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Editors' Note

The editors of Fidelity Interactive Content Services (FICS) selected this content because it offers valuable information for investors.

A subpar recovery

The global and U.S. economies continue to see gradual improvement, but it’s still a subpar recovery.

BlackRock’s outlook is for modest acceleration next year, with the U.S. gross domestic product (GDP) growing at around 2.5%. We expect the yield of a 10-year bond to be about 3.5% by the end of 2014, and we don’t expect a lot of inflation, at least not over the next 12 to 18 months.

BlackRock expects to see better growth out of Europe, and some stabilization in emerging markets. U.S. consumers will continue to struggle, we think, because some of the issues they face are structural. Many of these headwinds were evident long before the financial crisis, and we think they will continue for the foreseeable future.

Stocks are no longer cheap, but they remain the best game in town. It seems unlikely that they are going to keep posting years of 15% returns—valuations are not as attractive as they were a year and a half ago.

In October, U.S. stocks were trading at around 15 to 16 times earnings. That’s not unreasonable, given the fact that interest rates and inflation are low, but we don’t think the economy will take off any time soon, and margins aren’t likely to expand much more either. This means modest expectations for earnings growth.

Some parts of the U.S. market, like energy, technology, and parts of the industrial sector, look cheaper than others. But other parts of the market—particularly utilities—still look expensive. Utilities tend to trade a lot like bonds. If real rates continue to rise, the valuations of these companies are likely to come down.

We are also very cautious about U.S. consumer companies. People are paying a big premium to own these, but we think the consumer is still struggling.

Look abroad

The fundamentals may look better in the United States than overseas, but the prices are higher. For example, valuations in Europe are cheap. There’s continuing headline risk, but there is some good value in Europe for the long-term investor.

So BlackRock recommends that people increase their international allocation, and that more aggressive investors—people who really have the stomach for the risk—look at emerging markets as well.

You don’t want to buy emerging markets at the same multiple as developed markets, which is what happened in late 2010. Over the past two years, emerging markets have gotten progressively cheaper. Now you can buy them at a 35% discount to developed markets, and in the past that has been a pretty good entry point.

Long-term inflation hedges

Given the state of government finances and the fact that Washington is not addressing long-term fiscal problems, there is some risk of higher inflation over the longer term. With that in mind, you may want to have some long-term inflation hedges in your portfolio, such as energy companies, hard commodities, and physical real estate.

I think the state of the country’s finances also means financial repression is here to stay, which will hold down interest rates for a long time. This means people will have to cast a wider net to generate income. There’s not going to be one substitute for Treasuries—it’s going to take a combination of different things. Consider getting more income from your stock portfolio, investing in infrastructure like toll roads and ports (through exchange-traded funds), holding municipal bonds, particularly if you can buy them on a dip, and considering bank loans, which provide a combination of hedging against rising rates and seniority to protect in the event of an economic downturn.

Related funds

  • Russ Kosterich is chief global investment strategist for BlackRock iShares.
  • Bill Irving manages Fidelity® Inflation-Protected Bond Fund (FINPX), Fidelity® GNMA Fund (FGMNX), Fidelity® Government Income Fund (FGOVX).
  • Ben Fischer is product team lead for the NFJ Dividend Value Fund (PNEAX) and NFJ International Value (AFJAX) investment strategies and product team co-lead for the NFJ All Cap Value Fund (PNFAX).
  • Meggan Walsh is the senior portfolio manager for Invesco Diversified Dividend Fund (LCEAX) and Invesco Dividend Income Fund (IAUTX).
  • John Dowd manages Fidelity® Select Energy Portfolio (FSENX) and Fidelity® Select Natural Resources Portfolio (FNARX).
  • Marc Seidner is a generalist portfolio manager for the PIMCO family of funds.

Learn more

Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
The views and opinions expressed by the speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product.
Neither Fidelity nor the speakers can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial adviser for additional information concerning your specific situation.
As with all your investments through Fidelity, you must make your own determination as to whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security.
The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
Fidelity is not recommending or endorsing any investment by making it available to its customers.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against a loss.
In general, the bond market is volatile, and fixed income securities carry interest rate risk, inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. While it may seem appealing to look at bonds that offer higher yields, investors should consider those higher yields to be a sign of potentially greater default, and credit and call risk.
Floating-rate loans generally are subject to restrictions on resale and they sometimes trade infrequently in the secondary market, and as a result may be more difficult to value, buy, or sell. The loan might not be fully collateralized, which may cause it to decline significantly in value.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risk, including the possible loss of principal.
Foreign markets can be more volatile than U.S. markets because of increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
Certain investment firms whose funds are available through the FundsNetwork® program for Fidelity were offered the opportunity to participate in this event. Fidelity considered a variety of factors when making the final firm selection. Firms may compensate Fidelity for participating in this event, including reimbursement for expenses.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates.
Portfolio Review is an educational tool.
As of August 30, 2013 the NFJ All-Cap Value Fund held the following securities named in this article (percentages indicate the percentage of base market value of the total fund): Cisco, 2.35%, Microsoft, 2.31%, Intel, 1.29%, International Paper, 2.37%, and Ford, 1.33%.
As of August 30, 2013, the Fidelity Select Energy Portfolio held the following security named in this article: Cabot Oil & Gas, 2.19%.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
665930.1.1

An economic tug-of-war

The economic recovery continues to be sluggish, with a tug-of-war between improving fundamentals and a drag from fiscal policy and tighter financial conditions.

On one hand household balance sheets are looking better. Debt compared with income is down, and gains in the stock market and home prices have pushed up wealth. Housing has been another bright spot, and I think can continue to be—there’s a lot of pent-up demand.

But fiscal policy has been a drag. This year saw the expiration of a 2% payroll tax holiday, higher income taxes for the wealthy, and the sequestration spending cuts. The Congressional Budget Office has estimated the impact to be about a 1.75% drag on GDP this year, though that headwind is supposed to abate starting next year. Higher interest rates have been a drag as well.

The Fed's tricky position

The nomination of Janet Yellen increases the continuity investors can expect for monetary policy, which should imply lower market volatility and, I think, lower interest rates. I think the federal funds rate may not reach a more normal level until 2018 or 2019.

The Fed has a difficult job, partly because there is considerable uncertainty about the amount of slack in the labor market. The unemployment rate has fallen steadily at around 0.9 percentage points per year, from 10% in 2009 to 7.3% now. The problem is that the unemployment rate has dropped in part because people have dropped out of the labor market.

The tricky thing for the Fed is to figure out whether people will become less discouraged and take another crack at trying to find a job, in which case labor market participation will rise and the unemployment rate will stop dropping as rapidly.

If the participation rate is going to trend back up, the Fed should maintain its very accommodative stance. If participation continues to fall, then the unemploymentrate will keep falling, and soon there will be tightness in the labor market, which could lead to inflation. So inflation will be the ultimate barometer of how much slack there is in the labor market.

Avoiding Treasuries may be a mistake

I think it could be a mistake to stay away from Treasuries on the view that rates are going to rise. There are two reasons that I do not think we are in a bear market for bonds.

First, our economy still depends on credit expansion and low interest rates—a sharp and extended move higher in interest rates would squash the recovery, which in turn would push interest rates back down.

Second, roughly half the correction in rates has already happened. The yield on 10-year Treasury inflation-protected securities (TIPS) has jumped around 125 basis points to 0.35%. In the long run, I think it should be in line with real GDP growth—which the Fed pegs around 2%. So rates could rise about 160-170 basis points (100 basis points equals one percentage point) from here. But I think that the other half of the normalization is going to happen at a much slower pace.

Given the Fed’s continued accommodative stance, I see some value in long-maturity TIPS versus conventional Treasuries. I see very little value in agency mortgage-backed securities, which don’t offer enough of a premium to compensate for prepayment risk.

Related funds

  • Russ Kosterich is chief global investment strategist for BlackRock iShares.
  • Bill Irving manages Fidelity® Inflation-Protected Bond Fund (FINPX), Fidelity® GNMA Fund (FGMNX), Fidelity® Government Income Fund (FGOVX).
  • Ben Fischer is product team lead for the NFJ Dividend Value Fund (PNEAX) and NFJ International Value (AFJAX) investment strategies and product team co-lead for the NFJ All Cap Value Fund (PNFAX).
  • Meggan Walsh is the senior portfolio manager for Invesco Diversified Dividend Fund (LCEAX) and Invesco Dividend Income Fund (IAUTX).
  • John Dowd manages Fidelity® Select Energy Portfolio (FSENX) and Fidelity® Select Natural Resources Portfolio (FNARX).
  • Marc Seidner is a generalist portfolio manager for the PIMCO family of funds.

Learn more

Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
The views and opinions expressed by the speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product.
Neither Fidelity nor the speakers can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial adviser for additional information concerning your specific situation.
As with all your investments through Fidelity, you must make your own determination as to whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security.
The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
Fidelity is not recommending or endorsing any investment by making it available to its customers.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against a loss.
In general, the bond market is volatile, and fixed income securities carry interest rate risk, inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. While it may seem appealing to look at bonds that offer higher yields, investors should consider those higher yields to be a sign of potentially greater default, and credit and call risk.
Floating-rate loans generally are subject to restrictions on resale and they sometimes trade infrequently in the secondary market, and as a result may be more difficult to value, buy, or sell. The loan might not be fully collateralized, which may cause it to decline significantly in value.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risk, including the possible loss of principal.
Foreign markets can be more volatile than U.S. markets because of increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
Certain investment firms whose funds are available through the FundsNetwork® program for Fidelity were offered the opportunity to participate in this event. Fidelity considered a variety of factors when making the final firm selection. Firms may compensate Fidelity for participating in this event, including reimbursement for expenses.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates.
Portfolio Review is an educational tool.
As of August 30, 2013 the NFJ All-Cap Value Fund held the following securities named in this article (percentages indicate the percentage of base market value of the total fund): Cisco, 2.35%, Microsoft, 2.31%, Intel, 1.29%, International Paper, 2.37%, and Ford, 1.33%.
As of August 30, 2013, the Fidelity Select Energy Portfolio held the following security named in this article: Cabot Oil & Gas, 2.19%.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
665930.1.1

Financial repression is here to stay

At NFJ, we don’t think the Fed will raise interest rates for two or three years. The Fed has to get unemployment down below 6% before it even considers raising rates, and I don’t think that will happen for a long time. Financial repression is here to stay, and investment survival depends on understanding it. We think it means you need to be in stocks paying dividends that can grow.

Valuations "not bad"

NFJ uses a bottom-up value approach to investing. But we looked at the P/E ratios of the cheaper stocks in our universe, and we found that they’re not bad—in the 10 to 12 range—even though the market has come up a lot. The average yield is about 20% to 30% higher than it was 10 years back, and the payout ratio is 35% compared with a historical average of 45%. So we don’t see obvious overpricing like we did in 2007.

My team has been finding values in the technology sector. Many tech stocks are cheap: Cisco, Microsoft, and Intel are all selling at relatively inexpensive multiples, with good yields and great balance sheets. They generate lots of cash and have the ability to buy back stock and pay a higher dividend.

Our funds have only minor exposure to electric utilities. Earlier this year, people were afraid of stocks but wanted yield, so the first stocks they went to were utilities. And they ignored the P/E ratios. At first P/Es were pretty reasonable: 10 for telephone utilities and eight or nine for electric utilities. But investors pushed them up to 15, 16, or 17, so we moved out.

Value in cyclicals

Many energy stocks have P/Es in the single digits—one of our energy stocks has a P/E of eight and a dividend yield of about 5.5%—and have an overweight position in materials.

Policymakers have to push the economy along at 1.5% or 2% a year. That is OK for cyclicals as long as there’s liquidity, especially companies that have strong cash flow and balance sheets that enable them to do financial restructuring. Take International Paper: Last week they raised the dividend 17% and bought back stock. Or Ford: Our team feels the company is cyclically strong and will be able to raise the dividend. So as long as the economy is moving ahead, the company’s in a good spot. If the Fed raises interest rates 300 basis points and kills the housing market, that’s obviously going to affect Ford and a lot of other companies.

My team has been finding values in certain emerging markets, which have been beaten down so badly, especially materials stocks. So we’re in places like Indonesia where we’re cautious, because there’s so much uncertainty about currency issues given Fed policy, but the values are compelling. Russia offers some opportunities as well: Some Russian banks are well managed, and a number of Russian energy stocks could do well.

Another area in which we’re finding continued opportunity is Japan, because it has a pretty aggressive policy of devaluing its currency. I think if policymakers there proceed as strongly as they say they’re going to, it’s worth having a market weighting in Japan.

Related funds

  • Russ Kosterich is chief global investment strategist for BlackRock iShares.
  • Bill Irving manages Fidelity® Inflation-Protected Bond Fund (FINPX), Fidelity® GNMA Fund (FGMNX), Fidelity® Government Income Fund (FGOVX).
  • Ben Fischer is product team lead for the NFJ Dividend Value Fund (PNEAX) and NFJ International Value (AFJAX) investment strategies and product team co-lead for the NFJ All Cap Value Fund (PNFAX).
  • Meggan Walsh is the senior portfolio manager for Invesco Diversified Dividend Fund (LCEAX) and Invesco Dividend Income Fund (IAUTX).
  • John Dowd manages Fidelity® Select Energy Portfolio (FSENX) and Fidelity® Select Natural Resources Portfolio (FNARX).
  • Marc Seidner is a generalist portfolio manager for the PIMCO family of funds.

Learn more

Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
The views and opinions expressed by the speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product.
Neither Fidelity nor the speakers can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial adviser for additional information concerning your specific situation.
As with all your investments through Fidelity, you must make your own determination as to whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security.
The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
Fidelity is not recommending or endorsing any investment by making it available to its customers.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against a loss.
In general, the bond market is volatile, and fixed income securities carry interest rate risk, inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. While it may seem appealing to look at bonds that offer higher yields, investors should consider those higher yields to be a sign of potentially greater default, and credit and call risk.
Floating-rate loans generally are subject to restrictions on resale and they sometimes trade infrequently in the secondary market, and as a result may be more difficult to value, buy, or sell. The loan might not be fully collateralized, which may cause it to decline significantly in value.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risk, including the possible loss of principal.
Foreign markets can be more volatile than U.S. markets because of increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
Certain investment firms whose funds are available through the FundsNetwork® program for Fidelity were offered the opportunity to participate in this event. Fidelity considered a variety of factors when making the final firm selection. Firms may compensate Fidelity for participating in this event, including reimbursement for expenses.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates.
Portfolio Review is an educational tool.
As of August 30, 2013 the NFJ All-Cap Value Fund held the following securities named in this article (percentages indicate the percentage of base market value of the total fund): Cisco, 2.35%, Microsoft, 2.31%, Intel, 1.29%, International Paper, 2.37%, and Ford, 1.33%.
As of August 30, 2013, the Fidelity Select Energy Portfolio held the following security named in this article: Cabot Oil & Gas, 2.19%.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
665930.1.1

A new bull case for energy

The bull case on energy has shifted over the past decade. People used to be bullish on commodity prices, based on economic growth and demand from the emerging markets combined with an inability to grow supply. It was a macro call: Get China right and you’ve got energy right. The companies most levered to the rising commodity prices benefited the most, and they were generally the worst companies—those that had the highest cost structures or the most financial or operational debt.

Now the bull case isn't premised on commodity price inflation. I don’t think it’s realistic to expect oil prices to move $100 to $200 without having dire economic consequences for the global economy.

The bull case is just as strong now, but it’s premised on cost deflation. The poster child is a natural gas company called Cabot Oil & Gas, which over the past three years has been the second-best-performing stock in the S&P 500® Index—even as natural gas prices have gone down. The company found a reservoir in the Marcellus Shale formation and perfected a technology that resulted in massive cost deflation. That’s the new modelthe application of a new technology to a really good resource.

Haves and have-nots

Three basins account for the vast majority of U.S. production growth: the Bakken in North Dakota, the Permian and the Eagle Ford in Texas. So there are haves and have-nots.

I’m trying to put together a portfolio of names that is likely to see costs per unit come down. So far, the companies with the best positions in the Marcellus, such as Cabot, have succeeded relative to all the other names in energy. And we’re seeing now that companies with good positions in the Bakken, Permian and Eagle Ford are seeing substantially better returns than their peers. But it’s early, and it’s an open question whether they’ll be able to replicate the experience of Cabot. The rest of the industry is experiencing cost inflationdeclining returns on capital, and rising capital spending without a commensurate increase in oil production.

I think you could probably paint a similarly bullish story about deep water oil production as I have about U.S. shale. That’s an area where new technologies are enabling the industry to do things they’ve never done before and to do things effectively that in prior decades would have been prohibitively expensive.

Related funds

  • Russ Kosterich is chief global investment strategist for BlackRock iShares.
  • Bill Irving manages Fidelity® Inflation-Protected Bond Fund (FINPX), Fidelity® GNMA Fund (FGMNX), Fidelity® Government Income Fund (FGOVX).
  • Ben Fischer is product team lead for the NFJ Dividend Value Fund (PNEAX) and NFJ International Value (AFJAX) investment strategies and product team co-lead for the NFJ All Cap Value Fund (PNFAX).
  • Meggan Walsh is the senior portfolio manager for Invesco Diversified Dividend Fund (LCEAX) and Invesco Dividend Income Fund (IAUTX).
  • John Dowd manages Fidelity® Select Energy Portfolio (FSENX) and Fidelity® Select Natural Resources Portfolio (FNARX).
  • Marc Seidner is a generalist portfolio manager for the PIMCO family of funds.

Learn more

Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
The views and opinions expressed by the speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product.
Neither Fidelity nor the speakers can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial adviser for additional information concerning your specific situation.
As with all your investments through Fidelity, you must make your own determination as to whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security.
The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
Fidelity is not recommending or endorsing any investment by making it available to its customers.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against a loss.
In general, the bond market is volatile, and fixed income securities carry interest rate risk, inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. While it may seem appealing to look at bonds that offer higher yields, investors should consider those higher yields to be a sign of potentially greater default, and credit and call risk.
Floating-rate loans generally are subject to restrictions on resale and they sometimes trade infrequently in the secondary market, and as a result may be more difficult to value, buy, or sell. The loan might not be fully collateralized, which may cause it to decline significantly in value.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risk, including the possible loss of principal.
Foreign markets can be more volatile than U.S. markets because of increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
Certain investment firms whose funds are available through the FundsNetwork® program for Fidelity were offered the opportunity to participate in this event. Fidelity considered a variety of factors when making the final firm selection. Firms may compensate Fidelity for participating in this event, including reimbursement for expenses.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates.
Portfolio Review is an educational tool.
As of August 30, 2013 the NFJ All-Cap Value Fund held the following securities named in this article (percentages indicate the percentage of base market value of the total fund): Cisco, 2.35%, Microsoft, 2.31%, Intel, 1.29%, International Paper, 2.37%, and Ford, 1.33%.
As of August 30, 2013, the Fidelity Select Energy Portfolio held the following security named in this article: Cabot Oil & Gas, 2.19%.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
665930.1.1

Value harder to find

Attractively valued investments still exist, but the opportunity set has narrowed in recent years. I analyze investments based on their appreciation, income, and preservation profile. Today, that analysis leads me to believe the market has discounted much of the improving fundamentals and is approximately fairly valued. My team has been finding it incrementally more difficult to identify new ideas that fit our investment criteria. However, we've been actively investing in companies where we have a high degree of confidence in their earnings sustainability over the next two to three years.

Given the unprecedented liquidity injected into the global financial system, I think it’s prudent to be careful about the valuations we’re assigning companies. It’s easy to find complacency with stocks up 20% year to date, and that is when you should be the most skeptical and focus on the level of conviction in your independent analysis.

Staples, European cyclicals, and dividend growth

My team at Invesco has been focused on areas of the marketplace that generate stable levels of high free cash flow, such as our investments in consumer staples. We believe that their earnings profiles are much more realistic over the next two years and that their margins are below historical peaks, unlike many other sectors of the economy.

We’re also finding opportunities in Europe. In our opinion, the marketplace has not recognized the earning power of some of the more capital-intensive companies—given the muted and lagged recovery in the region. But of course, one must measure the downside risks, such as the impact of a sustained period of below-trend consumer spending.

We are also very positive on dividend growth outlook. Payout ratios (the percentage of earnings paid out to shareholders) have improved from this cycle’s low of 27% to 34% today, but remain below long-term averages. Free cash flow is still growing in excess of net income for most companies, and balance sheets are very strong—meaning there is room for dividends to increase from here. The average return on equity (ROE) for S&P 500 companies currently is 19%, with little top-line growth and flat to declining incremental margins. In this environment, growing your return of capital to shareholders via dividends has been rewarded by investors.

Management teams have been able to navigate a very low top-line growth environment and still deliver strong earnings since the recession. The market is also beginning to accept mergers and acquisitions (M&A) if they involve reasonably priced deals.

Liquidity and the great unwind

I have been carefully watching the extension of risk in the marketplace today. Hedge funds, sovereign wealth funds, and pension funds have been investing in longer-duration assets, such as infrastructure plays. and hard commodities. For example, a private equity firm recently purchased 150 homes in Tampa, and sovereign wealth funds are making similar decisions. The extension of long-duration assets in the marketplace today is unprecedented and the risk of a misstep is high. If investors had to unload those assets, what would that mean for liquidity in the marketplace? This is something I am monitoring because we've never seen it before.

We are mindful of the implications of an eventual unwind of zero-bound interest rates on the economy and the markets. After all, assuming perpetual below-inflation cost of funding for both the government and corporations is not something market participants model. The market will determine what the appropriate discount rate is before a regime change in interest rates occurs. But my biggest concern is not the policy details—such as whether or not the Fed tapers—it’s whether the market loses confidence in the process. I would expect volatility to be high over the next three months as the market works through leadership changes at the Fed and negotiations in Washington, D.C. This volatility is an opportunity for long-term investors and we will keep an eye out for investments with an attractive risk-reward profile based on our fundamental research.

Related funds

  • Russ Kosterich is chief global investment strategist for BlackRock iShares.
  • Bill Irving manages Fidelity® Inflation-Protected Bond Fund (FINPX), Fidelity® GNMA Fund (FGMNX), Fidelity® Government Income Fund (FGOVX).
  • Ben Fischer is product team lead for the NFJ Dividend Value Fund (PNEAX) and NFJ International Value (AFJAX) investment strategies and product team co-lead for the NFJ All Cap Value Fund (PNFAX).
  • Meggan Walsh is the senior portfolio manager for Invesco Diversified Dividend Fund (LCEAX) and Invesco Dividend Income Fund (IAUTX).
  • John Dowd manages Fidelity® Select Energy Portfolio (FSENX) and Fidelity® Select Natural Resources Portfolio (FNARX).
  • Marc Seidner is a generalist portfolio manager for the PIMCO family of funds.

Learn more

Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
The views and opinions expressed by the speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product.
Neither Fidelity nor the speakers can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial adviser for additional information concerning your specific situation.
As with all your investments through Fidelity, you must make your own determination as to whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security.
The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
Fidelity is not recommending or endorsing any investment by making it available to its customers.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against a loss.
In general, the bond market is volatile, and fixed income securities carry interest rate risk, inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. While it may seem appealing to look at bonds that offer higher yields, investors should consider those higher yields to be a sign of potentially greater default, and credit and call risk.
Floating-rate loans generally are subject to restrictions on resale and they sometimes trade infrequently in the secondary market, and as a result may be more difficult to value, buy, or sell. The loan might not be fully collateralized, which may cause it to decline significantly in value.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risk, including the possible loss of principal.
Foreign markets can be more volatile than U.S. markets because of increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
Certain investment firms whose funds are available through the FundsNetwork® program for Fidelity were offered the opportunity to participate in this event. Fidelity considered a variety of factors when making the final firm selection. Firms may compensate Fidelity for participating in this event, including reimbursement for expenses.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates.
Portfolio Review is an educational tool.
As of August 30, 2013 the NFJ All-Cap Value Fund held the following securities named in this article (percentages indicate the percentage of base market value of the total fund): Cisco, 2.35%, Microsoft, 2.31%, Intel, 1.29%, International Paper, 2.37%, and Ford, 1.33%.
As of August 30, 2013, the Fidelity Select Energy Portfolio held the following security named in this article: Cabot Oil & Gas, 2.19%.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
665930.1.1

Still the "new normal"

At PIMCO, we continue to believe in the notion of “new normal” economic growth. By that we mean we expect growth of around 4%, which is roughly 2% inflation and approximately 2% real growth. That’s probably lower than many believe, but the economy faces headwinds from deleveraging, increased regulation, and changes in fiscal and monetary policy. And, in fact, those headwinds could accelerate in the near term.

The optimists say the bright spots are the U.S. housing recovery, energy independence, and manufacturing. But there are reasons to question the impact of all three from an economic perspective. As interest rates go up, some of the steam is going to come out of the housing market. Energy independence is a healthy secular trend for the United States, but there’s no immediate impact—prices at the pump haven’t gone down. And even if they do start to decline, what’s good for the U.S. economy might be destabilizing for many other regions with economies dependent on energy revenues. Manufacturing is a positive story, but it accounts for such a small proportion of the U.S. economy that it can’t improve fast enough to move the needle on the near-term outlook.

I think the Fed would like to back away from quantitative easing by the end of 2014, if economic conditions permit. But we don’t think the economy is going to break out into the “old normal” growth rates of 5% to 6%. So the Fed will have to keep short-term rates at effectively zero until 2015 or beyond. That should prevent the general level of rates from rising dramatically: There won’t be the rise in short-term interest rates necessary to validate higher intermediate-term rates.

Bonds over stocks

At PIMCO, we believe valuation has shifted in favor of bonds before stocks. Expected returns on stocks have gone down as prices have risen, while higher rates have boosted expected returns on bonds We’re actually getting a real rate of return on fixed income again: The real yield of 10-year Treasury Inflation-Protected Securities (TIPS) has gone from -0.75% to 0.5%, and the yield of a 10-year Treasury has gone from 1.75%, with inflation at 2%, to a high of 3% with inflation down to about 1.5%. So bonds look much more attractive than they have for the past year or so.

Thirty-year Treasuries still don’t look attractive, because the nominal rate of interest remains too low given the risks of inflation and volatility. However, the income generated by three- to five-year Treasuries—or, better yet, three- to five-year corporate bonds—is going to look very good on a risk-adjusted basis over the next year compared with earning practically nothing on a money market account.

I also like senior secured bank loans. With expected returns of around 3.5% to 4.5% for the sector, they’re attractive relative to cash. However, they’re almost always floating rate in nature, so they can offer some protection against rising rates in a positive economic environment. And their seniority provides some level of protection against default in case the economy stumbles. They’re not suitable for all investors—they’re below investment grade and tend to be more risky and less liquid than other types of debt instruments.

In terms of stocks, dividend-oriented stocks are very appealing to us right now—their income is a tailwind in a world of economic headwinds. And certain parts of the market are growing. Housing-related stocks are leveraging the housing recovery, and will likely continue to do so even if it slows. Some areas of manufacturing, like the auto industry, have also been doing incredibly well.

Related funds

  • Russ Kosterich is chief global investment strategist for BlackRock iShares.
  • Bill Irving manages Fidelity® Inflation-Protected Bond Fund (FINPX), Fidelity® GNMA Fund (FGMNX), Fidelity® Government Income Fund (FGOVX).
  • Ben Fischer is product team lead for the NFJ Dividend Value Fund (PNEAX) and NFJ International Value (AFJAX) investment strategies and product team co-lead for the NFJ All Cap Value Fund (PNFAX).
  • Meggan Walsh is the senior portfolio manager for Invesco Diversified Dividend Fund (LCEAX) and Invesco Dividend Income Fund (IAUTX).
  • John Dowd manages Fidelity® Select Energy Portfolio (FSENX) and Fidelity® Select Natural Resources Portfolio (FNARX).
  • Marc Seidner is a generalist portfolio manager for the PIMCO family of funds.

Learn more

Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
The views and opinions expressed by the speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product.
Neither Fidelity nor the speakers can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial adviser for additional information concerning your specific situation.
As with all your investments through Fidelity, you must make your own determination as to whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security.
The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
Fidelity is not recommending or endorsing any investment by making it available to its customers.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against a loss.
In general, the bond market is volatile, and fixed income securities carry interest rate risk, inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. While it may seem appealing to look at bonds that offer higher yields, investors should consider those higher yields to be a sign of potentially greater default, and credit and call risk.
Floating-rate loans generally are subject to restrictions on resale and they sometimes trade infrequently in the secondary market, and as a result may be more difficult to value, buy, or sell. The loan might not be fully collateralized, which may cause it to decline significantly in value.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risk, including the possible loss of principal.
Foreign markets can be more volatile than U.S. markets because of increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC.
Sector funds can be more volatile because of their narrow concentration in a specific industry.
Certain investment firms whose funds are available through the FundsNetwork® program for Fidelity were offered the opportunity to participate in this event. Fidelity considered a variety of factors when making the final firm selection. Firms may compensate Fidelity for participating in this event, including reimbursement for expenses.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates.
Portfolio Review is an educational tool.
As of August 30, 2013 the NFJ All-Cap Value Fund held the following securities named in this article (percentages indicate the percentage of base market value of the total fund): Cisco, 2.35%, Microsoft, 2.31%, Intel, 1.29%, International Paper, 2.37%, and Ford, 1.33%.
As of August 30, 2013, the Fidelity Select Energy Portfolio held the following security named in this article: Cabot Oil & Gas, 2.19%.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
665930.1.1
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The outlook for Fed policy