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Fidelity® Strategic Disciplines


A Message from the Fidelity® International Equity Strategy Portfolio Management Team*

By Jeff Delleo, Portfolio Manager, Strategic Advisers LLC — March 31, 2020

Q1 2020 Market Highlights


The global spread of the pandemic known as COVID-19 led to an abrupt slowdown of economic activity and a significant increase in stock market volatility.


Government-led efforts to combat the spread of the virus suppressed consumer activity pushing many mature, developed market economies into the onset of recession.


Historically, stock markets have often rallied when the deterioration of economic conditions begins to slow. Therefore, staying invested during recessions is essential to take advantage of market recoveries.

The humanitarian crisis caused by COVID-19 led to significant declines in stocks globally

The Fidelity® International Equity Strategy:

  • Seeks capital appreciation through active management.
  • Seeks to provide greater returns than the MSCI EAFE Index (Net MA Tax) over a full market cycle.
  • Diversifies exposure across different regions, including Europe, Australia, Asia, and the Far East.
  • Allocates opportunistically across investment styles including growth, value, and core stocks.
  • Adjusts as needed to help manage volatility throughout the market cycle.

The global spread of COVID-19 has resulted in significant suffering and loss of life around the world. As a result of the virus, many countries implemented social distancing policies in an effort to suppress transmission. Suppression efforts have led to a sharp drop in demand for goods and services from both consumers and businesses. Investors around the world have been fraught with anxiety and uncertainty over financial conditions, leading to periods of intense volatility. International developed market stocks fell by 22.8%1 for the quarter. Nearly all losses were generated from mid-February onward as the markets reacted to the spread of the virus.

For some time we had positioned our strategies to be in line with our belief that many developed international economies were in the late phase of the business cycle and nearing recession. Our positioning involved strategically reducing stock investments that are sensitive to economic activity. We now believe many of these economies have entered the onset of recession, due to the recent sharp drops in demand.

The strategy’s allocations toward quality and growth helped limit losses during a turbulent quarter

Q1 2020 Account Summary

  • We have increased exposure to some very high quality stocks that have moved down with the rest of the market.
  • While some companies may be substantially affected by virus containment efforts, we believe price declines observed in the stock market for other companies may be more extreme than the actual impact to their businesses.
  • Since we believe we are at the start of a recession, we strategically reduced our allocations to cyclically sensitive sectors such as real estate, industrials, materials, and energy, which benefitted the portfolio as those areas fell the most during the quarter.
  • Due to our prior planning and positioning during late-cycle, we believe current holdings are generally appropriate for our current environment.

In spite of market declines and periods of intense volatility, the Fidelity® International Equity Strategy held up well during the quarter. The Strategy outperformed the broader international developed stock market.1 As part of our on-going strategy, we continued to favor allocations to quality, growth, and large company stocks.

Here’s how those areas of the market performed during the quarter:

  • Across international developed markets, quality stocks outpaced the market by 7.3%2. Quality stocks are companies with low debt and stable earnings. They typically hold their value better versus the broader market during periods of volatility.
  • Growth stocks outperformed the market by 5.3%3 and beat value stocks by 10.7%4.Value stocks tend to struggle at the onset of recessions, as investors express near-term doubts about the outlook for some of these companies.
  • Large company stocks performed in line with the market, while outperforming small companies by 5.5%5. Historically, larger companies often perform better than smaller ones during recessions and other periods of market stress.

From a regional perspective, the strategy benefited from reducing exposure to investments in both the Pacific region and mainland Europe. Across developed markets, the United Kingdom declined the most. They were followed closely by the Pacific region (excluding Japan), and mainland Europe. Italy and Spain in particular struggled with significant stock declines. They were hit especially hard by the viral outbreak.

We believe that many developed market economies stand at the onset of recession. Therefore, we have maintained our low strategic allocations to sectors such as real estate, industrials, materials, and energy. They are particularly sensitive to economic activity. The strategy benefited from these smaller allocations since these sectors dropped the most during the quarter. Health care, utilities, and consumer discretionary sectors held up relatively well. The strategy also benefited from individual stock selection within the industrials and real estate sectors.

We anticipate volatility, but continue to watch for signs of stabilization

Q1 2020 Outlook

  • As new viral cases begin to slow in certain countries, our managers are tracking the economic recovery by analyzing data such as energy consumption, traffic congestion, and railway activity, to assess whether economic changes may justify positioning changes.
  • Our managers are adding to their favored positions and looking for additional value in anticipation that as economic conditions improve, stock markets will recover.

The onset of the pandemic occurred relatively quickly. The regions that were hardest hit are now beginning to emerge from a period of widespread inactivity. In China and South Korea, cases have already slowed. Underlying model managers (“our managers”) in those countries are tracking high-frequency economic indicators (e.g., reported weekly) to assess whether economic changes justify positioning changes. Such indicators include:

  • Coal consumption
  • Traffic congestions
  • Railway activity
  • Vehicle sales

As the virus runs its course through developed market economies, our managers investigate real-time indicators for signs that the deterioration of economic conditions may be slowing. Our managers within the overall strategy continue to pay close attention to the rate and number of global COVID-19 cases.

Meanwhile, we continue to focus on quality and growth stock investments. We have sought to add to positions that have experienced price declines that we consider disproportionate to broader market declines. We anticipate that as economic conditions begin to improve, stock markets across the globe will recover, as they have done in the past.