Amit Lodha, Portfolio Manager of the Fidelity Global Equities Fund – “I expect global economic growth to remain muted in 2012, with a continued and marked divergence between developed world and emerging market growth. The sovereign debt issues in the eurozone are far from resolved and the political intervention and consensus needed to stem the crisis will take time to materialise.

“Meanwhile, I expect the European economy to enter into recession on the back of constrained bank lending and austerity measures. The policy response from the European Central Bank (ECB) will dictate the length and depth of the recession, and its socio-economic implications.

“My outlook for the US is more positive. Housing starts have begun to rise from an all-time low as ultra-low interest rates are starting to incentivise buying rather than renting, and the backlog of foreclosed properties is starting to clear. Meanwhile, emerging markets continue to offer significant long-term growth potential. India, Indonesia and Thailand should benefit from inflation peaking in 2012. While a planned leadership change in China should be positive as the current government has undertaken sufficient policy tightening to create leeway for the new policymakers to settle-in.

“On the corporate front, balance sheets the world over are in excellent shape. This could support capital expenditure and merger and acquisition activity. This will benefit sectors such as technology, late cycle industrials and investment banks.

“During this low growth environment, my focus is on quality franchises with strong balance sheets, which do not rely on banks for funding. I look for companies that own assets where supply and demand is tight, sell products that all of us need on a daily basis, or are doing something truly innovative, which gives them pricing power.”

Nick Price, Portfolio Manager Emerging Markets – “Within the region of Emerging Europe, Middle East and Africa (EMEA), we are blessed with companies that can grow regardless of the economic landscape.

“Without a doubt, the outlook for developed economies remains poor and the pains of the financial crisis in the eurozone are likely to be felt for some time. Consequently, we expect a degree of stock market volatility in our markets in the year ahead, but believe the long-term case for investing in the region remains as strong as ever.

“We are currently avoiding most Central European and Middle Eastern stocks as it will probably take some time before their overarching macro situations are resolved. Instead, we are buying into those businesses participating in the unappreciated African consumer and those miners involved in gold and silver production, as they should continue to do well.

“Global economic growth is expected to moderate in the new year as domestic activity in many countries eases and Western export markets weaken. However, emerging market valuations are attractive, especially in places like China and Russia. And while global markets may remain volatile in the near term, the growth potential for equities in the developing world significantly outweigh those offered by cash, debt and stocks in the more advanced economies.

“Despite the negative headwinds, we continue to find several interesting opportunities ranging from Asian smartphone component production to Russian oil and gas supply, to Nigerian beer consumption – all stories that have yet to be fully appreciated by the market. Therefore, we are positive over the long-term outlook, but remain fairly cautiously positioned until we see some sort of resolution to the current European crisis.”

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. This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. 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 also should consider the Product Disclosure Statements (“PDS”) for respective Fidelity products before making a decision whether to acquire or hold the product. The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. © 2012 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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Paul Taylor, Head of Australian Equities and Portfolio Manager of the Fidelity Australian Equities Fund

“Markets are nervous, sceptical, cautious and scared and for very good reasons. We have a European sovereign debt crisis, a huge US debt issue, worrying US economic growth, slowing global growth and concerns that China may reign in growth too hard and go straight past the soft landing scenario and head directly into a hard landing. Further depressing the market is the thought that the sovereign debt issues in Europe and the US are likely to be with us for a prolonged period of time – major readjustments like these take a long time to play out.

“Having made all those depressing comments any potential bright spots or glimmers of hope tend to get drowned in the over riding gloom of the current market sentiment. There is some good news in the US reporting season which is generally better than expected on both revenues and costs and I believe that China is much better positioned than market fears would suggest. The simple fact that Chinese policy is trying to lower growth to a more sustainable level and control inflation already means that they are in a stronger position than the rest of the world which is struggling to achieve any growth. The worse the rest of the world gets the higher the likelihood that China will at least halt its monetary tightening policy. China demonstrated through the global financial crisis (GFC) that it will act very counter cyclically and step up and invest when the rest of the world is struggling and they may well take the same approach again as global growth slows.

“What does all this mean for Australia? It means that with the sovereign debt issues in Europe and the US we are in a lower growth world. As the world undertakes de-leveraging this will have a negative impact on global growth and Australia as a small open economy will be negatively impacted by lower world growth.

“However while we are in a lower growth world this does not mean everything is low growth, it means on average we are low growth but within this average we will see some real pockets of growth. These pockets of growth will include China and a range of emerging economies. Australia will continue to be a beneficiary of its complementary economy with other emerging economies like China.

“With investors so cautious and sceptical they are implying that not only are we in a low growth world but that every market and every company is low growth – and that is the real opportunity in the market at the moment.

“We have seen very significant compression of valuations between markets as well as stocks within markets as investors become very sceptical about growth for all markets and companies. The Australian market is currently very attractively valued at about 10-11x price to earnings ratio and a 5% dividend yield. This sort of valuation is very attractive from an absolute perspective as well as relative to Australia’s own history. The Australian market has historically traded at between 14-15x price to earnings ratio. It is hard to see the Australian market re-rating from 10-11x back to 14x-15x over the next 12 months while these macro black clouds remain, so the market’s performance will likely come from the market’s earnings growth and dividend yield. It is very realistic to expect Australian market returns of 10%-15% over the next 12 months from dividends and earnings growth even without a valuation uplift.

“I think the really interesting point over the next 12 months will be the differentiation at the individual stock level. The pockets of growth in the market will provide a real opportunity to differentiate those stocks with significant growth opportunities. In a low growth world those stocks with growth opportunities will likely be bid up by the market as they become rare assets.

“As valuations are compressed the market is not differentiating between those companies with growth and those without growth. When we look back through history these sort of periods prove to be great long-term investment opportunities into great quality companies, with strong balance sheets and management teams, excellent growth opportunities and attractive valuations.”

Martha Wang – Portfolio Manager of the Fidelity China Fund

“Although China is not insular from recent world events, the sustainable domestic demand fundamentals driving the long-term growth and given the current attractive valuations against regional peers and versus long-term historical averages should provide ample grounds for fund flows back into China. “Given the domestic focus of my portfolio the impact from this incident would be less than other export oriented portfolios.”

Trevor Greetham, Director of Asset Allocation at Fidelity

“I see the US credit rating downgrade as bad news, but not for the obvious reasons. To me the ratings agencies are inadvertently playing a pernicious role in worsening the global policy response to the private sector debt crisis.

“They, along with the IMF, are encouraging governments to tighten fiscal policy when it is very hard to ease monetary policy effectively as an offset due to the zero lower bound for interest rates in the case of the US and UK or the one-size-fits-all ECB rate in the case of peripheral Eurozone countries. In addition, with almost all developed economies now tightening, export growth cannot offer the cushion it might to a country embarking on cut backs in isolation.

“Fighting the current crisis with additional austerity measures could be self-defeating. If growth weakens there will be negative consequences for tax revenues, private sector debt dynamics and financial stability.

“The credit agencies might argue they are not responsible for the broader implications of their actions. It is widely accepted that they were instrumental in creating the financial crisis in the first place due to the AAA ratings they placed on flawed structured products. As much as they are able, governments should probably ignore them. US regulators have already issued guidance saying US banks should continue to treat Treasuries as AAA. Taking things a step further, governments should not abandon the option of short term fiscal stimulus. Cut backs that create recession serve no purpose – not even to reduce government debt.”

Nick Price, Portfolio Manager Emerging Markets

“Given the political and currency frictions, it is highly likely that governments may have to resort to inflating away their debt problems.

“This bodes well for resource stocks, and especially those with assets less exposed to the economic cycle. We are already seeing this, with a number of the gold stocks recently reporting significant improvements in cash-flow generation on the back of recent rises in the prices of precious metals. If there is further monetary stimulus, this effect may well become more pronounced.

“In stark contrast to the cash constrained economies of the West where state funding is under pressure, we are also seeing opportunities present themselves in the developing markets where money is actually flowing into public sector systems, such as healthcare and infrastructure.

“This is exhibiting itself in the form of superior earnings growth rates in these segments, where the recent market falls are presenting stocks with superior fundamentals at increasingly attractive valuations.

“Against the backdrop of the recent declines in equity markets over the last few days, we have been using the opportunity to increase our holdings in those high quality stocks that can continue to generate free cashflow and pay an increasingly attractive dividend yield. Even the stocks with the best fundamentals are being impacted on an intraday basis, despite the fact that many of their fundamentals are proving stronger than ever.

“We regard the current environment as a real opportunity to buy some really good businesses at some great prices. This is exactly what we have been doing over the last few days.”

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