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A year of divergence

At Goldman Sachs Asset Management (GSAM), a key theme for 2015 is that divergence creates opportunity. Our forecast is that the U.S. should start growing north of 3% year over year, while we expect the euro area and Japan to grow around 1%. We project China’s growth to hover around 7%, down from its double-digit-level growth over the past decade. We also expect central bank policies to continue to diverge. In the U.S., the Federal Reserve exited its stimulus program, commonly known as quantitative easing (QE), but the European Central Bank has just announced its own program, and the Bank of Japan is continuing its QE program. We anticipate further divergence in currencies as well, with the U.S. dollar expected to continue gaining against virtually every major currency across the globe.

What divergence means for equities

A lot of the stock market’s gains in recent years have come from rising valuations. Now we expect earnings to be a central driver of performance. After double-digit-level returns over the past few years, we believe annual equity returns will be mid-single digit for the next five years. Although we envision more muted performance than in the recent past, equities are still quite attractive, in our view, particularly compared with fixed income. Given the improving U.S. economy and our focus on earnings, cyclical parts of the market—sectors that perform well when economic activity increases—look attractive. Technology, energy, and telecom potentially provide opportunities.

Divergence strengthens the case for active management. The individual P/E ratios of the stocks in the S&P 500® Index are trading at their narrowest distribution in more than 30 years—that is, the gap between the least expensive and the most expensive stocks is among the tightest in recent memory. We see opportunities emerging if these valuation discrepancies return to more historically normal levels.

Fixed income and diversification

After a 30-year bull market in bonds, at GSAM, we think investors should temper their return expectations. We believe the bond market might return about 2% a year going forward, without adjusting for inflation. While global conditions may suppress the ability of U.S. rates to normalize in the near term, we believe fundamentals from broadening global expansion may support higher rates over time. We expect the 10-Year Treasury yield to move up to about 3% by the end of the year, which may depress returns along the curve. Additionally, investors focused on the short end may be surprised if and when the Federal Reserve raises rates.

Given the current environment, we think that investors should diversify their sources of yield and look for potential opportunities in areas like high yield, bank loans, and emerging market debt. An active approach could be another potential solution, where investors may consider using diversified fixed income portfolios to take advantage of these opportunities.

What lower oil prices mean for investors

Given the structural shifts in the energy market, prices may need to trade below—or perhaps even well below—equilibrium to address global oversupply. This may leave high-cost, or highly levered, producers vulnerable in the near term. As supply and demand come back into balance, we see West Texas Intermediate approaching $65 by the end of the year.

We like master-limited partnerships (MLPs), which have sold off as the price of oil has fallen. These companies focus on the midstream portion of the energy process, including pipelines and infrastructure, and they typically have long-term contracts. These areas are driven more by volume over the long term and are less directly affected by the drop in oil prices. In addition, we believe MLP valuations have become more attractive given their yield and distribution growth potential.

Related funds

  • Candice Tse is part of Goldman Sachs Asset Management.
  • Matt Freund is chief investment officer for USAA.
  • Jed Weiss is co-manager of Fidelity® Total International Equity Fund (FTIEX) and manager of Fidelity® International Growth Fund (FIGFX) and Fidelity® International Small Cap Opportunities Fund (FSCOX).
  • Jeff Feingold is manager of Fidelity® Magellan® Fund (FMAGX).
  • Raman Srivistava is co-deputy chief investment officer and managing director of global fixed income at Standish Mellon Asset Management and manager of Dreyfus/Standish Global Fixed Income Fund (DHGAX), Dreyfus International Bond Fund (DIBAX), and Dreyfus Opportunistic Fixed Income Fund (DSTAX).

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.
Guidance provided by Fidelity through the Planning & Guidance Center is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment or tax-planning decisions.
IMPORTANT: The projections or other information generated by Fidelity’s Planning & Guidance Center Retirement Analysis regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.
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.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry 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.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes because of potential changes in the credit quality of the issuer.
Investments in publicly traded MLPs involve risks and considerations that may differ from investments in common stock.
To the degree that bank loan funds concentrate their investments in the banking and financial services industries, bank loan fund performance could be influenced by the overall condition of those industries. Bank loan fund investments can also be affected by government regulation, and are susceptible to interest rate changes and economic downturns in the U.S. and abroad. Such investments can carry significant credit and call risk, and may also be relatively illiquid, trade over the counter, and consequently can be difficult to value.
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.
Jeffrey Feingold manages Fidelity® Magellan Fund, which holds some of the stocks mentioned in this article. As of December 31, 2014, the last disclosed holdings of the fund included Google, Inc., Class A (1.6% of portfolio assets); Google, Inc. Class C (1.6% ); Biogen Idec, Inc. (0.75%); Amgen, Inc. (1.88%); TJX Companies (1.03%); Costco Wholesale Corp. (0.59%); Domino’s Pizza, Inc. (0.253%); and Deere & Co. (0.08%).
Jed Weiss manages Fidelity® International Growth Fund, which invests in some of the stocks mentioned in this article. As of December 31, 2014, the fund held 0.233% of assets in CSL Plasma Inc.; 0.433% in Tencent Holdings, Inc.; and 0.439% in Naver Corp.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
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.
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.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

714766.1.3

Three factors driving the markets

I’m watching how three factors could affect asset prices: the economy, interest rates, and valuations.

The U.S. economy is doing OK, but not great. Economists are being very free with their adjectives and talking about escape velocity, but I just don’t think we are there. And the idea that the U.S. can remain decoupled from a global slowdown is problematic. The consensus for 2015 is for 3.00% to 3.5% GDP growth; at USAA, we think it’s going to be lower, and asset values need to reflect that.

Bonds lower for longer

My team at USAA expects interest rates will stay low for longer than the consensus reflects. The Federal Reserve is looking to the data to tell it when to act, and at this point, I don’t see what problem the Fed would be trying to solve by raising interest rates. Inflation doesn’t seem to be an issue—the dollar is strengthening, not weakening, and asset markets aren’t overheating. The Fed’s economic forecasts have been overly optimistic in the past, so it remains to be seen just how strong the economy actually is.

Mixed outlook for stocks

Equity valuations look a bit high when considered in the context of current GDP growth expectations. Strategists on the street seem to think that equities are fairly or fully valued. They’re looking back at how extreme valuations were in 2000, or other market tops, and saying, “At least current valuations aren’t as high as they were then.” I think the problem with that argument is that it overlooks the fact that valuations now are higher than they were when most bear markets started. I am not saying to expect an imminent crash, but valuations do look rich.

Value opportunities

I like large-cap, high-quality U.S. stocks that can grow their dividends. Their valuations are much more attractive to us than small caps’, which seem very out of line. Dividend growth plays into a theme we have at USAA, which is buying inflation protection when no one’s worried about inflation. Another way to play that theme is with precious metals and mining stocks, which are way out of favor now.

Risks increasing

We try to get a picture of the mosaic that’s out there in the markets. And right now it feels as though volatility is on the upswing. Energy is an obvious example of this. It will take a series of quarters to see what impact the huge drop in oil prices will have on the economy and the markets. Then there’s the strong dollar, which is closely related to the drop in oil. We are effectively seeing a very polite currency war going on in the world today as countries devalue their money for competitive reasons in this low global growth environment. We’re not aware of a single currency war that ended well.

We think the bond market tends to be smarter than the stock market at identifying risks, and bonds are pricing in more risk. Rates in Europe are negative, and credit spreads are starting to widen, even outside the energy sector. This is an indication that bond investors are getting more worried.

At the same time, we are seeing very low liquidity in the bond markets, as measured by trading volumes, dealer inventories, and other metrics. Liquidity is like oxygen: When it’s there you don’t think about it, and when it’s not, things die really fast. We also think it’s important to be mindful of liquidity in this rising-volatility environment—not just whether your mutual funds are liquid, but also whether their underlying investments are liquid.

Opportunities for yield

At USAA, we like some high-yield bonds. We’re finding decent securities yielding between 5.25% and 5.75% that we feel confident will pay us back. With interest rates as low as they are, that yield is very attractive.

We also think bank loans make sense. They’re out of favor for a variety of reasons, but their yields are attractive and they don’t have a lot of sensitivity to interest rate moves.

Duration doesn’t scare us in today’s market. We have been barbelling our portfolios, pairing some very short-term securities with 20- and 30-year bonds.

We also like long-maturity, high-quality municipal bonds, which are attractively priced on a tax-equivalent basis.

Related funds

  • Candice Tse is part of Goldman Sachs Asset Management.
  • Matt Freund is chief investment officer for USAA.
  • Jed Weiss is co-manager of Fidelity® Total International Equity Fund (FTIEX) and manager of Fidelity® International Growth Fund (FIGFX) and Fidelity® International Small Cap Opportunities Fund (FSCOX).
  • Jeff Feingold is manager of Fidelity® Magellan® Fund (FMAGX).
  • Raman Srivistava is co-deputy chief investment officer and managing director of global fixed income at Standish Mellon Asset Management and manager of Dreyfus/Standish Global Fixed Income Fund (DHGAX), Dreyfus International Bond Fund (DIBAX), and Dreyfus Opportunistic Fixed Income Fund (DSTAX).

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.
Guidance provided by Fidelity through the Planning & Guidance Center is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment or tax-planning decisions.
IMPORTANT: The projections or other information generated by Fidelity’s Planning & Guidance Center Retirement Analysis regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.
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.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry 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.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes because of potential changes in the credit quality of the issuer.
Investments in publicly traded MLPs involve risks and considerations that may differ from investments in common stock.
To the degree that bank loan funds concentrate their investments in the banking and financial services industries, bank loan fund performance could be influenced by the overall condition of those industries. Bank loan fund investments can also be affected by government regulation, and are susceptible to interest rate changes and economic downturns in the U.S. and abroad. Such investments can carry significant credit and call risk, and may also be relatively illiquid, trade over the counter, and consequently can be difficult to value.
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.
Jeffrey Feingold manages Fidelity® Magellan Fund, which holds some of the stocks mentioned in this article. As of December 31, 2014, the last disclosed holdings of the fund included Google, Inc., Class A (1.6% of portfolio assets); Google, Inc. Class C (1.6% ); Biogen Idec, Inc. (0.75%); Amgen, Inc. (1.88%); TJX Companies (1.03%); Costco Wholesale Corp. (0.59%); Domino’s Pizza, Inc. (0.253%); and Deere & Co. (0.08%).
Jed Weiss manages Fidelity® International Growth Fund, which invests in some of the stocks mentioned in this article. As of December 31, 2014, the fund held 0.233% of assets in CSL Plasma Inc.; 0.433% in Tencent Holdings, Inc.; and 0.439% in Naver Corp.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
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.
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.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

714766.1.3

Forgotten Japanese small caps

When choosing investments for my fund, I look for multiyear structural growth stories, high barriers to entry, and businesses at attractive valuations based on my earnings forecasts. I have been finding these kinds of investments among select Japanese small caps.

This market segment has significantly underperformed for 25 years. The result is that people don’t pay attention to the stocks anymore. When I visit companies in Japan, I realize that in many cases no one has been to visit them in years. That has led to a number of valuation anomalies, with some companies wildly too cheap.

That doesn’t mean I’m excited about all Japanese small caps. Probably 80% of the stocks are cheap for good reason. But maybe 20% of the index is made up of steadily growing businesses producing solid returns that are much cheaper than their global peers. To give an extreme example, there’s a Japanese snack company that owns a stake in a Chinese food and beverage company worth two to three times its own market cap. It also has an investment in a company that could be worth another 50% of its market cap and is a reasonable business in its own right. That’s an extreme example, but there are a number of other companies that are profitable, have never lost money, and are trading at the net cash on their balance sheets.

Unique opportunities in emerging markets

Emerging markets are an unloved asset class that I’m increasingly interested in. Certain segments are present in emerging markets that you don’t have the opportunity to invest in elsewhere. Take mobile messaging networks. WhatsApp gets lots of press in the U.S. because Facebook bought it for a huge multiple. But there are similar companies, like WeChat, a subsidiary of Tencent (TCEHY) in China, or Line, a subsidiary of Naver (NHNCF), in Japan, that arguably are cheaper than the implied valuation paid for WhatsApp, more locally dominant, and growing faster.

Upturn in Mexican housing

The Mexican housing sector has had a nasty down cycle. Most of the publicly traded Mexican homebuilders have effectively gone bust, and there’s really only one well-capitalized, public Mexican homebuilder standing. So that company could potentially be in a tremendous position to benefit as Mexican homebuilding recovers. Mexican housing has historically lagged the trends in the U.S. housing sector, but has been rebounding of late.

Cheap stocks near core Europe

Stock markets became very cheap in Denmark, Belgium, and the Netherlands because of financial crises in those countries, so you can find great franchise businesses at cheap prices. But these countries’ balance sheets have been much better than those of peripheral European countries, and the economies are closely tied to stronger core economies like that of Germany.

I’ve found opportunities in companies that make commercial lighting fixtures. LED fixtures are growing significantly as a percentage of commercial lighting fixtures; that’s beneficial because margins are often better for LEDs than for other types of fixtures. These companies have strong relationships with architects, and architects are unlikely to choose a different company’s fixtures based solely on price. As a result, these companies have pricing power— prices for many commercial lighting fixtures in Europe have held fairly steady over the last six years, even though the commercial construction arena has been horrible. The problems in European commercial construction mean you have typically been able to get the stocks at very cheap multiples compared with their global counterparts. If we start to see a recovery—which recently has seemed to be happening in parts of Europe—there’s a lot of opportunity for these stocks to run.

Blood plasma

Another overlooked area that’s been with the fund since inception is drugs made from human blood plasma, which are used for various kinds of neurological and immunological diseases. This market has grown at a very high clip for a long time.

CSL Plasma, Baxter (BAX), and Grifols (GRFS), the three main players in this area, together make up more than 90% of the market, so they have tremendous pricing power. Pricing for key products over the last 10 years has been flat to up—even during hard times for hospital admissions, like 2008 and 2009.

From a volume standpoint, a lot of these neurological diseases and immunological disorders are significantly undertreated disorders, so there’s a big opportunity to improve treatment penetration rates. Plus, researchers are finding new uses for blood plasma all the time. So there should be a long runway for growth.

Related funds

  • Candice Tse is part of Goldman Sachs Asset Management.
  • Matt Freund is chief investment officer for USAA.
  • Jed Weiss is co-manager of Fidelity® Total International Equity Fund (FTIEX) and manager of Fidelity® International Growth Fund (FIGFX) and Fidelity® International Small Cap Opportunities Fund (FSCOX).
  • Jeff Feingold is manager of Fidelity® Magellan® Fund (FMAGX).
  • Raman Srivistava is co-deputy chief investment officer and managing director of global fixed income at Standish Mellon Asset Management and manager of Dreyfus/Standish Global Fixed Income Fund (DHGAX), Dreyfus International Bond Fund (DIBAX), and Dreyfus Opportunistic Fixed Income Fund (DSTAX).

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.
Guidance provided by Fidelity through the Planning & Guidance Center is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment or tax-planning decisions.
IMPORTANT: The projections or other information generated by Fidelity’s Planning & Guidance Center Retirement Analysis regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.
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.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry 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.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes because of potential changes in the credit quality of the issuer.
Investments in publicly traded MLPs involve risks and considerations that may differ from investments in common stock.
To the degree that bank loan funds concentrate their investments in the banking and financial services industries, bank loan fund performance could be influenced by the overall condition of those industries. Bank loan fund investments can also be affected by government regulation, and are susceptible to interest rate changes and economic downturns in the U.S. and abroad. Such investments can carry significant credit and call risk, and may also be relatively illiquid, trade over the counter, and consequently can be difficult to value.
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.
Jeffrey Feingold manages Fidelity® Magellan Fund, which holds some of the stocks mentioned in this article. As of December 31, 2014, the last disclosed holdings of the fund included Google, Inc., Class A (1.6% of portfolio assets); Google, Inc. Class C (1.6% ); Biogen Idec, Inc. (0.75%); Amgen, Inc. (1.88%); TJX Companies (1.03%); Costco Wholesale Corp. (0.59%); Domino’s Pizza, Inc. (0.253%); and Deere & Co. (0.08%).
Jed Weiss manages Fidelity® International Growth Fund, which invests in some of the stocks mentioned in this article. As of December 31, 2014, the fund held 0.233% of assets in CSL Plasma Inc.; 0.433% in Tencent Holdings, Inc.; and 0.439% in Naver Corp.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
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.
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.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

714766.1.3

Checking the pillars of growth

As I think about the overall stock market, it looks like a mixed bag. I like to use a framework developed by Fidelity’s Bruce Johnstone, which looks at valuation, global liquidity, and corporate earnings as the pillars of growth. Earnings are fairly benign in the U.S.; valuations are okay—definitely not cheap, but not egregious; and global liquidity is mixed with Europe easing and the U.S. preparing to tighten. So the outlook for stocks is mixed.

I look for three kinds of stocks that I think can outperform in any environment: quality growers, which are stable, steady compounders; cheap stocks with improving fundamentals; and scarce growers—companies that can grow their sales and earnings very rapidly.

Quality growers: low-end retailers

Quality growers can provide more stable earnings and less volatility. One approach that fits into this trend is investing in companies that can provide value in a world where the Internet is driving down prices, such as T.J. Maxx (TJX) and Costco (COST). They’re both well-run companies that have been able to grow faster than their competitors by serving customers who increasingly want more for less. Value consciousness is thriving these days, and these companies have been capitalizing on it.

Cheap stocks with improving fundamentals: agriculture

Maybe the most attractive part of the market for outperformance over time is cheap companies with improving fundamentals. Airlines have been a great example of this over the past few years. The stocks were cheap when consolidation and management changes improved fundamentals.

Today, I’m finding cheap stocks with improving fundamentals tied to agriculture. Low prices on corn and other agricultural products have punished many stocks in this sector, some of which seem poised to perform well when prices recover. Corn prices have been low for some time, because supply has been quite high for the last few years. But this year, planting doesn’t seem to have gone great, and prices have begun to move off the bottom of $3.25 per bushel. The outlook may improve over the next 12 to 18 months. This could strongly affect companies like John Deere (DE)—when corn prices rise, farmer income grows and boosts demand for farm products.

Deere’s stock has gone sideways for the last couple of years, while the market has gained a lot. The company has been diligently preparing to take advantage of the eventual upswing—buying back stock, tightening its cost structure, and otherwise ensuring that it’s in a strong position to help grow earnings. So from where the stock is today, there could be a nice upside over the next two years or so if agricultural prices rise. Meanwhile, the stock has recently paid a 3% dividend.

Scarce growers

The fastest-growing stocks can come with big risks, and it’s hard to deliver outperformance in this part of the market. But if you pick the winners, there can be great rewards, so I try to keep part of my portfolio in names that fall into this category. You can find fast growers in any part of the market, including traditional tech areas like Internet services and online security, but also in less traditional growth areas like restaurants, such as Domino’s (DPZ). I try to look out two or three years, recognizing that growth is never going to be a straight line. For example, companies like Google (GOOG) invest heavily in their businesses. These types of investments can reduce earnings growth in the short term, while boosting a company’s long-term prospects. Investors focusing on quarterly results sometimes sell these types of stocks, creating opportunities for longer-term investors.

Biotech also falls into the scarce growth category. People will pay for drugs that truly offer differentiation and efficacy. And biotech companies can provide long, durable earnings because their patents last many years. This is one part of the market where bigger can be better. Large, well-established companies like Biogen (BIIB) and Amgen (AMGN) have many shots on goal: Even if one drug fails, there’s typically a robust pipeline. They may also have extensive resources to invest in R&D, and relatively low valuations compared with smaller, faster-growing players. This is one of the few areas of the market where we can look out two, three, four years in some cases, and have an idea of potential earnings.

Related funds

  • Candice Tse is part of Goldman Sachs Asset Management.
  • Matt Freund is chief investment officer for USAA.
  • Jed Weiss is co-manager of Fidelity® Total International Equity Fund (FTIEX) and manager of Fidelity® International Growth Fund (FIGFX) and Fidelity® International Small Cap Opportunities Fund (FSCOX).
  • Jeff Feingold is manager of Fidelity® Magellan® Fund (FMAGX).
  • Raman Srivistava is co-deputy chief investment officer and managing director of global fixed income at Standish Mellon Asset Management and manager of Dreyfus/Standish Global Fixed Income Fund (DHGAX), Dreyfus International Bond Fund (DIBAX), and Dreyfus Opportunistic Fixed Income Fund (DSTAX).

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.
Guidance provided by Fidelity through the Planning & Guidance Center is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment or tax-planning decisions.
IMPORTANT: The projections or other information generated by Fidelity’s Planning & Guidance Center Retirement Analysis regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.
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.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry 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.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes because of potential changes in the credit quality of the issuer.
Investments in publicly traded MLPs involve risks and considerations that may differ from investments in common stock.
To the degree that bank loan funds concentrate their investments in the banking and financial services industries, bank loan fund performance could be influenced by the overall condition of those industries. Bank loan fund investments can also be affected by government regulation, and are susceptible to interest rate changes and economic downturns in the U.S. and abroad. Such investments can carry significant credit and call risk, and may also be relatively illiquid, trade over the counter, and consequently can be difficult to value.
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.
Jeffrey Feingold manages Fidelity® Magellan Fund, which holds some of the stocks mentioned in this article. As of December 31, 2014, the last disclosed holdings of the fund included Google, Inc., Class A (1.6% of portfolio assets); Google, Inc. Class C (1.6% ); Biogen Idec, Inc. (0.75%); Amgen, Inc. (1.88%); TJX Companies (1.03%); Costco Wholesale Corp. (0.59%); Domino’s Pizza, Inc. (0.253%); and Deere & Co. (0.08%).
Jed Weiss manages Fidelity® International Growth Fund, which invests in some of the stocks mentioned in this article. As of December 31, 2014, the fund held 0.233% of assets in CSL Plasma Inc.; 0.433% in Tencent Holdings, Inc.; and 0.439% in Naver Corp.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
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.
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.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

714766.1.3

Yields should stay low

Many investors might be worried about rising interest rates, particularly on longer-term bonds. My view is that it’s going to be difficult for longer-term rates to rise significantly. A lot less supply will come into the market this year, both domestically and globally, even before the European Central Bank starts buying 60 billion euros’ worth of bonds a month. Meanwhile, there continues to be strong demand from central banks for government bonds. Those technicals, combined with relatively weak global economic growth, should keep a lid on global yields, including Treasuries.

As for the Fed, it has delivered a very consistent message—that investors should expect a rate increase toward the middle of this year. The market has pushed this date back, but I think investors should take the Fed at its word and recognize the potential for shorter rates to rise if we see stronger growth and inflation data later this year. That could actually push down long-term yields if the Fed is seen as being ahead of inflation.

Opportunities in non-government bonds

Investors may be wondering what to make of negative interest rates in Europe. This isn’t the first time we’ve had negative rates in places like Switzerland—it happened during the European crisis, and it ushered in some compelling opportunities outside the government bond markets. We’re seeing some similar opportunities emerge in corporate bonds today.

The fall in oil prices has pushed up high-yield bond yields. Energy is about 15% of the high-yield market, but a lot of the high-yield market trades as a whole. As a result, you can find some really attractive bonds outside energy. I’d say the same for investment-grade corporate bonds. As the Treasury yield curve has flattened, the spread between the yield on longer-dated corporates and Treasuries has increased. For example, a 30-year single-A corporate bond might yield 4.5%, compared with 2.5% for a 30-year Treasury.

U.S. securitized bonds have been remarkably stable, and we believe they will continue to be stable, offering compelling yields and return prospects. During the financial crisis, some of these bonds paid 15% or 20% yields. Now their yields are down to about 5%. But their maturities are shorter, in some cases with just two or three years left. They’re very high quality and there’s a long history to judge the performance of the collateral.

Bond-picking in emerging markets

You’re also beginning to see some opportunities in parts of the emerging markets, primarily in sovereign and some corporate debt. You have to tread carefully here and can’t approach this sector as a whole: You need to determine which bonds have the potential to default—which, at this point of the cycle, could include many.

For example, we like certain corporate bonds in Brazil. We think conditions in Brazil will improve, especially in the second half of the year. Local currency Brazilian government bonds pay yields of over 12%, and corporate bonds mostly denominated in U.S. dollars pay anywhere from 2% to 7% higher yields than equivalent-maturity U.S. government debt. Our analyst teams are continually working to identify the bonds we think will have the financial capacity to pay their yields, while taking into account the fact that many of these bonds may not be very liquid.

In a similar vein, India is a relatively high-yielding country with an improving economic and political backdrop, and has one of the few currencies we think could appreciate against the dollar this year. In addition, there are some well-run, multinational companies whose bonds yield anywhere from 1% to 3% higher than equivalent-maturity Indian government debt.

Some of the most interesting opportunities are in less-followed markets that are on the cusp between developed and emerging—places like Romania, Lithuania, and Morocco. These countries have very strong economic fundamentals and, in the case of Eastern Europe, are benefiting from euro integration; they present opportunities to pick up extra yield, with the potential for price appreciation as well.

Related funds

  • Candice Tse is part of Goldman Sachs Asset Management.
  • Matt Freund is chief investment officer for USAA.
  • Jed Weiss is co-manager of Fidelity® Total International Equity Fund (FTIEX) and manager of Fidelity® International Growth Fund (FIGFX) and Fidelity® International Small Cap Opportunities Fund (FSCOX).
  • Jeff Feingold is manager of Fidelity® Magellan® Fund (FMAGX).
  • Raman Srivistava is co-deputy chief investment officer and managing director of global fixed income at Standish Mellon Asset Management and manager of Dreyfus/Standish Global Fixed Income Fund (DHGAX), Dreyfus International Bond Fund (DIBAX), and Dreyfus Opportunistic Fixed Income Fund (DSTAX).

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.
Guidance provided by Fidelity through the Planning & Guidance Center is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment or tax-planning decisions.
IMPORTANT: The projections or other information generated by Fidelity’s Planning & Guidance Center Retirement Analysis regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.
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.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry 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.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes because of potential changes in the credit quality of the issuer.
Investments in publicly traded MLPs involve risks and considerations that may differ from investments in common stock.
To the degree that bank loan funds concentrate their investments in the banking and financial services industries, bank loan fund performance could be influenced by the overall condition of those industries. Bank loan fund investments can also be affected by government regulation, and are susceptible to interest rate changes and economic downturns in the U.S. and abroad. Such investments can carry significant credit and call risk, and may also be relatively illiquid, trade over the counter, and consequently can be difficult to value.
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.
Jeffrey Feingold manages Fidelity® Magellan Fund, which holds some of the stocks mentioned in this article. As of December 31, 2014, the last disclosed holdings of the fund included Google, Inc., Class A (1.6% of portfolio assets); Google, Inc. Class C (1.6% ); Biogen Idec, Inc. (0.75%); Amgen, Inc. (1.88%); TJX Companies (1.03%); Costco Wholesale Corp. (0.59%); Domino’s Pizza, Inc. (0.253%); and Deere & Co. (0.08%).
Jed Weiss manages Fidelity® International Growth Fund, which invests in some of the stocks mentioned in this article. As of December 31, 2014, the fund held 0.233% of assets in CSL Plasma Inc.; 0.433% in Tencent Holdings, Inc.; and 0.439% in Naver Corp.
Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
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.
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.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

714766.1.3

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