Market Perspectives

December 2014 / January 2015

Business Cycle Update: U.S. Economy Sturdy, Global Divergences May Spur Volatility in 2015 The U.S. economy continues to exhibit broad-based strength, bolstered by an improving real income outlook for the U.S. consumer. Looking abroad, sluggish economic growth, disinflationary trends, and increasingly accommodative monetary policy characterise the landscape. These global divergences may incite higher market volatility over the course of 2015.

KEY TAKEAWAYS

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The U.S. economy continues to strengthen, driven by gains in the employment and manufacturing sectors.

LEVEL OF INDICATOR

STRONG

U.S. ECONOMIC INDICATORS SCORECARD

Capital Expenditure

Corporate Manufacturing Credit/Banking

Employment Consumption Housing

WEAK

Global

WORSE

BETTER

RECENT TREND IN INDICATOR

The economic indicators scorecard is an illustrative framework based on the analysis summarised in “Recent trends in major categories” beginning on page 2. Movement along the horizontal axis depicts whether the recent trend has become better or worse, while vertical placement indicates whether the indicator is currently in a stronger or weaker overall condition. Shaded trails show the changes from the previous reading.

For illustrative purposes only. Source: Fidelity Investments (Asset Allocation Research Team), as of 3 December 2014.

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Stark divergences punctuate the global landscape, with the strengthening U.S. economy moving toward policy tightening, while weakness in other major economies leads to even greater stimulus measures Tepid global growth and broad-based disinflationary trends are likely to persist into 2015, restraining commodity prices and global bond yields Market volatility may rise as we move deeper into 2015 due to potential risks such as Fed tightening, slowing growth in China, and fuller asset valuations. From an asset allocation standpoint, our outlook for equities remains constructive, favouring mid-cycle U.S. and European equities, though the magnitude of gains may be more limited Low inflation and strong global demand for bonds should prevent a dramatic spike in interest rates—a dynamic supportive of high-quality bond exposure to help diversify riskier assets, even in an environment of monetary tightening

Authors Dirk Hofschire, CFA SVP, Asset Allocation Research

While long-term historical averages provide reasonable baselines for portfolio allocations, over shorter time horizons asset price fluctuations are driven by a confluence of various short-, intermediate-, and long-term factors that may cause performance to deviate significantly from historical averages. For this reason, we employ an asset allocation framework that analyses underlying factors and trends among the following three temporal segments: tactical (one to 12 months), business cycle (one to 10 years), and secular (10 to 30 years). This report, part of a monthly series, focuses primarily on the intermediate-term fluctuations in the business cycle.

Lisa Emsbo-Mattingly Director of Asset Allocation Research This document has been provided by Pyramis Global Advisors. Pyramis is a subadvisor of institutional investment products to Fidelity Worldwide Investment.

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accommodative, as the European Central Bank (ECB) has implemented various easing measures, which, at a minimum, should offset the remaining 2011/2012 long-term refinancing operations (LTROs) due to mature in January. Europe’s expansion is likely to remain weak, but a continental triple-dip into recession appears unlikely.

Recent trends in major categories The following is a detailed look at developments in major areas of the economy.

Global The global economy decelerated in 2014 and remains on a slow growth trajectory, with GDP expectations continuing to shift downward since 2010 (see Exhibit 1, below). Widening economic and policy divergences punctuate the global landscape, with countries outside the U.S. in various phases of the business cycle. Leading economic indicators deteriorated during the first six months of the year, but have stabilised over 1 the past four months. Moreover, economic weakness has spurred some positive offsetting factors, including lower energy prices that will benefit consumers, weaker currencies (relative to the dollar) that make exports more competitive, and monetary and fiscal policy responses that have become more accommodative.

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Europe. Recent weakness has likely been symptomatic of a mid-cycle slowdown rather than the onset of a new recession. In November’s “Business Cycle Update: Market Wobble Presents Opportunities, Including Mid-Cycle Europe,” we made the case that Europe’s tightening monetary and credit conditions over the past two-and-ahalf years is coming to an end, with increased competitiveness and pent-up demand in the periphery supporting Europe’s cyclical momentum. The completed asset quality review (AQR) stress tests should encourage banks to continue to ease lending standards, a key 2 component for mid-cycle credit growth. Moreover, both monetary and fiscal policies are becoming more

Exhibit 1: Emblematic of tepid global growth, expectations for most countries have fallen during the past several years.

Japan. At the beginning of the year, we predicted that Japan’s consumption-tax hike in April would impede the economy’s cyclical expansion, resulting in greater monetary easing from the Bank of Japan (BOJ) with ensuing yen weakness. After the tax hike, Japan suffered two negative quarters of GDP growth and is currently in a mild recession, as it has been unable to regain cyclical traction. The BOJ has dramatically expanded its quantitative easing program, 3 and the yen has declined by 13%. However, the Japanese economy should benefit in the near term from a cheaper yen supporting the export sector, lower oil prices aiding the consumer, and the delay of the 2015 consumption tax providing less restrictive fiscal policy.

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China. China remains in a cyclical downtrend, with a deteriorating real-estate sector amid massive home-price and credit imbalances. While the property sector remains weak and credit growth has slowed considerably, policy easing may be helping to stabilise activity at a lower level. After several months of targeted lending programs and easing measures, in November the central bank implemented its first broad-based cut to lending rates in more than two years. Along with a continued effort to step up government infrastructure spending, policymakers appear to be emphasizing another round of fixed-asset investment to offset weakening private-sector activity. These measures reduce the immediate threat to financial stability, but they fail to address the high levels of leverage, overcapacity, and weak profitability that have weakened the private sector, making a sustainable reacceleration unlikely.

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The emerging-market (EM) outlook is also challenged, since more than 75% of EM equity market capitalization consists of 4 commodity exporters and China’s East-Asian trading partners, whose outlooks are highly contingent on the severity and timing of China’s descending trend. After some recent weakness, global growth is positive but likely to remain muted and varied among countries, as accommodative policy action in many regions may lack the potency to produce a sustainable reacceleration.

0

U.S. employment and consumption

IMF GROWTH EXPECTATIONS (NEXT 12 MONTHS) 10

2014

2010

8 6 4

China India Philippines Indonesia Korea Mexico U.S. Turkey Australia U.K. Canada South Africa Spain Germany Brazil France Italy Japan Russia

Real GDP Growth (%)



Source: International Monetary Fund, Haver Analytics, Fidelity Investments (AART), as of 7 October 2014.

Relative to current demographic trends, the pace of hiring today is the fastest it’s been in almost 15 years. During the past year, 5 the U.S. has added more than 2.6 million jobs, but the workingage population has grown by only about 1.4 million workers (see 6 Exhibit 2). Leading economic indicators, such as initial unemployment claims, job openings, and the nonmanufacturing

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Purchasing Managers’ Index (PMI) for employment remain in upward trends as well, suggesting that this pace of improvement 7 may continue in 2015. Over the longer term, demographic trends in the U.S. are poised to slow further: 10 years from now, the U.S. economy will need to add just 50,000 to 60,000 jobs per month, as retiring baby boomers are expected to push the participation rate even lower going forward.

Exhibit 3: Employers did not restrain real wage increases during the 2008 recession to the same extent they had during previous downturns, implying they might now be slower to raise them. CHANGE IN EMPLOYMENT AND WAGES DURING RECESSIONS Increase in Unemployment Rate (percentage points)

Despite the labour market tightening, nominal wage growth remains slow and may continue at a relatively modest pace. While the slack in the labour market remains a significant drag on wages, pent-up wage deflation from the 2008 recession is likely also restricting wages. During deep recessions, such as 1973 and 1981, companies cut jobs and limited real wage increases for remaining workers, resulting in declines in real (inflation-adjusted) wages (see Exhibit 3, right). However, in 2008, companies did not limit wage growth as significantly, causing real wages to continue to rise. As a result, employee earnings may have been higher at the start of this recovery than is typical, potentially hindering companies’ willingness to accelerate wage growth today. Even though the current pace of nominal wage gains is relatively modest, when combined with slowing inflation due to falling commodity prices it is strong enough to provide the U.S. consumer with its best outlook for real income growth since before the financial crisis. Moreover, the current pace of wage gains is also not detracting from corporate profitability, which would be a sign of rising late-cycle pressures. The result is an incrementally more positive outlook for personal consumption—albeit still not as strong as during previous expansions because the savings rate remains 8 elevated and consumers remain hesitant to increase borrowing. Job gains, incrementally improving wages, and slowing commodity inflation provide a favourable backdrop for real consumer spending in 2015. Exhibit 2: Considering current demographic trends, the pace of hiring in the U.S. is the fastest it’s been in almost 15 years.

Employment vs. Population Growth Population Growth

2.0

4

1.8

2 0

1.6

–2

1.4

–4 1.2 2019

2016

2013

2010

2007

2003

2000

1997

1994

1990

1987

–8

1984

–6

% Change in Real Average Hourly Earnings

4% 2%

0% –2% –4%

–6%

1973

1981 Recessions

2008

Source: Real average hourly earnings deflated by headline CPI. Recessions dated by the National Bureau of Economic Research (NBER). Source: Bureau of Labor Statistics, NBER, Haver Analytics, Fidelity Investments (AART), through 24 November 2014.

Credit and banking Credit conditions in the U.S. remain constructive and on a trend of further improvement. Banks have continued to ease credit standards across the board, while write-offs and delinquencies have reached new cycle lows. Outstanding mortgage debt has continued to increase, rising 4% on a year-over-year basis after 9 falling during the previous five years. Despite strong fundamentals, credit spreads have been trending higher over the past several months, as investors may be bracing for less liquid markets following the completion of the Federal Reserve’s (Fed’s) quantitative easing program. Nevertheless, corporations continue to enjoy ample access to credit markets. Improving credit conditions provide a tailwind to the midcycle expansion in the U.S.

Corporate Growth in Working Age Population (Millions)

6

1981

Difference Between Payroll Employment and Working Age Population* Growth (Millions)

EMPLOYMENT GROWTH VS. POPULATION GROWTH

6%

1.0

*Population ages 16 and over, adjusted for the participation rate. Source: Bureau of Labor Statistics, U.S. Census Bureau, Haver Analytics, Fidelity Investments (AART), through 24 November 2014.

The corporate sector remains solid, supported by rising revenues and elevated profit margins. Earnings rose in the third 10 quarter, increasing by 10.6% year over year. Corporate revenues climbed by more than 5% for the second-straight 11 quarter, outpacing 2013 and historical average sales growth. Profit margins have expanded throughout 2014 to all-time highs and should remain elevated, as companies continue to enjoy low borrowing rates, soft producer prices, muted wage pressures, and strong cyclical productivity. The outlook for business spending also continues to improve, as surveys of corporations report plans to increase capital expenditures in the 12 next 12 months. Additionally, manufacturing remains one of the strongest sectors of the U.S. economy, with the PMI

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reported as 58.7 in November, an indication that the sector 13 remains in solid expansionary territory. The increase in the manufacturing bullwhip—new orders less inventories—shows healthy demand and supports a positive outlook for the sector. Solid earnings growth, strong manufacturing activity, and an improving outlook for capital spending indicate a healthy corporate sector in 2015.

Housing After a rapid recovery in 2013, the housing market’s more mature pace of expansion has persisted late into 2014. Housing permits—a leading indicator of residential construction activity—trended generally positive throughout the latter part of 14 the year for single-family homes. Housing affordability remains high and has ticked up in recent months, helped by moderating home price gains and a renewed decline in 15 mortgage rates. Employment growth, mortgage credit easing, and limited housing supply provide a favourable backdrop for the housing sector’s steady, moderate expansion.

Inflation Inflationary pressures remain minimal in the United States, with disinflation gaining the upper hand due to slow global growth and continued muted wage gains. U.S. inflation was flat month over month in October, and the headline and core consumer price indices (CPI) were up just 1.7% and 1.8% year over year, 16 respectively. Shelter costs have been the largest contributor to U.S. inflation over the past two years; core CPI ex-shelter is 17 running at a rate of only 0.9%, suggesting that there may be widespread disinflationary pressures throughout the U.S. economy. Sluggish global growth has weighed on commodity prices, with crude oil prices dropping 35% since the start of the 18 year. Alongside wage gains, disinflationary trends seen in falling commodity prices should continue to benefit the U.S. consumer.

Summary and outlook As 2014 unfolded, the strengthening mid-cycle expansion in the U.S. created a stark divergence with most of the rest of the world, as growth decelerated in China and Europe, and contracted mildly in Japan. Now, at the end of the year, solid U.S. growth has led to less policy accommodation, as the Fed ended its quantitative easing program, while weaker non-U.S. growth led to a spurt of even greater stimulus measures announced by China, Japan, and Europe. The deviating economic and policy trends among the world’s largest economies set the stage for a strong appreciation in the U.S. dollar in relation to most of the world’s currencies. Oil and other commodity prices, in addition to global government bond yields, tumbled amid tepid global growth and broad disinflationary trends (see “What a strengthening dollar and plummeting oil prices mean for 2015,” starting on page 4).

Global economic outlook Our cyclical outlook for the global economy is for many of these divergent patterns to continue in 2015. Specifically:

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Global growth is likely to remain tepid, as policy measures lack the potency to create sustainable acceleration in many regions, including late-cycle China and mildly contracting Japan.

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Global disinflation will continue amid subdued demand and muted wage pressures.

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The U.S. mid-cycle expansion remains steadier than most other economies, with its consumer sector benefiting from global disinflation.

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Some offsetting developments, such as cheaper commodity prices, weaker currencies, and increased policy easing should prevent non-U.S. growth from weakening dramatically.

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Europe’s economy is likely to remain slow but should emerge from a mid-cycle slowdown.

What a strengthening U.S. dollar and plummeting oil prices mean for 2015 The U.S. dollar Why the big move? The dollar’s appreciation is largely a reflection of the relative strength of the U.S. economy. Better economic and corporate performance is making U.S. assets more attractive to foreign investors. It has also enabled the Fed to conclude its quantitative easing program and consider tightening in 2015, increasing the appeal of the interest rate backdrop in the U.S. for foreign bond investors relative to many other countries where monetary policy easing is ongoing.

What’s the impact? Overall, the impact on the U.S. economy is mixed. U.S. consumers benefit from increased purchasing power, as the dollar now buys more imported goods. However, a stronger dollar is a drag on the profitability of exporters and multinational corporations, as earnings generated abroad translate into fewer dollars and cost-competitiveness is reduced.

What’s the outlook? We expect the dollar to remain strong, as the underlying economic trends are unlikely to reverse any time soon. However, after the sharp drop in many foreign currencies, the pace of any additional dollar strengthening may be much more muted in 2015.

Oil prices Why the big move? Oil markets were impacted by a growing excess of supply over demand as 2014 unfolded. Global demand was slower than expected, as China, Japan, and other (continued on page 5)

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Risks

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Market volatility will likely rise. Economic and policy divergences are likely to continue to generate volatility in currency markets, and could spread to other areas. Fed tightening might harm assets and entities most-dependent on abundant liquidity, including emerging markets and some credit sectors. Tactical maneuvers may be rewarded. Steadier cyclical outlooks suggest potentially better risk-adjusted returns in the U.S. and Europe. After years of rapid credit and capacity expansion, China and many emerging markets have little impetus for an earlycycle acceleration, and a slow global economy and potential Fed tightening are hindrances.

Crude Oil Price (Right)

$110 $90 $70 Sep-14

Nov-14

Jul-14

May-14

Trade-Weighted USD (Left)

$50

WTI Oil Price (USD/Barrel)

$130

Jan-14

110 108 106 104 102 100 98 96

Mar-14

Outlook for equities still favourable, though the magnitude of gains may diminish. In general, the environment of incremental growth, low inflation, and low interest rates should still be supportive of risk assets. However, fuller valuations in many asset categories suggest returns will be more muted than in recent years.

U.S. DOLLAR VS. OIL PRICES

Nov-13

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Exhibit A: The U.S. dollar climbed while oil prices tumbled in the second half of 2014.

Sep-13

As a result, our asset allocation outlook for 2015 is as follows:

We expect global commodity prices to remain weak amid slowing growth in China, lackluster global demand, and positive supply growth. However, after the steep drop, oil prices may enter a trading range over the next year or two, as lower prices act to restrain supply additions and potentially spur renewed demand.

Jul-13

Asset allocation outlook

What’s the outlook?

May-13

Market dynamics. After several years of gains, global equity and bond valuations are pricing in more good news and may be more susceptible to negative surprises. In particular, limited liquidity in some areas of the bond market has the potential to magnify any volatility.

On balance, lower oil prices are a net positive for the global economy because they benefit consumers in large importing countries, including the U.S., China, Japan, Europe, and India. There could be some negative impact on U.S. oilproducing regions if future investments slow, but countries whose economies are largely dependent on oil exports, including Russia, Venezuela, and many Middle Eastern nations, will likely suffer from lower oil prices.

Mar-13

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Fed tightening. Our base-case scenario is that the Fed will hike its benchmark interest rate in 2015, but the tightening will be modest. Clear improvement in U.S. labour markets will be partially offset by weak global growth and disinflation, obviating the need for a steep tightening cycle. However, rising short-term U.S. rates, in addition to monetary policy uncertainty, are likely to create greater market volatility. Faster-than-expected U.S. wage growth would present greater late-cycle risks to the markets, though we consider this a lesser probability in 2015.

What’s the impact?

Jan-13



(continued from page 4) major importers registered disappointing growth. Supply also exceeded expectations, as war-torn Libya significantly increased output and U.S. production continued on its steady ascent. Moreover, Saudi Arabia—the world’s largest swing producer—did not step in with supply cuts to prop up markets as it has done in the past.

Nominal TradeWeighted USD Index

While market volatility in 2014 was relatively muted in global equity and bond markets, a number of risks are likely to stir up greater volatility as we move deeper into 2015. The following are among the most concerning:  Global growth risks. Once the engines of global growth, both Asia and developing economies face major cyclical challenges. China is still trying to navigate an environment of slower growth mixed with a severe overhang of credit excesses, real estate prices, and overcapacity. Japan’s attempts to jump-start its deflationary economy have yet to produce a sustainable uptrend in domestic consumption or investment. Many emerging-market economies have downshifted but lack an impetus for reacceleration. Generally, the slow-growth environment makes the global economy less resistant to any potential shocks.

Source: Federal Reserve Board, U.S. Energy Information Administration, Haver Analytics, Fidelity Investments (AART), as of 30 November 2014.

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A spike in interest rates remains unlikely. Low inflation and strong global demand for bonds should help keep rate increases from being dramatic. This dynamic supports maintaining high-quality bond exposure to help diversify risk assets, even in an environment of monetary tightening.

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Commodity disinflation is likely to continue. After a steep drop in 2014, commodity prices may be more rangebound going forward, but weak global growth fundamentals suggest a strong upside is unlikely.

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The U.S. mid-cycle expansion persists, while Germany faces a mid-cycle slowdown. Risks in China remain elevated, but have been tempered by accommodative monetary policy. Japan has entered a mild recession. TYPICAL BUSINESS CYCLE

Note: This is a hypothetical illustration of a typical business cycle. There is not always a chronological progression in this order, and there have been cycles when the economy has skipped a phase or retraced an earlier one. Economically sensitive assets include stocks and high-yield corporate bonds, while less economically sensitive assets include Treasury bonds and cash. *A growth recession is a significant decline in activity relative to a country’s long-term economic potential. We have adopted the “growth cycle” definition for most developing economies such as China because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity, and the deviation from the trend tends to matter the most for asset returns. We use the classic definition of recession, involving an outright contraction in economic activity, for developed economies. Please see endnotes for a complete discussion. Source: Fidelity Investments (AART).

Authors Dirk Hofschire, CFA SVP, Asset Allocation Research

Lisa Emsbo-Mattingly Director of Asset Allocation Research

The Asset Allocation Research Team (AART) conducts economic, fundamental, and quantitative research to develop asset allocation recommendations for our portfolio managers and investment teams. AART is responsible for analysing and synthesizing investment perspectives across the asset management unit to generate insights on macroeconomic and financial market trends and their implications for asset allocation.

Asset Allocation Research Analysts Austin Litvak, Jacob Weinstein, Caitlin Dourney, Joshua Lund-Wilde, Ilan Kolet, Irina Tytell, and Jordan Alexiev also contributed to this article. Thought Leadership Associate Editor Kevin Lavelle and Investment Writer Christie Myers provided editorial direction.

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Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity Investments does not assume any duty to update any of the information. Generally, among asset classes, stocks are more volatile than bonds or short-term instruments and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Although the bond market is also volatile, lower-quality debt securities including leveraged loans generally offer higher yields compared to investment grade securities, but also involve greater risk of default or price changes. Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. 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 carry inflation, credit, and default risks for both issuers and counterparties. Investing involves risk, including risk of loss.

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Population of available workers is the growth in resident population ages 16 and over, adjusted for the participation rate. Source: Bureau of Labor Statistics, U.S. Census Bureau, Haver Analytics, Fidelity Investments (AART), as of 7 November, 2014. 7

Source: U.S. Department of Labor (initial unemployment claims), Bureau of Labor Statistics (job openings), Institute for Supply Management (nonmanufacturing PMI), Haver Analytics, Fidelity Investments (AART), as of 22 November 2014. Job openings data as of 7 November 2014. Non-manufacturing PMI data as of 5 November 2014. 8

Source: Bureau of Economic Analysis (personal savings rate), Federal Reserve (consumer borrowing), Haver Analytics, Fidelity Investments (AART), as of 26 November 2014. Consumer borrowing data as of 18 September 2014. 9

Federal Reserve Bank of New York Consumer Credit Panel/Equifax, Fidelity Investments (AART), as of 25 November 2014. 10

Standard & Poor’s (S&P), Haver Analytics, Fidelity Investments (AART), as of 21 November 2014. 11

S&P, Haver Analytics, Fidelity Investments (AART), as of 21 November 2014.

12

Duke CFO Magazine Global Business Outlook Survey, Fidelity Investments (AART), as of 11 November 2014. 13

Institute for Supply Management, Haver Analytics, Fidelity Investments (AART), as of 30 November 2014. 14

Past performance is no guarantee of future results.

U.S. Census Bureau, Haver Analytics, Fidelity Investments (AART), as of 31 October 2014.

Diversification does not ensure a profit or guarantee against loss.

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All indices are unmanaged. You cannot invest directly in an index. The Typical Business Cycle depicts the general pattern of economic cycles throughout history, though each cycle is different; specific commentary on the current stage is provided in the main body of the text. In general, the typical business cycle demonstrates the following: • During the typical early-cycle phase, the economy bottoms out and picks up steam until it exits recession, then begins the recovery as activity accelerates. Inflationary pressures are typically low, monetary policy is accommodative, and the yield curve is steep. Economically sensitive asset classes such as stocks tend to experience their best performance of the cycle. • During the typical mid-cycle phase, the economy exits recovery and enters into expansion, characterised by broader and more self-sustaining economic momentum but a more moderate pace of growth. Inflationary pressures typically begin to rise, monetary policy becomes tighter, and the yield curve experiences some flattening. Economically sensitive asset classes tend to continue benefiting from a growing economy, but their relative advantage narrows. • During the typical late-cycle phase, the economic expansion matures, inflationary pressures continue to rise, and the yield curve may eventually become flat or inverted. Eventually, the economy contracts and enters recession, with monetary policy shifting from tightening to easing. Less economically sensitive asset categories tend to hold up better, particularly right before and upon entering recession. Please note that there is no uniformity of time among phases, nor is there always a chronological progression in this order. For example, business cycles have varied between one and 10 years in the U.S., and there have been examples when the economy has skipped a phase or retraced an earlier one. Endnotes 1

Organisation for Economic Co-operation and Development (OECD), Foundation for International Business and Economic Research (FIBER), Fidelity Investments (AART), as of 30 September 2014. 2

ECB, Fidelity Investments (AART), as of 30 September, 2014.

3

Bloomberg Finance L.P. Fidelity Investments (AART), as of 3 December, 2014. 4

Source: MSCI EM Index, Bloomberg Finance L.P., Fidelity investments (AART), as of 31 October 2014.

National Association of Realtors’ Housing Affordability Index, Haver Analytics, Fidelity Investments (AART), as of 30 September, 2014. 16

BLS, Haver Analytics, Fidelity Investments (AART), as of 31 October 2014.

17

BLS, Haver Analytics, Fidelity Investments (AART), as of 31 October 2014.

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FactSet, Energy Information Administration, Fidelity Investments (AART), as of 2 December 2014. Index definitions The Consumer Price Index (CPI) is a monthly inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. The MSCI Emerging Markets (EM) Index is a market capitalization-weighted index of over 850 stocks traded in 22 world markets. A purchasing managers’ index (PMI) is a survey of purchasing managers in a certain economic sector. A PMI over 50 represents expansion of the sector compared to the previous month, while a reading under 50 represents a contraction, and a reading of 50 indicates no change. Institute for Supply Management® reports the U.S. Manufacturing PMI®. Markit compiles non-U.S. PMIs. Important Information Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Index or benchmark performance presented in this document do not reflect the deduction of advisory fees, transaction charges, and other expenses, which would reduce performance. Certain data and other information in this research paper were supplied by outside sources and are believed to be reliable as of the date presented. However, Pyramis has not verified and cannot verify the accuracy of such information. The information contained herein is subject to change without notice. Pyramis does not provide legal or tax advice, and you are encouraged to consult your own lawyer, accountant, or other advisor before making any financial decision. These materials contain statements that are “forward-looking statements,” which are based upon certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialise or that actual returns or results will not be materially different than those presented.

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Source: Bureau of Labor Statistics (BLS), Haver Analytics, Fidelity Investments (AART), as of 7 November, 2014.

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Important Information This material is intended for investment professionals and must not be relied upon by private investors. Fidelity Worldwide Investment refers to the group of companies which form the global investment management organisation that provides information on products and services in designated jurisdictions outside of North America. Fidelity Worldwide Investment does not offer investment advice based on individual circumstances. Any service, security, investment, fund or product mentioned or outlined in this document may not be suitable for you and may not be available in your jurisdiction. It is your responsibility to ensure that any service, security, investment, fund or product outlined is available in your jurisdiction before any approach is made to Fidelity Worldwide Investment. This document may not be reproduced or circulated without prior permission and must not be passed to private investors. Past performance is not a reliable indicator of future results. Unless otherwise stated all products are provided by Fidelity Worldwide Investment, and all views expressed are those of Fidelity Worldwide Investment. Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and currency F symbol are trademarks of FIL Limited. Fidelity Investments is a privately-owned financial services firm based in Boston, Massachusetts, USA. Fidelity Investments established Pyramis Global Advisors (Pyramis) in 2005 as a separate business unit to focus on institutional clients. Pyramis’ investment team was initially formed through the migration of investment professionals from Fidelity Management & Research Company (FMR Co.), the mutual fund division of Fidelity Investments. Fidelity Worldwide Investment has agreed to be responsible for the distribution of Pyramis Global Advisors’ (PGA) products outside of North America. This document has been written by members of PGA’s investment team. Issued by FIL Pensions Management (FCA registered number 144345) a firm authorised and regulated by the Financial Conduct Authority. FIL Pensions Management is a member of the Fidelity Worldwide Investment group of companies and is registered in England and Wales under the company number 02015142. The registered office of the company is Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge, Kent TN11 9DZ, United Kingdom. Fidelity Worldwide Investment’s VAT identification number is 395 3090 35. Issuer in Germany: Issued in Germany by FIL Investments International - Niederlassung Frankfurt on behalf of FIL Pension Management, Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge, Kent TN11 9DZ. Issuer for Austria, Hungary, Slovakia and Czech Republic: FIL (Luxembourg) S.A., 2a rue Borschette, 1021 Luxembourg. EMEA20145762

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