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October 2012

For Investment Professionals

Jurrien Timmer Director of Global Macro co-PM of Global Strategies Fund (USA) co-PM of Tactical Strategies Fund (Canada)

The information presented reflects the opinions of Jurrien Timmer, Director of Global Macro, for Fidelity Asset Management as October 3, 2012. These opinions do not necessarily represent the views of Fidelity or any other person in the Fidelity organization and are subject to change at any time based upon market or other conditions. Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and,

because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund.

Global StrateGieS

inveStment outlook

2

•This chart shows the distribution of the S&P 500 index from 10/98 through the end of 2012, in 50 point increments.

•Most of the time, the SPX has been stuck in a range between 1000 and 1400, with the occasional tails to below 700 or above 1500.

Risk vs Reward

Data source: FMR, Bloomberg, Haver Analytics, Factset, CQG. Daily data as of October 3, 2012.


4 4 29 12

23

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8590

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25

76

53

75

106

148

189

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152

186

164

143

184178

160166

111

101

121

94 95

70 70

37

80

0

50

100

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250

<700 750-800 850-900 950-1000 1050-1100 1150-1200 1250-1300 1350-1400 1450-1500 1550>

Num

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ns

S&P 500 Index in 50 point increments

Distribution of the S&P 500 Since October 1998Daily Data f rom 10/1/1998 through 12/15/2011.

Source: FMRCo, Factset

QE-ternity Housing Energy

China Europe

Earnings Fiscal Cliff

Oil

You are here

3

•The business cycle can be defined many ways but perhaps the simplest is to divide into quadrants based on the level of economic activity and the rate of chance.

•Level up, ROC up: expansion (mid-cycle growth).

•Level up, ROC down: late cycle (stagflation).

•Level down, ROC down: recession.

•Level down, ROC up: early recovery (reflation).

0 12 24 36 48

Economic Cycle

early cycle - reflation

mid cycle -expansion late cycle -

stagflation

down cycle -deflation

peak ROC

trough ROC

FED EASING


The Market Cycle

Data source: FMR, Bloomberg, Haver Analytics, Factset, CQG. Weekly data as of 3 October 2012.

4

•The global economy continues to slow down.

Global PMIs in Late & Down Cycles

Data source: FMR, Bloomberg, Haver Analytics, Factset, CQG. Monthly data as of October 3, 2012.


World

Australia

Brazil

Russia

India

China

Canada

EZ

AustriaFrance

GermanyGreece

Ireland

Italy

NL

Spain

Indonesia

JapanKorea

Mexico

Singapore

SouthAfrica

Switzerland

Taiwan

Turkey

UKUSA

Vietnam

-20

-15

-10

-5

0

5

10

15

20

25

35 40 45 50 55 60

New

Ord

ers

-Inv

ento

ries

Markit/HSBC PMI

Global PMIs vs New Orders - InventoriesMonthly data. Source: Haver Analytics, Markit

Size of bubble: GDP (in USD)EARLY CYCLE

MID CYCLE

DOWN CYCLE

LATE CYCLE

5

•Capital has been fleeing Greece and is now fleeing Spain. This creates potentially unsustainable imbalances between the AAA core and the Periphery.

Europe’s Structural Imbalances

Data source: FMR, Haver Analytics, Factset. Monthly data as of 3 October 2012.


€235

€146

€981

€896

500

600

700

800

900

1000

1100

110

130

150

170

190

210

230

250

Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12

Greek Household Deposits (EUR Billions)

Spain Household Deposits (EUR Billions)

€221

€378

€971

0

100

200

300

400

500

600

700

800

900

1000 Imbalance of Payments

Target 2 Balance for Germany, Finland & the Netherlands

6

•While the official growth rate remains high, anecdotal data suggests a far less rosy picture.

China in Hard Landing



1000

10000 China Rail Freight IndexSource: FMRCo, Bloomberg. Monthly Data.

Shanghai Comp

-15

-10

-5

0

5

10

15

20

25

30

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12

China Rail Freight Index (CHTPFTR)

China Rail Freight Index (CHTPFTR)

7

•The big question about China is whether its fixed asset boom is sustainable.


Cyclical or Structural Risk for China?


Indonesia

USABrazil

Mexico

Russia

China

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000

Cem

ent P

rodu

ctio

n pe

r Cap

ita

GDP per Capita

Cement Production Around the WorldSource: USGS, IMF, World Bank. Annual data.

Indonesia

USA

Brazil

Mexico

Russia

China

India

8

•The performance of EM equity markets and currencies appears to be closely linked to the growth of global FX reserves (or the lack thereof).


EM in Liquidity-Induced Slowdown


200

400

800

1600 EM & Global FX Reserve GrowthSource: FMRCo, Bloomberg, Haver. Monthly Data.

MSCI EM

-$200

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Annual change in Global FX Reserves ($Bil)

9

•With emerging country GDP now overtaking developed countries, what happens to growth in the EM space is very important.


EM Growth Matters More than Ever

Data source: FMR, Bloomberg, Haver Analytics, Factset, CQG. Annual data as of 2012.

25

30

35

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55

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65

701981

19821983

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19971998

19992000

20012002

2003

2004

2005

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2009

2010

2011

2012

2013

2014

2015

20162017

2018

Advanced & Emerging Economies as a % of World GDP

Developing Economies

Advanced Economies

Annual data since 1981. Source: IMF.

10

The Fiscal Cliff

Source: James Aitkens.


11

Fiscal Cliff? What Fiscal Cliff?

Data source: FMR, Bloomberg, Haver Analytics, Factset, CQG. Weekly data as of October 3, 2012.


•People don’t seem worried at all about the fiscal cliff.

175

200

225

250

275

300

325

350

375 HeadlinesSource: FMRCo, Haver Analytics. Headlines are 4wk sums.

Weekly Data.

MSCI ACWI

0

1000

2000

3000

4000

5000

6000

7000

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12

Lexis Nexis Headline Count: "Debt Ceiling"(Count)

Lexis Nexis Headline Count: "Fiscal Clif f " (Count)

12

Nobody likes Austerity



13

•Since the credit crisis in 2008, deficit spending has offset the sharp contraction in private consumption resulting from debt deleveraging.

•If fiscal austerity occurs before this deleveraging cycle has been completed, it will likely have a negative impact on growth.

Why Fiscal Austerity Could Hurt Growth

Data source: FMR, Bloomberg, Haver Analytics, Factset, CQG. Quarterly data as of October 3, 2012.


134%

113%

60%

70%

80%

90%

100%

110%

120%

130%

140% Public Debt Replaces Private DebtSource: FMRCo, Haver Analytics, Federal Reserve Bank

Quarterly Data since 1972.

Household Liabilities as a % of Disposable Income

8.0%

-11.3%

-15%

-10%

-5%

0%

5%

10%

'72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '13

Net Private Savings / GDP

Net Gov't Savings / GDP

14

•A simple rule of thumb is that as long as a country’s nominal GDP growth remains above its funding rate, it can grow its way out of debt. That has been the case in the US so far.

How Sustainable Are Our Deficits?



1.72

4.0%

-4

-2

0

2

4

6

8

10

12

14

16 Nominal GDP vs Interest RatesSource: FMRCo, Haver Analytics, Factset. Quarterly data.

10yr Tsy Yield

Nominal GDP Growth

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

1977 1982 1987 1992 1997 2002 2007 2012

Budget Def icit/GDP

15 For Investment Professionals

QE-ternity


Ray Dalio’s Deleveraging Outcomes

•Beautiful Deleveragings •Ugly Deflationary Deleveragings •Ugly Inflationary Deleveragings

17

•The relationship between GDP growth and unemployment suggests that growth needs to be at least 3% in order for the jobless rate to come down.

Economy at Stall Speed



y = 54.449x2 - 9.6849x + 0.1999R² = 0.6719

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

-6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14%

yoy

chg

in jo

bles

rate

yoy chg in real GDP

Real GDP vs UnemploymentQuarterly Data. Source: Haver Analytics, FMRCo

need 3% growth just tokeep unemployment steady

18

•The decline in the labor force participation rate has occurred while more and more Americans are receiving food stamps. This appears to be a structural issue.

A Depressing View of the American Economy



66.4

63.5

63.0

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67.0

Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12

Labor Force Participation Rate

26.2

46.7

25

30

35

40

45

50 America's Broken EconomyMonthly data. Source: FMRCo, Bloomberg

Food Stamp Participation (millions of Americans)

19

The Single Mandate Fed?


20

•After a 30-40 year increase in debt and financial leverage, we have been in what could be a 15 year debt deleveraging super cycle.

Debt Deleveraging Super-Cycle

Data source: FMR, Haver Analytics, Factset. Weekly data as of 3 October 2012.


50

100

200

400

800

1600

Secular TrendsSource: FMRCo, Ibbotson Associates.


Nominal S&P 500

corporate deleveraging household

deleveraging

sovereigndeleveraging

dot.com bubble

housing bubble

fiscal & monetary

bubble

68%

84%

92%

0%

20%

40%

60%

80%

100%

120%

140%

'68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16

Federal Govt

Households

f inancial sector

21

•Household net worth has improved from $51.19 trillion in 2009 to $62.67 trillion as of the second quarter, most of that coming from financial assets.

US Households Getting Healthier



$15.61

$67.36

$51.19

$62.67

$25.03

$19.06

$26.68

$13.77

$24.22

$0

$1

$10

$100 Household Net WorthSource: FMRCo, Haver Analytics, Federal Reserve Board


Nominal GDP

Household Net Worth ($Trillions)

Residential Real Estate

Stock Market Capitalization

Mar-65

Jun-81

Mar-05

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

'50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

U.S. Age Wave

22

•This chart shows what happened to the SPX following QE1, QE2, the ECB’s LTRO, and during the post LTCM-period in 1998-2000. Will history repeat?

The Market’s Pavlovian Response



1250

1300

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Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

"All QE" AnalogsWeekly data. Source: Factset, FMRCo

All QE

1998 Post-LTCM

QE1 (March 2009)

QE2 (Aug 2010)

LTRO (Nov 2011)

S&P 500

23

•There is now a notable divergence between the ACWI and the ISI Economic Diffusion Index. Usually they track each other closely.

Stocks Way Ahead of Fundamentals



650

750

850

950

1050

1150

1250

1350

1450

ISI Company Survey IndexData Source: FMRCo, ISI. Weekly data.

S&P 500 Index

25

30

35

40

45

50

55

Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12

ISI Company Survey Average(0=Weak, 100=Strong)

24

•Housing has become one of the bright spots of the US economy.

Housing Recovery



90

110

130

150

170

190

210

230 HousingSource: FMRCo, Bloommberg. Monthly Data.

Case-Shiller Composite

200

700

1200

1700

2200

2700

0

10

20

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40

50

60

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'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

NAHB Housing Market Index

Housing Starts (SAAR)

25

America’s Renaissance?

Source: James Aitkens.


Cost of natgas 2010

Japan $16

Korea $16

Germany $10

USA $2

26

•If central bank balance sheets continue to expand (not a stretch of the imagination), then gold will likely follow. This chart suggests that gold could be well above $2,000 a year from now.

Gold is the Pure Play on More QE



$14,102

y = 1848e0.0131x

$1,800200

400

800

1600

3200

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Gold vs Central Bank Balance SheetsSource: FMRCo. Monthly Data.

Gold

Combined Assets of the Fed, ECB, PBoC, BoE, BoJ & SNB

27

•This chart shows the distribution of the S&P 500 index from 10/98 through the end of 2012, in 50 point increments.

•Most of the time, the SPX has been stuck in a range between 1000 and 1400, with the occasional tails to below 700 or above 1500.

Risk vs Reward

Data source: FMR, Bloomberg, Haver Analytics, Factset, CQG. Daily data as of October 3, 2012.


4 4 29 12

23

6457

8590

56

25

76

53

75

106

148

189

201

152

186

164

143

184178

160166

111

101

121

94 95

70 70

37

80

0

50

100

150

200

250

<700 750-800 850-900 950-1000 1050-1100 1150-1200 1250-1300 1350-1400 1450-1500 1550>

Num

ber o

f Dai

ly O

bser

vatio

ns

S&P 500 Index in 50 point increments

Distribution of the S&P 500 Since October 1998Daily Data f rom 10/1/1998 through 12/15/2011.

Source: FMRCo, Factset

QE-ternity Housing Energy

China Europe

Earnings Fiscal Cliff

Oil

You are here


Questions? Comments?


Important Disclosures •The information presented reflects the opinions of Jurrien Timmer, Director of Global Macro, for Fidelity Asset management as of October 3, 2012. These opinions do not necessarily represent the views of Fidelity or any other person in the Fidelity organization and are subject to change at any time based upon market or other conditions. Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund. •As with all of your investments through Fidelity, you must make your own determination whether an investment in any particular security or fund is consistent with your investment objectives, risk tolerance, financial situation, and your evaluation of the investment option. Fidelity is not recommending or endorsing any particular investment option by mentioning it in this conference call or by making it available to its customers. This information is provided for educational purposes only, and you should bear in mind that laws of a particular state and your particular situation may affect this information.

•Past performance is no guarantee of future results. •Foreign investments, especially those in emerging markets, involve greater risks and may offer greater potential returns than US investments. These risks include the political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations.

•Sector investments may involve greater volatility than more broadly diversified investments.

•Lower-quality debt securities involve greater risk of default or price changes due to the credit quality of the issuer.

•The S&P 500® and S&P, are registered trademarks of The McGraw-Hill Companies, Inc., and are licensed for use by Fidelity Distributors Corp., and its affiliates. The S&P 500 Index is an unmanaged market capitalization-weighted index of common stocks.

•All indexes are unmanaged and no investment may be made in any index. Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Small-cap stocks are generally more volatile than large-cap stocks. Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Foreign investments, especially those in emerging markets, involve greater risk and may offer greater potential returns than U.S. investments. This risk includes political and economic uncertainties of foreign countries, as well as the risk of currency fluctuation. Changes in real estate values or economic conditions can have a positive or negative effect on issuers in the real estate industry. Value stocks can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

•Fed Funds rate is the rate of interest on overnight loans of excess reserves among commercial banks.

•Bonds are rated by agencies such as Standard & Poor’s and Moody’s Investor Services with ratings that measure the risk of default.

•Bonds rated AAA are considered to be the safest while those rated below BBB are considered to be “high yield” or below investment grade. Intermediate ratings of AA+ or BB- are often used to further differentiate bonds.

•30-year treasury and 10 year treasury are a fixed income securities backed by the full faith and credit of the U.S. government and are used as benchmarks for the pricing of various corporate fixed income instruments.

•The Fed Funds rate is the rate of interest on overnight loans of excess reserves among commercial banks. Bonds are rated by agencies such as Standard & Poor’s and Moody’s Investor Services with ratings that measure the risk of default. Bonds rated AAA are considered to be the safest while those rated below BBB are considered to be “high yield” or below investment grade. Intermediate ratings of AA+ or BB- are often used to further differentiate bonds. Lower-quality debt securities involve greater risk of default or price changes due to the credit quality of the issuer. 30-year treasury and 10 year treasury are a fixed income securities backed by the full faith and credit of the U.S. government and are used as benchmarks for the pricing of various corporate fixed income instruments. The S&P Gold group is an index of gold stocks as defined by Standard & Poor’s. The NAREIT All Issues REITs Index is an index of real estate investment trusts as defined by the Nat’l Assoc. of Realtors.

•Sources for correlation slide:

•All data downloaded from Haver Analytics. All country and regional equity indices: MSCI. All bond indices: Barclays Capital. Gold: Handy & Harman. All GSCI: Goldman Sachs Commodity Index. Currencies: Morgan Stanley. Hedge Fund Data: Hennesee.

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