cycle companies seem less hindered by modest capex levels: maintaining returns and profitability simply seems to require less investment in capital. This means that even consumer manufacturing companies are scaling back their capital expenditure. In fact, the only sectors that are still seen increasing their capital expenditure over the year are healthcare, IT and telecoms. THIS WEAKNESS in industrial production and manufacturing has of course been evident in macro data for a while, but this data is backward looking. Fidelity’s survey tells us that it will take much longer to address the overhang of years of over-investment. In fact, it may take years of capital scarcity to restore the capital and cost discipline that is required for an equilibrium in supply and demand, particularly affecting emerging markets, with their concentration of commodity and materials businesses. While the supply-side adjustment in the ‘old economy’ sectors clearly weighs on Fidelity’s analysts’ predictions, we still see pockets of strength in other sectors, underpinned by three key trends. The first of these is innovation. Few sectors appear immune to the effects of new technologies, inventions, discoveries and business models and the disruptive impact these can have on pricing power and market share; but the most affected are IT and healthcare. This requires careful analysis as the fortunes of those who can capture innovation will contrast starkly with those left behind, yet it creates many exciting opportunities for investors who can identify the winners of such upheaval at an early stage. THE SECOND ENCOURAGING THEME is the emergence of the developed markets’ consumer as the engine of growth. Consumers’ purchasing power benefits from low energy prices, low inflation overall, supportive housing markets, wage growth (even if very subdued) and recovering labour markets. Consequently, management confidence in both consumer staples
COOLING SEGMENT
WARMING SEGMENT
Slow but steady progress In Europe and the US, Fidelity’s analysts predict that company fundamentals will remain comparable to last year’s conditions – possibly slightly better in Europe, and a little softer in the US. This is an important finding, indicating that the economic cycle in both regions is maturing, but not yet coming to an end. It is the detail that is most illuminating – a tale of upheaval and pricing power pressures that contrast with consumer resilience. Innovation is spurring growth particularly in IT and healthcare, but elsewhere too, for example in finance and media.
Capex demand stagnates The situation across emerging markets is worrisome, requiring investors to tread carefully. The economies that are hardest hit are those reliant on commodities, clustering in the Middle East, Africa and Latin America. Last year’s findings flagged this, pointing to deteriorating company fundamentals in this region, yet there are few indications yet that this trend could be bottoming out. The vast majority of Fidelity’s analysts expect things to get worse (or much worse) before they get better.
and discretionary goods has turned neutral; Fidelity’s analysts no longer predict falling confidence like they did last year and generally predict more hiring than in other sectors except IT. Returns in consumer staples are likely to rise on pricing power and demand growth, and discretionary analysts tell us that CEOs regard demand growth as the main source of earnings growth. Strong balance sheets and falling leverage mean consumer companies do not need to raise much capital. Add to this modest cuts in capital expenditure and the result is sufficient room for dividends to be maintained or raised. Read a full report on Fidelity’s analyst survey, with all the key indicators revealed, on your local Fidelity website.
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ANALYS
Challenging corporate climate Regarding China, Fidelity’s analysts are somewhat more pessimistic than in 2015 and anticipate an increasingly challenging corporate climate over the year. However, this is not out of line with market expectations for a continued slowdown in growth in China, as the investment-export growth axis slowly gives way to consumer-driven growth, forcing large-scale adjustment in the manufacturing part of the economy. Expected returns
in the industrial sector are under pressure but higher up the value chain, China is fast becoming more competitive. As low-value-add businesses move away, China is acquiring the tools required to compete throughout the entire production chain, including up-market technologies and high-level skills. In turn (and over time), this is boosting the country’s consumer base, its purchasing power and its competitiveness in advanced industries.
Catch-up effect from a low base
Stable outlook masks mixed bag Asia Pacific (excluding China and Japan but including Australia) constitutes more of a mixed bag. Overall, analysts are less optimistic than they were last year, when they still predicted a slight further improvement in company fundamentals, now sitting on the fence with a neutral outlook for 2016 overall. However, this region hides a multitude of microclimates. In India, for example, Fidelity’s analysts still see many attractive investment opportunities supported by an entrepreneurial spirit, economic reform,
The survey Every year, Fidelity asks all its credit and equity analysts about the fundamentals for the companies they analyse. They do not focus on capital market pricing trends or valuations, which are highly sensitive to
infrastructure improvements and supportive demographics. Tech-heavy Taiwan and South Korea will benefit from cheap input costs and economies like Vietnam, Laos, Cambodia and Myanmar from the migration of low-value-add manufacturing out of China to lower-cost production centres. But the larger economies of Indonesia and Malaysia are facing headwinds from China’s growth slowdown, low commodity prices, institutions that are unwilling to adapt, poor governance and inadequate reform.
sentiment swings, but on the underlying business conditions that determine companies’ successes and struggles; their ability to evolve and grow, but also the hurdles they face and the threats to their competi tiveness over time. The result is a temperature check on geographies and sectors that is rare
among investment surveys for being built entirely from the bottom up. This is not a macroeconomic overview of corporate conditions, based on widely available, publicly released data and official indicators. Rather it is an aggregate measure of sentiment based on a wealth of proprietary
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Japan tops Fidelity’s forwardlooking sentiment ranking. This confirms that the slow-butsteady improvement in corporate governance promoted by the ‘Abenomics’ programme’s third arrow is becoming embedded, leading to anticipated improvement in key corporate indicators focusing on shareholder value and returns on capital. Compared to Western markets, Japan’s industry returns still seem low and many significant challenges remain, so in many ways this is a catch-up effect from a low base. But longer term, the improvement bodes well, both for investors and for economic growth.
analysis and company meetings – a pixe lated image, made up of 17 000 company interviews and countless hours of in-house analysis by Fidelity’s analysts, covering all industries and all regions of the world. In a sea of top-down surveys, it offers a genuinely ‘bottom-up’ picture of the outlook for the corporate sector.
Fidelity Funds China Consumer Fund – a fund investing in the new China
“Performance drivers are stock-specific” FUND IN FOCUS The Fidelity Funds China Consumer Fund has a strong track record, much thanks to portfolio manager Raymond Ma and his bottom-up stock selection approach. Here, he shares his thoughts on the Chinese market. You have recently completed five years as the portfolio manager of the Fidelity Funds China Consumer Fund. Are there any achievements that you would like to highlight? “First of all, I would especially like to thank investors for their trust in Raymond Ma this strategy since its inception in February 2011. During this period, the fund’s size has grown substantially, from US$5 million to over US$1.3 billion today. Secondly, the fund has a good track record since inception, having delivered a net of fee excess return of 5.2% per annum compared to the MSCI China Index and 4.7% per annum compared to its peer group average. It has also beaten 97% of its peers since inception. This could be attributed to my bottom-up stock selection approach. Finally, I had long foreseen that consumption and services would emerge as China’s new growth engine and would ultimately replace traditional growth drivers the medium to long term. Therefore, since inception, the fund maintained a significant bias towards consumer-related and services sectors and an underweight stance in traditional “Old China” sectors such as banking, energy, materials and industrials. Over the past five years, the strong performance of “New China” plays was in stark contrast to the underperformance of “Old China” stocks.”
What has contributed the most to the fund’s consistent outperformance? “Over the past five years, prudent stock selection has been the key source of alpha generation. In particular, rewarding security selection in the consumer discretionary, consumer staples and financials sectors supported returns. Moreover, the overweight exposure to information technology and underweight allocation to “Old China” sectors such as energy and materials helped gains. STRONG RELATIVE RETURNS COMPARED TO PEERS 8 7
MSCI China Index Peers Group Average
6 5 4 3 2 1 0
6-months
1 year
Since inception (annualized)
Source: Fidelity International, Morningstar, as of 29 February 2016. Performance figures are net of fees in USD terms, gross income reinvested. The fund was launched on 23 February 2011. Peer group refers to the funds that fall under the category of Morningstar GIF Equity Greater China.
The fund’s strong outperformance has been primarily driven by its exposure to a handful of off-benchmark stocks as well as the high-conviction holdings in internet and software companies further boosted returns. In addition, the lack of exposure to energy stocks supported relative performance.” How will you position the fund going forward? “As a bottom-up stock picker, I believe an uncertain macroeconomic environment is often one where investors can pick up great companies at attractive valuations. In general, I believe that performance drivers for the next 12 months will be very stock- specific and that bottom-up stock selection will remain the primary driver of my portfolio’s positioning. I continue to focus on areas that can deliver sustainable growth in the next three to five years. I maintain an overweight stance in “New China” sectors, as they are less sensitive to short-term policy shifts. These sectors are also expected to witness solid growth in the coming years due to technological advancement, changes in consumer behaviour and flexible business strategies. I will also maintain the underweight stance in “Old China” sectors given their weak growth outlook. As liquidity risk remains a key concern, I continue to prefer companies that have strong cash generation capability. I also like companies with strong balance sheets and net cash positions as such holdings will enhance the defensiveness of the portfolio.”
Past performance is not a reliable indicator of future results. The value of investments [and the income from them] can go down as well as up and investors may not get back the amount invested. We recommend that you obtain detailed information before taking any investment decision. Investments should be made on the basis of the current prospectus and KIID (key investor information document), which is available along with the current annual and semi-annual reports free of charge from our distributors, from our European Service Centre in Luxembourg , FIL (Luxembourg) S.A. 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
This document is for professional investors only and may not be reproduced or circulated without prior permission and must not be passed to the general public. Unless otherwise stated, all views expressed are those of the Fidelity organisation. This communication is not directed at, and must not be acted upon by persons inside [the United Kingdom or] the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on its own products and services and does not provide investment advice based on individual circumstances. Fidelity Funds “FF” is an open-ended investment company established in Luxembourg with different classes of shares. Due to the lack of liquidity in many smaller stock markets, certain Country Select Funds may be volatile and redemption rights may be restricted in extreme circumstances. In certain countries, and for certain types of investments, transaction costs are higher and liquidity is lower than elsewhere. There may also be limited opportunities to find alternative ways of managing cash flows especially where the focus of investment is on small and medium sized firms. For funds specializing in such countries and investment types, transactions, particularly those large in size, are likely to have a greater impact on the costs of running a fund than similar transactions in larger funds. Prospective investors should bear this in mind in selecting funds. Some funds invest in a relatively small number of companies. This can make them more volatile than funds that are more diversified. Income is paid to shareholders. The fund seeks to maintain a stable payment per share so far as is reasonable. The payment is not fixed and will vary according to economic and other circumstances, and the ability of the fund to support stable payments without a long-term positive or negative impact on its capital. This may occasionally result in income payment coming out from the capital. Charges are taken from the capital. Performance calculated NAV to NAV, gross income reinvested, in [currency], excluding initial charge as per 29 February, 2016. Unless otherwise stated, all views expressed are those of the Fidelity organisation. Investors should also note that the views expressed may not be current and may have been acted upon by Fidelity. The research and analyses used in this documentation is gathered by Fidelity for its use as an investment manager any may have already been acted upon for its own purposes. This document is for professional investors only and may not be reproduced or circulated without prior permission and must not be passed to the general public. Issued by FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier). SSL1605N01/1116