Dominic Rossi

The US equity market is poised to rise in coming years and the S&P 500 Index could reach 2,300 from just under 1,900 now, says Dominic Rossi, the Chief Investment Officer, Equities, at Fidelity.

Amid the challenges facing the world and the US economy, equity investors are not fully recognising how rapidly the US economy is strengthening in many areas and that government finances are improving, Mr Rossi says.

“US economic growth is going to surprise on the upside and we will be discussing 3%-plus growth again,” he says. “The speed of the improvement in the US federal budget deficit is remarkable. Since 2009, the fiscal deficit has shrunk to around US$600 billion (A$640 billion) from US$1.5 trillion. It is not implausible that President Barack Obama will finish his term with a fiscal surplus.

“In which case, we are looking at a US equity market that is similar to the late 1990s (when we had the Clinton fiscal surplus), where equities should be well supported by liquidity.”

It is prudent to consider the standard counter-argument to the buy case for the US, which has lately become commonplace, Mr Rossi says. This argument points out that the US is on a price-earnings ratio of 16 times yet corporate profitability is at record highs. And if we cyclically adjust for peak profits, then the price-earnings ratio is 22 times.

“Profit margins may well be at record highs, but they can move higher,” Mr Rossi says. “The distribution of profits between capital and labour in the US is going through a fundamental shift. It’s hard to see why margins need to mean revert; for this to happen, labour’s share of profits would have to move higher. Unless we go back to highly unionised workforces, which is unlikely, profits are going to remain at high levels.

“If labour’s share of profits were to fall further, we could expect to see some political pressure. Overall, however, the outlook for corporate earnings remains favourable. Combined with healthy liquidity, these two drivers should sustain a multi-year bull market in US equities,” Mr Rossi says. “I believe the S&P 500 could move to 2,000 to 2,300 from its current level.”

The S&P 500 Index finished at 1,896.65 on May 12.

The post The US share market is headed for a multi-year bull run: Fidelity’s CIO Equities appeared first on AdviserVoice.

The use of demographics, the most important driver of our times: Fidelity.

Demographics is the most resilient and significant investment driver of our time, providing investors with greater certainty than many macroeconomic themes and allowing them to identify companies likely to benefit from compounding cash returns over the longer term, Fidelity Worldwide Investment said today.

In a White Paper released titled ‘Investing in Demographics’, Fidelity’s portfolio managers, Hilary Natoff and Nicola Stafford, who are based in London and visiting clients in Australia, discuss in detail the impact of demographics on stock picking and portfolio construction.

“Demographic trends and structural growth themes are happening now and have created clear opportunities for investment strategies for both retail and institutional investors,” said Hilary Natoff, Co-Portfolio Manager of the Global Demographics Fund, Fidelity Worldwide Investment.

“Demographics can be expected to play out with a greater level of certainty than the macroeconomic trends because they don’t just emerge accidentally, they happen systematically. In fact, demography is one of the few social sciences where projections can be made with a relatively high level of certainty,” said Ms Natoff.

“In addition, markets are losing sight of the long-term value of a business with the average stock holding period currently under three months globally. Sell-side analysts focus on near-term earnings forecasts yet earnings – not valuations – drive returns in the long run. A large part of company value is represented by longer term profitability and compounding so those investors able to identify companies exposed to long term structural growth themes such as demographics can sensibly exploit this market inefficiency. “

Ms Natoff said the world is undergoing a dramatic transformation as a result of three demographic megatrends– global population growth, emerging middle class and ageing populations.

“A changing world creates investment opportunities. By 2030, world population is expected to grow from 7 to 8.3 billion, the middle classes will more than double, and the over-60 age group will expand from 0.8 to 1.4 billion. This is having a significant impact on the demand side of the global economy, creating opportunities for companies to expand sales and earnings in growing global marketplaces.”

Ms Natoff said these trends present a number of structural growth opportunities for investors.

“We have more people but a finite world. Rising demand for resources, such as food, water, arable land and energy have a clear multiplier effect on products such grain to feed live stock. With the rapid rise in spending levels across developing markets, we’re seeing opportunity sets emerge in the consumption of staples, global brands, healthcare and education. While with ageing populations, we’re seeing opportunities in areas such as hearing aids and eye care for example.

Click here to read the white paper.

“Time spent identifying companies with a strong competitive advantage and valuable intellectual property in industries benefitting from structural growth is time well spent. Companies such as Essilor, Nigerian Breweries and Novo Nordisk have all significantly outperformed the broader market due to strong structural demographic growth drivers.”

The post Investing in demographics – identifying the growth winners appeared first on AdviserVoice.

Investors who remain on the lookout will benefit from changing conditions.

We’re more than half way through 2013 and after some early signs of a return to equity, it’s fairly clear that investors need to remain switched on and active with their investment allocation decisions to achieve the best possible outcome. A few months ago, amid strong gains for US and Japanese equities and a more patchy performance from emerging markets, some analysts noted a distinct reduction in correlation, which had seen markets move in lockstep with every twist and turn of risk sentiment. They saw signs that markets were returning to fundamentals, where the individual stock merits and country-level macro factors were finally beginning to re-assert themselves in place of synchronized market swings linked to global risk factors, such as Eurozone sovereign debt issues and the US fiscal cliff.

Then along came Ben Bernanke’s comments about the Fed tapering its QE policy. That sent markets into another tailspin in May, prompting an emerging markets sell-off and also a sharp rise in US Treasury yields. Fidelity Worldwide Investment’s Global CIO for Fixed Income noted that for the week ending June 26, around US$5.7 billion was pulled out of emerging market debt funds – the biggest single weekly move in the history of emerging market debt flows. Some of that has flowed back subsequently, amid signs that the US recovery and inflation outlook remain relatively subdued. But the size of the numbers involved only goes to show how many investors were forced to make a relatively sudden switch in allocations to protect their investments. Looking at Asia equities, Thailand and the Philippines saw around 20% lopped off frothy valuations after a strong run, in a broad risk-off move by investors.

And it’s not just a question of keeping on top of tactical turning points. There are clear signs that some fundamental long-term trends are reversing. A few years ago it was a useful analytical framework to talk about a “2-speed world” – roughly divided between faster-growing emerging markets and slower-growing developed markets. However, it’s becoming increasingly clear that this simple contrast is no longer sufficient. There is no “free lunch” in emerging markets anymore and investors must do their homework on which countries are offering attractive growth opportunities based on innovation, superior products and true economic reform and those countries which have simply been riding the wave of a weak dollar and related commodities boom without reforming their markets. As Reuters News recently reported, investors who have plowed some $400 billion into raw materials markets over the past 10 years are accelerating efforts to change their strategies, if not their allocations, on the growing belief that the commodities “super-cycle” has come to an end^[1].

Likewise there are clear signs that a three-decade long bull run for bonds has turned a corner, as central banks (particularly in developed markets) get set for a resumption of growth and inflation. The exact timing of interest rate rises is hotly-debated but there can be little doubt that US bonds are unlikely to test new lows anytime soon. And this takes us neatly back to the improved outlook for the US economy and by association, the US dollar. If we go back to Christmas 2012, most people who depend on financial markets for a living probably had their financial news and smartphones close to hand over a turkey lunch as the US prepared to go over the fiscal cliff amid disagreement over the US budget. However, since then there has been a marked improvement in the US fiscal and trade deficits, helped by spending cuts and rising corporate tax receipts. The US economy is continuing to grow at a reasonably healthy rate, bolstered by a steady housing recovery. There is also a growing realization that the recent breakthroughs in US shale gas extraction have the potential to revolutionize US energy supplies.

So what does this all mean for investors? It means investors need to remain active and alert and be prepared to reassess their portfolio allocation decisions regularly. Keep on top of the markets but also do your homework on long-term economic shifts.  It means that a simple, passive allocation strategy or a “choose once and leave” approach are particularly at risk of poor end results. June was a particularly bad month for many ETFs. More than anything, it means that investors need to look at fundamentals and/or invest with professionals who are dedicated to uncovering real value, growth opportunities and companies with genuine levels of competitive advantage. Thankfully some recent reversals for stock markets have not been accompanied by elevated levels of volatility – in 2008 equity volatility spiked into the 30-40% range and although it moved above 20% briefly in recent months, it has since dropped away. This means that a fundamental, bottom-up approach to investment, assessing each opportunity on its merits rather than as part of a synchronized dance driven by external factors, is once again the best approach for investors.

Article by Gareth Nicholson, Investment Commentator at Fidelity

The post Portfolio allocation still a tough call for investors appeared first on AdviserVoice.

A pause in the bullish market on the way.

A new secular bull market started at the lows in 2009. Although it may soon be interrupted by a period of instability as the market digests an environment of rising interest rates and a lack of EPS growth, investors need to remember that investing is a long-term game. Investors need to return to fundamentals and start investing again based on their own convictions, rather than relying on support from central bank quantitative easing.

Outlook for Equity markets 

The new secular uptrend that commenced with the lows in Q1 2009 is likely to enter a broad trading range for the remainder of 2013 and possibly into 2014 as well. The US and European equity markets have already discounted a continued improvement on the macro front, but the market now needs to see more positive surprises to drive the next major upleg. The two most imminent risks the market faces are 1) a general rising interest rate environment, and 2) the possibility of earnings disappointments in the upcoming company reporting seasons. After more than four years of recovery, therefore, there is likely to be a pause in the action before the current secular uptrend resumes in earnest in 2015. This scenario is not at all bearish, but rather I expect equity markets to trade in a wide range for now. That said, it is important to emphasize that equities are poised to continue their long-term winning streak and are set to beat bonds on a multi-year year outlook. Taking a long-term view on the increasing value of equities, the S&P 500, for example, is likely to continue trading well above its 45 degree trajectory for a very long time to come, just as it has performed since the 1920s.

Given the inevitability that the markets will be weaned off QE in the foreseeable future – a process known as tapering – there will surely be some volatility over the next 12 to 18 months. We have already witnessed a sharp jump in long term interest rates recently, albeit from an abnormally low starting point. The Central Banks will try their best to talk down rates, and it could be that they stay in a higher range for awhile before the next significant move > 3%. It is not necessarily the higher level of rates that is disturbing, but the rate of change which has caught the market off guard of late.

Certain sectors look better prepared for future interest rate hikes than others: The consumer discretionary sector still offers a wealth of opportunity across all regions and sub-sectors and should survive the first wave of impending interest rate rises intact. Healthcare stocks are a unanimous “buy” now and financial stocks are attractive, especially those in the US where loan growth and the credit markets are expanding more rapidly than elsewhere.

Outlook for Bond markets

Over the next six to 12 months, we can expect to see the yield on 10-year US Treasuries surpass 3% and the yield on Bunds to break through the 2% barrier. It has been quite awhile since we have witnessed divergent paths on the interest rate front, but that is exactly what we are likely to see going forward. The risk remains that the US will unintentionally export higher interest rates abroad just as they did lower rates during the Financial Crisis. At the moment this is only a risk, but the fact remains that bond markets often trend higher and lower together irrespective of their individual macro backdrops.

In this environment, HY bonds still appear attractive after the recent rise in yields as corporate default rates have stayed low and are not expected to deteriorate much as the recovery slowly expands. Only in an environment of rising long rates and deteriorating fundamentals would HY face a severe headwind.

Further, select corporate bonds still offer value especially as the wall of money that had entered bond flows has fallen significantly the past few months, creating opportunities at the individual level that did not exist during the tidal wave of inflows the past few years.

Conclusion

With a strong cross wind emanating from China and EMG in general, the markets are confused and lack strong conviction about where the macro indicators are heading. But even within EMG space, stock picking is still working very well and there are many stocks with very low correlation to the general index that continue to perform very strongly. Although asset classes have performed relatively well since 2009, a closer look at how they have performed in 2013 shows bonds and commodities are in the red – the only exceptions are global equities, global property and US high yield, but these asset classes, too, have been following a downward trend since May. Since growth expectations have not really moderated at all yet, the burden of proof to keep the long-term secular uptrend going is definitely in the bullish camp now. In this context, a lack of EPS growth is a risk, if reality does not match expectations over a prolonged period.

Against this backdrop, investors – above all – need to find their conviction again and think longer term as the near-term environment might prove difficult to navigate. Stay focused and do not confuse any short term weakness with longer term goals, equity markets are very likely continue the new secular bull market over the next 5 – 10 years.

By Jeff Hochman, Director of Technical Analysis and member of Fidelity’s Asset Allocation Group

The post Investors need to go back to fundamentals appeared first on AdviserVoice.

Is the super cycle over?

Time to move on from commodities to global stock picking

Morgan Stanley last week joined a growing list of big investment banks beating a partial retreat from commodities trading. Like Barclays, UBS and Deutsche Bank, it is struggling to make sense of a business where revenues have tumbled since the hey-day of the natural resources boom immediately prior to the financial crisis. So is the commodities super-cycle over?

For three reasons, I think the remarkable rally in the prices of energy and metals (although maybe not food which marches to a different beat) may have ground to a halt. If so, this might have big implications for investors.

The first headwind for commodities prices going forward is the likely strength of the US dollar, the currency in which most resources are priced. As the US currency rises in value, commodity producers are prepared to accept a lower price because their income remains unchanged in their own currency. And why should the dollar appreciate from here? A combination of economic recovery, interest rates returning to pre-crisis norms, a better trade balance and structural improvements in America’s fiscal situation. Put these together and I expect a decade-long dollar decline to reverse.

The second key driver of commodity prices is demand and here too the outlook points to further declines. The principal reason for this is the ongoing rebalancing of the Chinese economy away from manufacturing, infrastructure investment and exports to domestic consumption. This coupled with a slowing in the overall rate of GDP growth in China means the country, while clearly still a big consumer of resources, will have less of an impact on prices at the margin. Five years ago, exports and private consumption both accounted for about 35% of Chinese GDP but in five years’ time those proportions will probably have become 25% and 40% respectively, a huge relative shift in only ten years.

Thirdly, even as demand for commodities is likely to moderate, the supply of energy and metals is expected to increase in the years ahead. This is a natural consequence of a decade of rising prices which has made previously unviable extraction of, for example, oil from Canadian tar sands financially worthwhile. It is also a result of technological advances, the main driver of the Shale gas revolution in the US about which I’ve written here a few times.

So a combination of dollar strength, weakening demand and increased supply looks like a recipe for lower commodity prices from here. What does this mean for investors?

Firstly, I think it will be broadly supportive of global growth. Lower energy costs increase disposable incomes for individual consumers and cheaper energy and metals reduce input costs for industry.

Secondly, weakening commodity prices contribute to the relative attractiveness of developed markets such as the US, Japan and Europe compared with emerging markets. The West is principally a consumer of commodities and the developing world a producer, although clearly this is a generalisation which will be less true in time as and when the US overtakes Saudi Arabia to become the world’s leading oil producer.

Thirdly, lower commodity prices are likely to lead to lower inflation, which in turn provides central banks with the cover to keep monetary policy looser for longer. In this context, I think the nervousness over the Fed’s tapering of quantitative easing may well have been overdone. The big problem in many economies is debt, public and private, and that makes them extremely sensitive to rising interest rates. Policy will remain easy for longer than some people now believe.

Finally, easing commodity prices could lead to a reduction in the risk-on, risk-off, macro-driven market movements which have characterised investment for the past few years. For one thing, the free lunch in emerging markets looks to be over. The rising tide has lifted all boats in the developing world and investors are going to have to be much more discriminating with their emerging market investments. My colleague Anthony Bolton’s long-held belief that investors will start to differentiate between those companies in China exposed to rising consumption, and those still dependent on an increasingly redundant export and investment model could come good just as he hangs up his boots next year.

Winners and losers from the end of the commodity super-cycle will be found at the country level and among individual stocks and sectors. Domestic Chinese airline, US steel-maker or Australian iron-ore producer? Working out where in the supply chain the real pricing power resides will be key. Trading commodities may not be very rewarding right now but it’s never looked a better time to be a bottom-up global stock picker.

By Tom Stevenson, Investment Director, Fidelity Worldwide Investment

——————–

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment.

Prior to making an investment decision, retail investors should seek advice from their financial advisers. This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

The post Is the commodities super-cycle over? appeared first on AdviserVoice.

Fed’s QE exit

We have known for some time that Ben Bernanke has worried about the build-up of risks stemming from investors’ reach for yield which has ultimately stemmed from the Fed’s highly accommodative monetary policy. On the other hand, we also know that Bernanke is fully cognisant of the risks associated with any sudden pick-up in yields from current depressed levels. Indeed, if bond yields were to rise too quickly upon commencement of the exit process, we would expect the Fed to manage the market’s expectations, possibly by pausing, or even temporarily reversing, the normalisation process.

Interestingly, in his March 1st speech, Bernanke pointed out that if policy rate hikes were implemented too soon this could even cause bond yields to fall. Although he did not explain how, it is our view that one way this could happen would be if an initial rise in yields caused a jump in interest costs, leading to a reduction in disposable income and slower demand for housing.

The 1994 comparison

Of the four rate-rising cycles since 1988, only the 1994 cycle resulted in the US 10-yr yield ending the cycle more than 75bps higher than when the cycle started. Thus only in 1994 did we have a relatively disorderly impact from Fed policy normalisation, with the rate rising cycle resulting in a capital loss on bonds. However, with coupons at 2% or lower, yields rises of 25 basis points or more per year will generate a capital loss.

To be clear, whenever policy rates are normalised, bond yields will go higher. However, that does not mean we will necessarily experience the disorder of 1994. It is difficult to say what the ‘new normal’ for the Fed Funds Rate will be. Assuming equilibrium inflation expectations of 2.5% and an equilibrium real short rate of 1.5%, perhaps 4% is reasonable. The Fed considers the bond yield as decomposed into an expected inflation rate plus an average real short rate plus a term premium. For example, a 2.5% expected inflation rate + a 1.5% real rate and a + 1% term premium, gives a 5% yield. But, it is the speed of the rise that is of critical importance both to investors and the economy. The good news here is that market currently believes it will take more than 10 years to normalise the Fed Funds Rate, implying a slow and manageable rise in yields.

The biggest area of concern for investors will be upward pressure on yields arising from higher inflation expectations as opposed to economic improvement and normalisation. For example, such a situation could arise if the FOMC persisted with a loose monetary stance for too long even as inflation was picking up. While we do not completely dismiss this risk, we feel this is unlikely because the Fed has stated very clearly that it will only unwind monetary accommodation once unemployment drops sufficiently and/or inflation rises beyond its threshold levels. The reference to inflation is key here because it is specifically intended to comfort the market that the Fed won’t allow inflation to become uncontrollable.

Another risk factor worth considering is an increase in the term premium. The most likely cause of this would be a deterioration of the US fiscal situation leading to increasing investor aversion to Treasuries. However, while this is also something that should not be dismissed entirely, we still see few parallels with the 1994 situation, when policy adjustment by the Fed led to a sharp spike in yields in a relatively short time frame. The big difference between now and 1994 is the Fed’s much improved communication with the market. In 1994, yields rose quickly because the market was effectively caught out and surprised by FOMC’s intentions – the FOMC had only recently began to issue policy statements at this time. Today however, we know that the Fed places an immense amount importance on its guidance to the market. Given this, a large rise in yields is only likely if the Fed unexpectedly shifts its stance on how it intends to normalise policy. While such a “blind-siding” in terms of market perception and Fed actions is possible, we think it is unlikely.

The sequence of the exit process is more difficult to predict, because the Fed will want to remain flexible enough to take decisions while the exit process progresses. However, an end to QE will almost certainly be the first step, followed by the winding down of treasury and agency MBS debt that was being rolled over – although this process will take place over the course of many years. As a next step, it’s possible that the Fed raises the interest rate on banks’ excess reserves (IOER) while scaling back the quantity of its reserves via repos (reverse repurchase arrangements) and offering depositary institutions term deposits. Asset sales would be a last resort to reduce the size of the balance sheet – used only in the event that the Fed wants to drain reserves faster than it currently anticipates.

Trevor Greetham, Asset Allocation and Investment Solutions Director, also commented: “Over the longer term, it is natural for bond yields to rise during an economic recovery and this isn’t usually a problem for stocks as long as the rise in yields is orderly. That said, the debate around QE exit is premature. US data has been weak and lead indicators are rolling over. Meanwhile, US headline CPI is 1% and falling. This data is more consistent with easing than tightening.”

By David Buckle, Head of Quantitative Research, Fidelity Worldwide Investment

——————–

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment.

Prior to making an investment decision, retail investors should seek advice from their financial advisers. This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

The post Fidelity: Thoughts on the Fed’s QE exit appeared first on AdviserVoice.

Against that uninspiring backdrop, investors are rightly questioning where they can find reliable and sustainable growth.

It’s the combination of reliability, or defensiveness, and growth that is the challenge because in most cases one comes at the expense of the other. Sectors like tobacco and utilities might offer predictability of earnings but they are pretty dull. Growth on the other hand tends to come highly correlated to the economic cycle so it can be a bit too exciting at times.

One investment theme which appears to offer the best of both worlds is demographic change. If you analyse the companies whose earnings have grown steadily through the ups and downs of the global economic cycle over the past ten years or so, many share a focus on one of three key demographic themes – population growth, ageing and the emergence of a middle class in the developing world.

Within that overarching theme, one sector in particular leaps out as a source of long-term earnings growth in excess of current market expectations – healthcare.

Scale and scope
The global healthcare industry is vast and growing rapidly. The areas it covers include drug companies, medical equipment providers, health insurers and hospitals. Investing in healthcare can seem daunting, but it’s a sector that investors should not ignore.

Figures from Bain, the management consultant, suggest that overall spending on healthcare could rise from $6 trillion in 2010 to $10 trillion in 2020.

The US accounts for 40 percent of current global spending and already spends more than $5,000 per capita each year. Even so spending on healthcare in America is forecast to grow at nearly 5 percent a year this decade.

Elsewhere, the growth potential is even greater. Starting from a low base of around $600 per capita in the world outside the US, spending is forecast to grow at rates of up to 15 percent a year in the developing world. In many economies, healthcare spending is growing much faster than the GDP. 

We can expect healthcare to account for a larger share of global GDP in future, supporting the case for a structural allocation to the sector.

Powerful long-term secular drivers
There are three key drivers of this growth. First, the world is ageing, fast.  Falling birth rates and longer life expectancy in developed countries mean populations are greying more than ever before, which increases the incidence of age related diseases such as many cancers, heart disease and Alzheimer’s.

Endologix, a heart disease specialist, has been doubling sales for the past five years and, with only 10 percent of the US market in its focus area of aortic aneurysms, it has plenty of scope for further rapid expansion, especially in Europe.

Hilary Natoff, joint Portfolio Manager of the Fidelity Global Demographics Fund, highlighted two companies standing to benefit from this growth driver: “There is also increased demand for general and specialist healthcare services. New Zealand company, Ryman Healthcare, which runs retirement villages, has a solid self-funding model which should provide a runway for growth as it prepares to expand in Australia. Meanwhile, Invocare, Australia’s largest funeral and crematorium operator, stands to benefit from the accelerating death rate in Australia (from 1% to 2.7%*), the trend towards more elaborate funerals and its growing market share in New Zealand and Singapore.”

Nicky Stafford, joint Portfolio Manager of the Fidelity Global Demographics Fund, summarised: “While the inescapable trend of global population ageing is creating some serious political headaches for national governments, it can also give rise to some attractive opportunities for both businesses and investors.”

Second, sedentary lifestyles are causing growth in a wide range of chronic diseases. In cities, deteriorating air quality has also led to an rise in respiratory illness. As waistlines expand along with greater consumption of protein, dairy and sugar, so too do the incidences of diabetes. A major beneficiary is Novo Nordisk, a global leader in insulin production with a 50 percent share of the fast-absorbing variety.

Third, demand for better healthcare is growing quickly in emerging markets as incomes increase and life expectancy rises. Many emerging markets are planning large-scale programmes to improve domestic healthcare.  China, for example, launched a $125 billion nationwide stimulus package in 2009. 

The aim is to cover 90 percent of its 1.3 billion population.  China’s pharmaceuticals market was already the eight largest in the world in 2006 and is predicted to be the third biggest by the end of this year. With an increasing middle class in many emerging markets, the private healthcare industry is thriving.  Apollo Hospitals, the world’s largest private hospital operator, has plans to expand the number of its sites in India by over 50 percent in the next five years.

Nick Price, Emerging Equities Portfolio Manager, says: “The developing world is a happy hunting ground for healthcare opportunities over the long-term.  With rapid population growth, rising incomes, natural inflation environments, underserved markets and strong government interest in supporting the populace, emerging market marketing in healthcare is set to grow from strength to strength.”

Investment considerations
One of the reasons why healthcare is so interesting to investors, apart from the scale of its growth, is the diversity of the sector. That means it can appeal to different styles of investor, with big, cash-rich pharmaceuticals companies offering secure dividends, mid-sized healthcare companies offering growth prospects and bio-tech start-ups offering high risk, high return potential and the chance of a takeover. Big pharmaceutical companies routinely use acquisitions to fill in products or skills where they don’t have the right expertise. Corporate activity is an interesting feature within the healthcare sector.

Many of the sub-sectors within healthcare march to very different beats which makes it easier to smooth returns while different parts of the supply chain from manufacturing to marketing, distribution and customer-facing service provision will be in favour at different points in the cycle.

Big companies might fare better in a downturn while small-caps offer growth when markets are rising fast.  While some healthcare stocks can offer defensive properties, they should be seen as more than a simplistic defensive play. On a relative basis the sector is less sensitive to the economic cycle than others, which means it offers good defensive qualities and more predictable earnings in times of market volatility. However, it can also offer tremendous growth potential. This is true even among mature large-cap companies.

There aren’t many things certain in today’s world but population growth and ageing are two about which we need have no doubts. The expansion of the emerging world’s middle class looks unstoppable too and the combination of all three means that increasing demand for healthcare is as close to a given as investors can hope for – however dreary the IMF’s outlook.

* Source: Invocare website February 2013

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment.

Prior to making an investment decision, retail investors should seek advice from their financial advisers. This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.

The post Healthcare offers remedy to IMF’s gloomy diagnosis appeared first on AdviserVoice.

The report explores the themes identified by more than 100 of Fidelity’s fixed income and equity research and fund management professionals across Europe and Asia Pacific. It is designed to shine a light on some of the companies, sectors, regions and secular themes that Fidelity analysts believe offer the most promising investment opportunities against a backdrop of debt reduction and consequently weak global economic growth.
 
The report identifies eight long-term investment themes of which the following are most common-place:

• An extended “Age of Deleveraging”. Companies around the world face strong headwinds as a result of public and private sector deleveraging. Unwinding debt is likely to be a multi-year process. This has important implications for investors. From an equity perspective, the current environment greatly adds to the appeal of reliable companies with robust balance sheets (without much debt) and good cash flows that can support healthy and growing dividends. However, the debt problem is not ubiquitous. Many less-developed countries have avoided the kind of debt accumulation that has become problematic elsewhere making emerging markets an attractive proposition in the long-term.
• A continuing search for income. In a low interest rate world, with ageing populations in many countries, income paying and capital preservation strategies will stay in demand, particularly for investors with longer-term horizons, such as pension funds.
• An ongoing place in investors’ portfolios for China. Chinese stocks have been some of the worst performers in Asia this year. However, we believe China remains an attractive long-term investment proposition due to several secular drivers, including increased urbanisation, a rising middle class and a shift from its export-driven economic model to a greater reliance on domestic consumption.
• More generally, consumption will continue to be a winning global theme driving global economic growth. Increased affluence and urbanisation in the past decade and the expanding middle class have underpinned the consumption theme. Quality brand names in the West will continue to compete for this new demand and benefit from its growth.
• A continued lack of correlation between investment performance and GDP growth. We live in a two-speed world divided broadly between high-growth emerging economies (high speed) and lower-growth developed markets (low speed). However, this does not mean that investors should turn their backs on developed markets. Select sectors in “low growth” countries may out-perform due to a range of unique factors. In Europe, for example, some multi-nationals with geographically-diversified earnings remain profitable despite the region’s recession. This confirms that investing based on economic growth alone can ignore the elements that determine total returns. These elements are often sector and company specific, requiring thorough bottom-up analysis that differentiates winners from losers.
• Innovation in technology & energy continue to be ‘game changers’, and is facilitating a developed market response to rapid emerging market growth. The shale revolution – as well as developments in social networking and smart phone industries – in the developed world will drive strong growth. For example, the US could reduce its dependency on foreign oil by two million barrels a day (or more) over the next five years because of developments in shale energy. This could have a significant impact on the broader US economy, reducing input costs materially, while reducing the US trade deficit.

Commenting on the findings of Fidelity’s latest Analyst Survey, Henk-Jan Rikkerink, Head of Equity Research, Europe says: “One of the principal features that differentiates our investment thinking is our ability to take a longer-term view than increasingly myopic, macro-driven markets.

“Our research process helps us to identify a range of long-term winners with strong fundamentals, which are likely to be beneficiaries of structural themes that act as a tailwind to earnings growth.

“These are typically stocks with a sustainable competitive advantage that enables them to deliver returns in excess of their long-run cost of capital and generate strong cashflow, some of which is returned to investors in the form of dividends.”

 To read the report, click here.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.  2013 FIL Responsible Entity (Australia) Limited.  Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

The post Investment thinking for tomorrow’s world appeared first on AdviserVoice.

While the prospects for earnings growth in most developed equity markets are now more modest, a positive case can be made for a re-rating of equities, yet this is dependent on progress being made against some powerful headwinds.

With major government bond yields likely to stay low and below inflation, investors will continue to seek positive real returns in higher-yielding, income-generating assets and dividend-paying equities remain attractive on a total return basis.

To read Fidelity’s white paper, 2013: An event driven year, click here.

The post Equities outlook 2013 appeared first on AdviserVoice.

Given that market volatility is likely to remain in 2013, amid the US ‘fiscal cliff’ issue and a continued period of austerity and deleveraging within the eurozone, this paper is particularly topical.

Fidelity’s paper finds that sovereign risk has caused a polarisation of the government bond market, creating concentration and liquidity risks among a shrinking set of over-valued safe haven assets. This has led investors to consider broader exposure to high-quality bonds beyond domestic or traditional government issuers.

Sovereigns such as Australia, Canada, and Switzerland, for example, can bring about sensible diversification and introduce currencies that reduce overall portfolio risk. Similarly, with the non-financial corporate sector in good balance sheet health, high quality investment grade corporate bonds, issued by strong multinational companies, are also a good source of safe havens.

Strategic portfolios investing across markets and bond classes can improve diversification and the risk-return profiles of portfolios by freeing up managers from traditional benchmarks. At present, many traditional market-weight bond benchmarks encourage investment in the most heavily indebted areas.

Mark Talbot, Managing Director, Asia Pacific ex-Japan at Fidelity Worldwide Investment said: “Financial markets have become less predictable.  As a result, we have observed investors’ increasing preference for less risky, or rather what are perceived to be less risky, fixed income assets.”

“However, the low or even negative yields for many safe haven bonds could mean low returns or a higher chance of capital loss for investors. As such, holding a diversified portfolio has become even more crucial in the current volatile environment. This paper is a valuable contribution to the current debate of how to improve the risk/return profiles of portfolios in these uncertain times.”

In terms of equities, investing in “quality” or companies with strong balance sheets, solid returns on equity, good free cash flow generation and low levels of leverage can offer a relative safe haven in uncertain times. Such companies can also improve their market share in times of crisis by making acquisitions at attractive prices.

Mr Talbot also observes: “Equities provide dividend income, and over the long run, compounded income is a powerful driver of total returns. Fidelity believes that having the latitude to shift portfolio exposure based on anticipated changes in the economy can allow managers to capture the best opportunities over time, making the most of our research insights.”

In turbulent times alternative investments can be used to generate return profiles that are uncorrelated to those of traditional assets, thereby offering diversification and opportunities for risk control. However, in times of real crisis, correlations can rise as negative sentiment creates general selling pressure that indiscriminately impacts almost every asset class. As such, Fidelity believes that consideration must be given to the nature of the assets held and the investment time horizon.

The paper also takes a look at the reinsurance sector and trend-following strategies as two case studies which provide interesting opportunities for investors looking at alternative return streams. Both offer the potential for attractive risk-adjusted returns but as Fidelity points out, careful manager selection is crucial.

To read the white paper, click here.

The post Diversification and investing in ‘quality’ are essential strategies for turbulent times appeared first on AdviserVoice.