Singapore, December 2009

Fidelity International

Market Outlook
ASIA capital flows in. China is a good example of this. There are
a number of local companies for example that are currently
developing jet airlines which are set to compete with the
Maria Abbonozio
existing duopoly of Airbus and Boeing.
Investment Director, Asia ex Japan

Low cost manufacturing continues to be a competitive

Equity-friendly conditions are expected to remain and Asia
advantage for most Asian countries and developed market
Pacific economies will be the place to invest with robust
dollars have flowed into the region in search of cheaply
economic conditions to continue throughout 2010.
manufactured goods and low cost production and in 2010,
this trend will continue. And of course, Asia has a growing
Asian markets remain attractive for investors but the degree
consumer class and demand for western-style consumer
of confidence in the region in 2010 will depend largely on
goods will grow exponentially as a result of growing
the pace of economic recovery in the West and the extent
prosperity across the region.
to which growing domestic demand in Asia can offset the
region's reliance on exports. The structural story in Asia
remains intact and the region is in a fortunate position
whereby government, corporate and personal balance INDIA AND EMERGING ASIA
sheets are healthy which is a very different story to many
Western economies. Teera Chanpongsang
Portfolio manager of Fidelity Funds - India Focus Fund and
There are four key differentiators which will drive Fidelity Funds - Emerging Asia Fund
future growth in the region: natural resources wealth,
emerging industries, the low cost of manufacturing Emerging Asia presents a strong long term investment
and the growing consumer class. opportunity. Early signs of a recovery are visible in recent
economic indicators and earnings upgrades. The region
Asia's geography is heavily endowed with natural resources, has one of the strongest GDP growth rate in the world,
including coal, oil and natural gas. We have seen a number driven by favourable demographics and healthy population
of international companies embark on or look to form joint growth, which means more people are added to the region's
ventures in countries such as Australia and Indonesia and work force. Low penetration of various consumer goods
this foreign investment will continue. and services and rising income levels imply significant
consumption growth potential. The key overweight positions
Asia also has a number of emerging industries and in this portfolio are in the consumer discretionary, financials
deeper markets are starting to develop as more foreign and technology sectors.
 Singapore, December 2009

In India, a key theme that I am playing is a further recovery infrastructure development in urban and rural areas.
in the domestic economy. Consequently, the portfolio is
overweight in the consumer discretionary, financials and The key opportunities to watch out for are in sectors
industrials sectors. The overweight among software services benefiting from the healthy growth in domestic demand
exporters is because of the prospects for - and India's and a global economic recovery. Broadly, the fund is
strong position in - the global outsourcing industry. overweight in the consumer discretionary, financials and
Favourable demographics, less reliance on exports relative information technology stocks. I also have a marginal
to regional peers and strong domestic consumption trends overweight in the industrials sector, given the increased
bode well. A stable government at the centre for the next infrastructure spending in the region.
five years should drive future reforms and fulfil infrastructure
development needs.
JAPAN
CHINA Robert Rowland
Portfolio manager of Fidelity Funds - Japan Fund
Martha Wang
Portfolio manager of Fidelity Funds - China Focus Fund My outlook for 2010 is mixed. The current economic cycle
is improving from a very low base, with exports, industrial
I remain positive about China given the economic growth production and capacity utilisation in the driving seat. This
momentum and government's inclination to ensure the has translated into a tentative recovery in corporate earnings
rapid pace of expansion. The crisis management and a number of companies have surprised the market with
programmes deployed at the end of 2008 could be gradually stronger-than-expected results and guidance at the interim
scaled back as stimulus measures gain traction and market stage.
participants and policy makers feel more confident that
recovery is sustainable. However, the government is focused While recent earnings upgrades are encouraging, there is a
on transforming the economy into one which is more reliant question mark over their sustainability because the absolute
on domestic sources of demand and hence some of the level of economic activity remains low and any further pick-
measures are expected to continue. up is likely to be focused on exporting sectors, with little
prospect of an immediate recovery in domestic demand.
The rollback undertaken so far has mainly focused on Although corporate Japan has become less pessimistic,
preventing risks associated with overheating of the capex plans and earnings forecasts remain weak. Furthermore,
economy, such as dropping incentives on second mortgage employment and income conditions remain severe and
lending. In its latest report, the Asian Development Bank deflationary trends are becoming more entrenched.
revised its forecast for China's economic growth this year
to 8.2% from its 7% estimated earlier, and expects it to While a cyclical recovery in the global economy, the
grow 8.9% next year, on likely maintenance of its fiscal prospect of political change and structural reform and
stimulus while the global economy recovers moderately. historically attractive valuations should support the
At the same time, equity market sentiment will probably Japanese equity market, the headwinds that Japan faces
remain volatile until investors are convinced that there is are not abating. These include potential political
indeed a meaningful gap between the end of easing and disappointments if the new government does not deliver
the beginning of tightening. the changes anticipated. Fundamental weakness in the
domestic economy and the strength of the yen are other
hurdles that need to be overcome.
SOUTH EAST ASIA
Allan Liu US
Portfolio manager of Fidelity Funds - South East Asia Fund
Adrian Brass
In 2010, I believe that Asian equity markets should continue Portfolio manager of Fidelity Funds - America Fund
to do well. Economic fundamentals remain strong, there
continues to be a healthy population growth and the trend Whilst the market has recovered significantly, there are
towards urbanisation and industrialisation will require still many reasons to remain positive. First, we remain a
 Singapore, December 2009

long way off the 2007 peak, with the S&P 500 still at the everything else will follow. Residential property remains
same level it traded at back in 1998 following a 'lost the largest component of consumer wealth and, if house
decade' of performance. Second, valuations are still prices go up, it creates a virtuous circle of increased
reasonable versus history on recovery earnings and cash confidence and a pick up in spending.
flow-based measures. Third, earnings are likely to recover
strongly from here and may continue to surprise versus I continue to be overweight in financials. The sector has
expectations. This is due to corporate America having seen a large upheaval in the last 12 - 18 months and, even
reduced costs more than at any time in the past fifty years. though the sector has seen good returns, I believe there
This has helped preserve cash flows in these difficult times, is still plenty of upside in selective stocks. However, unlike
but will also produce new records in profitability for some in 2009, stock picking will be even more important. When
companies as we move further into the recovery. I think about the world pre- and post-crisis, and which
industries have been damaged the most, the four to be
Risks to a sustained recovery remain focused on the most affected have been airlines, cement, autos and banks.
government exit strategy from its quantitative easing and However, it has only been the banks that have seen
stimulus programmes and the impact of potentially higher structural improvements. There has been very little capacity
taxes on a deleveraging consumer. My highest conviction taken out of airlines or autos, which have both benefited
ideas are in areas where the recovery is not yet priced in, from government initiatives, while the cement industry has
such as the housing-related or semiconductor equipment been helped by fresh finance. Banks are the only industry
sectors or, increasingly, in great quality, steady-growth which has seen capacity taken out and, as a result, margins
businesses which have been left behind in the rally. have improved. Many of the stronger banks have bought
good assets at cheap prices and I believe this will lead to
strong long-term outperformance.
EUROPE

Alexander Scurlock EMERGING MARKETS

Portfolio manager of Fidelity Funds - European Growth
Fund Nick Price
Portfolio manager of Fidelity Funds - Emerging Markets
When I look towards 2010, there is still a certain amount of and Emerging Europe, Middle East and Africa Fund (EMEA)
nervousness in investors and I am often asked whether there
will be a double dip and what shape the recovery is likely to It is my belief that emerging markets offer the prospect of
take. At this stage, I do not see any reason why there should growth which is patently not available in the developed
be a double dip. The government initiatives have been world and, over time, the market will pay more of a premium
unprecedented and have led to an upturn in economic for this growth. Near term, any significant stall in the US
conditions. Furthermore, double dips are rare. As for the recovery would pose a considerable risk but it is an outcome
shape of the recovery, that is very much country-dependent. which looks increasingly less likely. Indeed, housing has
Within Europe, some countries will come out of the recession stabilised in the US, the worst of the increase in
faster and be in a stronger position than others. unemployment appears behind us and we are seeing the
inventory cycle turning at last.
Even though I don't like to make top-down calls, I believe
inflation will be more of a risk than is currently anticipated Over the long term, the secular trends across the region
and, as a result, I believe that monetary policy will tighten remain positive: a young population backdrop with some
next year. I think this will happen at both ends of the yield of the lowest retirement percentages per capita in the
curve and I also believe that central banks will use more world; a diverse region with an unrivalled commodity
than just interest rates to control inflation. If inflation returns, exposure which can provide an important inflation hedge;
it will most likely be asset price inflation and not core rising productivity growth from the lowest-cost labour
inflation. This should be supportive of equities as investors force; an undeveloped consumer base in Africa; a high
move out of (short-dated) government bonds and into propensity to save, underpinning domestic consumption
assets which can provide a higher real return. across Asia; and, in aggregate, the opportunity to invest
in stocks at reasonable prices.
However, for central banks, especially the Fed in the US,
the number one concern is to stabilise real estate prices
rather than inflation. If they can stabilise real estate markets,
 Singapore, December 2009

GLOBAL SECTORS
On the other hand, headline inflation, including food and
energy, is likely to be volatile. Between now and early next
Amit Lodha year we will see a rapid swing from deflation to inflation
Portfolio manager of Fidelity Funds - Global Real Asset
as the year ago base comparison for crude oil drops from
Securities Fund
$145 to $35. If this trend continues, interest rates will rise
sooner than expected.
There are two key issues that investors should consider.
Firstly, near term, is the prospect of inflation. It is clear that
Either way, we appear to be in the early stages of a strong
the scale of the global financial stimulus is unprecedented.
economic recovery and one that could prove very profitable
Knowing by how much to increase the money supply and
for investors.
when to stop is difficult to get right; it is not a question of
'if' but 'when' governments will overshoot. An inevitable
consequence of fiscal programmes on this scale will be
a rapid return of inflation. I believe the rate cycle and onset FIXED INCOME
of inflation will benefit real asset prices, be they
commodities, real estate or industrials, like rail roads. Ian Spreadbury
Portfolio manager of Fidelity Funds - European High Yield
Secondly, we are at an interesting juncture in markets, Fund
where the developing world - countries like China, India
and Brazil - continue to grow while, at the same time, to I believe corporate bonds continue to offer good value
fight the recession, developed world countries have set in despite their strong performance since March. Corporate
motion massive stimulus programmes. Again, this phase bond yields remain high relative to expectations of nominal
will create interesting opportunities both in the short and growth in the economy and credit spreads are wide versus
medium terms. history. The default experience of investment grade bonds
has historically been exceptionally low, even in crisis
Combining both these mega-trends, I think investors should periods, and I believe investors are currently being
continue to focus on stocks that will do well in inflationary handsomely compensated for the added risks. Instead,
conditions and yet gain from the long themes of clean the key risks for the asset class stem from economic
energy, food shortages or stimulus spends, provided those factors such as the possibility of a double dip in the
stocks can be found at reasonable valuations. economy or a drastic rise in inflation. I see only a small
chance of either of these occurring and, instead, expect
slow growth and low inflation, which should prove to be
ASSET ALLOCATION a favourable environment for high quality credit.

Trevor Greetham
Director of Asset Allocation and portfolio manager of Fidelity
Funds - Multi Asset Navigator Fund

After being on the defensive since third quarter 2007, my

fund has shifted gears and adopted a much more
aggressive asset allocation approach. I raised commodities
so that this now represents the same overweight percentage
as equities. The rebuilding of developed world inventories
will be a positive. At the sector level, I have taken industrials
to overweight and I remain significantly overweight Asian
and Emerging market stocks versus the US and Europe.

The path of inflation will be critical to the durability of this

bull market. If inflation stays low, central banks will want
to keep rates low, and we could see a period of prolonged
expansion. This seems the most likely outcome in view of
the massive spare capacity in the world economy.
 Singapore, December 2009

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