INVESTMENT OUTLOOKFidel i t y Per sonal Inves t ing ’s marke t and inves tment v iew

July 2016

“The unexpected result of the British referendum on EU membership hit European and domestically-focused UK assets hard and showed the importance

of diversification. A well-balanced portfolio, spread across uncorrelated asset classes and geographies is essential in uncertain times.”

By Tom Stevenson, Investment Director

In this issue: ■ Brexit casts a long shadow

over financial markets

■ Federal Reserve holds fire on monetary tightening

■ Investors continue to seek out safe havens

■ Fidelity launches

For the full

Select 50 please

turn to page 12

2

Important information: Please be aware that past performance is not a reliable indicator of what might happen in the future. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in small and emerging markets can be more volatile than those in other overseas markets. Reference to specific securities or funds should not be construed as a recommendation to buy or sell these securities or funds and is included for the purposes of illustration only. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give investment advice. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

Executive summary

Please note the views in this document should not be seen as investment advice. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

Asset classesCurrent View

3 Month Change

Equities Equities remain a solid bet among an uninspiring field. They are not expensive but, in the absence of rising valuations, earnings growth must deliver.

Bonds Investors have flocked to the perceived safety of bonds. This leaves them expensive but there is no reason to think they will become less so.

Property Brexit has knocked sentiment. Income will be the main driver as yield compression slows. Europe looks better than the UK.

Commodities Oil continues to look more interesting than industrial metals where supply and demand remain out of kilter. Gold has seen the best of its recent run.

Cash During the recent volatility it has paid to have some cash at hand to buy the dips. With political risk high, that remains the case.

Equity regions

Current View

3 Month Change

US In an uncertain world, its biggest economy must remain a safe haven. Not cheap but worth a place in a diversified portfolio.

Japan Japan has suffered from the yen’s role as a safe haven. Exporters will continue to be squeezed by the currency. There are question marks over Abenomics.

UK Brexit has driven a wedge between domestic-facing mid-caps and international blue-chips. Until the politics is clearer, stay defensive.

Europe It is arguable that Europe is a bigger victim of Brexit than the UK. But the region is home to some fantastic internationally-focused companies.

Asia Pacific ex-Japan With the US looking fully valued and political risk so high in Europe, Asia and

Emerging Markets look relatively attractive for diversified investors.

Three Month Change: the direction of the arrows indicates any change in the view since the previous Investment Outlook.

For more market data including full 5 year performance figures see page 15

3

Acknowledgements I would like to thank the many knowledgeable and experienced people within the wider Fidelity organisation who have helped me develop the ideas in this Investment Outlook. Although the views expressed here do not represent the shared opinion, or house view, of Fidelity’s investment team, the combined expertise of over 380 investment professionals in 13 countries is a very significant resource on which I have been able to lean. In particular, I would like to thank Kevin O’Nolan in Fidelity Solutions; Paras Anand and Richard Lewis, respectively the Heads of European and Global Equities; Jeremy Osborne, Investment Director in Tokyo; Matthew Sutherland, Senior Investment Director in Hong Kong; Rebecca McVittie, Investment Director, Emerging Market Equities; Matthew Jennings, UK Investment Director; Andy Howse, Investment Director in our London-based Fixed Income team; and Neil Cable, who heads Fidelity’s Real Estate investment team.

Q2 2016: delay, divorce, devaluation

Fed holds fire on interest rate riseWe’re back on hold. The Federal Reserve pointed investors towards a rate hike in June or July after its April meeting. That suggested that the move to interest rate normality was back on track after stalling since last December. But expectations of renewed monetary tightening were dashed by a much worse than expected set of non-farm-payroll employment data for May – just 38,000 jobs were created versus expectations of around 200,000. The June Fed meeting duly passed without a rise and experts now doubt whether there will be movement before September at the earliest. Janet Yellen’s natural caution will have been heightened by Britain’s Brexit vote. Looking further out, the so-called dot plots, which set out the forecasts of the Fed’s open market committee members, now look for only one or two quarter point rises this year. The market expects fewer.

0%

1%

2%

3%

4%

5%

6%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Federal funds target rate

Source: Thomson Reuters Datastream, as at 5.7.16

85

90

95

100

105

07-Jul

05-Jul

01-Jul

29-Jun

27-Jun

23-Jun

21-Jun

17-Jun

15-Jun

13-Jun

09-Jun

07-Jun

MSCI UK Banks

EU Referendum

Source: Thomson Reuters Datastream, as at 8.7.16

1.30

1.35

1.40

1.45

1.50

30/0

6/16

24/0

6/16

20/0

6/16

14/0

6/16

08/0

6/16

02/0

6/16

27/0

5/16

23/0

5/16

17/0

5/16

11/0

5/16

05/0

5/16

29/0

4/16

25/0

4/16

19/0

4/16

13/0

4/16

07/0

4/16

01/0

4/16

USD to GBP

EU Referendum

Source: Thomson Reuters Datastream, as at 8.7.16

UK votes to leave EU The equity market called the EU referendum completely wrong. In the week leading up to Britain’s vote on membership of the European Union shares soared as investors assumed (on the basis of no clear evidence) that we would vote for the “devil we knew”. In fact, as we all know, the Leave camp edged it and Britain and Europe were plunged into a political, constitutional and economic crisis. The reaction of the stock market was negative but mixed. The closer a business is to the UK’s domestic economy, the worse its shares fared. That was bad news for banks, retailers and housebuilders. The FTSE 250, which has outperformed for many years, was in the firing line. The more international FTSE 100 was relatively unscathed. European bourses were even harder hit than London as the prospect of other countries following Britain’s lead began to be priced in.

Sterling devalues Investors in the pound fared even worse than equity traders as the results of the referendum became clear on the night of 23 June. Expectations that the UK would opt for the status quo had seen sterling rise to a high of $1.50 as the polls closed. By the time the result was confirmed, the pound had lost 10% of its value against the US currency. The fall in sterling is a mixed blessing for the UK. A weaker pound promises rising inflation as the cost of imported goods increases. For exporters and overseas earners, however, devaluation is good news. It makes our goods and services more competitive overseas. The impact on foreign investors is also mixed. Losses on holdings of UK assets may prompt some investors to retreat but for potential purchasers of UK property or British companies, everything is suddenly on sale.

Past performance is not a reliable indicator of what might happen in the future. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment. For full 5 year performance figures please see page 15.

4

Focus: The Select 50

Regular readers of this Investment Outlook will know that we view it as a key element of our investment guidance. From its inception two and a half years ago, it was designed to be used alongside our other main investment tool – the Select List. I have written the Outlook each quarter to provide the context for your fund choices from that list – a top down view of the investment world to help you make better fund selections.

We are continually trying to make both the Outlook and Select List work harder and to that end I’m delighted that we have just re-launched the Select List as Fidelity’s Select 50 – a shorter, higher-conviction list of our best fund ideas.

The best judge of whether our tools are really useful is you, the investor. So at the beginning of the year we sat down with some of you and asked: how do you use select lists; what are you looking for in a list; and what do you like and dislike about our own Select List?

We picked up a very clear message from you. You wanted a shorter list of funds, clearly presented in fewer categories, that we really believed had the potential to be consistently good performers through the cycle. Not a list of hot tips but a collection of funds managed by experienced and skilful managers that could be relied on in the medium to long term.

That made intuitive sense to me. It’s a bit like sitting down in a restaurant and getting to grips with a long menu or wine list. If you are anything like me you want some help from the experts. You want the sommelier to come over and share his knowledge and experience.

Armed with those clear instructions we went to Fidelity Solutions, our multi-asset and multi-manager investment group, and challenged the fund selection experts in that team to come up with a list of the funds that they would want to own themselves. Above all, we wanted to see alignment between what they are highlighting for our customers and what they are actually buying for their funds of funds.

We were delighted when Tom Ewing, the head of research in Fidelity Solutions, said he would also be linking his analysts’ remuneration to the quality of the Select 50. Our fund selectors really are going to be eating their own cooking.

Unique two-part processWe have always believed in the importance of investment integrity when it comes to picking the funds for our select list. The quality of a fund and its manager is paramount. A fund manager has never been able to buy their way onto our list and they never will.

However, when we spoke to our customers they also told us that they see fund cost and value as important considerations too. They understand that charges can eat into long-term returns and they want to minimise costs. Finally, they said they wanted to understand the funds they are investing in, to know what a manager’s philosophy is and how he or she is responding to changing market conditions.

In light of all this we have introduced a two-part fund selection process. The first stage – and the more important, in our view – is purely investment focused. Our fund analysts use a mixture of quantitative screens and qualitative measures (including face to face meetings) to provide the Personal Investing business with a long-list of top-quality funds.

Armed with that list, we go out to our fund provider partners (including Fidelity, which we view in exactly the same way as any other manager) and discuss with them: the price they can offer us and the access they can provide us to the fund’s manager. We also look at the quality of a fund partner’s operations and some other factors but price and access are the two main considerations.

Other

UK

North America

Japan

Global

Europe

Bonds

Asia and EM 10

6

357

10

6 3

With this information we then slim down the long-list from Fidelity Solutions to the final list of 50 funds, spread across eight categories. We’ve listed all of the funds on pages 12-14, together with some performance information. Obviously, we are limited by space, however, so do please go online at www.fidelity.co.uk/select to get to know the funds in more detail.

2,000+FUNDS

INVESTMENTANALYSIS CUSTOMER

BENEFIT

5

Economic Outlook: implications of Brexit

■ Brexit threatens UK recession

■ ECB support should help Europe escape downturn

■ US better insulated; Japan hit by yen strength

Britain’s decision to leave the European Union is a political shock which will have knock-on economic implications. Like ripples on a pond when a stone is thrown into the water, the effects will be felt most keenly near to the epicentre of the Brexit crisis. Clearly the UK and Europe will be most affected but there will be an impact worldwide and global growth could be little better next year than this.

The UK’s economy is likely to face a mild recession in the second half of the year. Funding an already high current account deficit is only possible if overseas investors are prepared to bridge the gap between what we earn and spend. This is not a problem when you have a stable government and a strong currency. With neither, the only way balance can be achieved is through a reduction in consumer spending and imports.

It will take time for this to show up in the data but by the final quarter of 2016 it will be evident and two successive quarters of contraction seem plausible. The Bank of England will seek to cushion the blow but its hands are tied by the fall in the pound. It will probably wait to cut interest rates or boost quantitative easing until sterling has stabilised.

Assuming Britain becomes a more closed economy in a post-EU era, its potential growth will probably reduce and the Bank of England will be slower to normalise interest rates than it would otherwise have been. This scenario remains at least two years off but there will be shorter term adjustments as businesses prepare for the new world by cutting investment and hiring. In Europe, a recession may be avoided thanks to the momentum in the German economy and the ECB’s determination to continue stimulating the Eurozone economy in the face of the bloc’s existential crisis. Given the shock to Europe’s aspirations for political integration, the pressure on fiscal consolidation will also likely ease in the months ahead.

Further afield, the impact is likely to be smaller. In the US, Brexit will almost certainly stay Janet Yellen’s hand when it comes to renewed monetary tightening. The dollar is still likely to appreciate, thanks to its safe haven status, and that will act as a check on US economic growth – but interest rates will stay lower for longer. This is doubly the case in light of November’s Presidential election.

In Asia, too, currencies will be a key driver. This is true in Japan, where the yen is seen as a safe haven and the currency has already reached levels at which the Bank of Japan might be expected to intervene. It is also the case in China, where the Government will view the rise in the value of the dollar with nervousness.

The fund-selection processOur fund selectors believe that active management can add value in most asset classes and geographies but that only a small number of managers have the ability to consistently outperform the market over the long term.

They think that there is no ‘right’ way to invest (and they are open to all approaches) but they say that the majority of ‘skilled’ managers have distinct and identifiable characteristics. They look for well trained and experienced investment managers who follow a disciplined, transparent and repeatable process.

To find these managers they use a combination of quantitative screens that look at performance, consistency and the extent to which a manager is subject to any biases of investment style. After they have applied this mechanistic sieve, they turn to the more subjective part of the process and begin to assess the quality of a manager’s process, how good they are at gathering and synthesising information, how well they anticipate market movements and how they express their convictions with meaningful active exposures to different individual stocks.

It all sounds quite simple and straightforward but finding great managers is an art not a science. At Fidelity we are uniquely well-placed to do this kind of analysis with the support of a large, high-quality investment team. It is the support of Fidelity Solutions that gives us such confidence in our Select 50. I recently interviewed Tom Ewing about the investment process. You can watch our conversation at www.fidelity.co.uk/select.

Monitoring and maintaining the Select 50Coming up with the Select 50 has been a significant piece of work and we are very pleased with the outcome. However, this is really just the start of an ongoing process because we have asked Fidelity Solutions to monitor and maintain the list on a continuous basis. This means that whenever our analysts decide a fund no longer qualifies for the list or they find a better alternative, they will tell us. Subject to our customer benefit analysis (price and access), funds can move on or off the list at any time, although we have made it very clear that we don’t wish to see unnecessary changes – investment is a long game and we know that over-trading is detrimental to long-term returns.

I’m sure you will agree with me that the Select 50 is a big step forward. I hope you find it useful.

6

Asset classes

EQUITIES

Valuations treading water

18

20

22

24

26

28

2011

Cyclically-adjusted PE Ratio (Shiller)

2012 2013 2014 2015 2016

Source: Thomson Reuters Datastream, as at 5.7.16

Past performance is not a reliable indicator of future returns.

Corporate earnings in the world’s biggest market, the US, have suffered from the twin effects of a strong dollar and weak commodity prices. In aggregate, earnings might actually fall in 2016 – bad news when stock market valuations are not especially cheap – but they should revert to double digit growth next year, assuming political developments do not derail the underlying economic recovery.

Equities remain the best bet in a relatively uninspiring field. Compared with bonds, they continue to look cheap, although this says more about elevated valuations in fixed income. They also look more appealing than commodities and the risks are rising in real estate. Shares remain a reliable source of income in a yield-hungry world.

Stock market investors need to see the early signs of economic recovery turn into something more sustainable. For now markets remain too dependent on supportive policy. Sentiment is subdued and this is holding companies back from investment while individuals are sitting on their hands. Animal spirits are not really in evidence anywhere.

Because of all that, the world remains vulnerable to the negative impact of a US monetary tightening cycle. Janet Yellen is naturally cautious but in due course she must re-start the journey back to interest rate normality. Faced with that cloud on the horizon, investors are bound to tread carefully. It is hard to see valuation multiples rising from here. If anything they are likely to tread water. That’s not an exciting outlook but, equally, the red lights that flash at the top of the market are not in evidence either.

BONDS

The spread of negative yieldsBond maturity (years)

1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y Switzerland

Negative yields Positive yields

Japan Germany Netherlands France Ireland Spain Italy Norway UK US China

Source: Fidelity International, Bloomberg, as at June 2016.

The bonds issued by the world’s more stable governments are among the safest investments because you can be almost certain that you will receive a regular income and then a full return of your capital when the security matures. In an uncertain world, that is extremely reassuring, especially if you have liabilities in the future that you cannot afford to renege on – let’s say you are a pension fund trustee, for example. As a consequence of this reliability, demand for government bonds is always strong and never more so than when there is lots to worry about in the world.

The downside of bonds’ popularity, however, is that the more people buy them, the more their prices rise and the less income they offer new investors (yields move in the opposite direction to prices). The level of bond yields we are seeing at the moment is unprecedented. Indeed in a growing number of cases,

government bonds actually offer a negative yield – people are so concerned about getting their money back that they are prepared to give some of their capital away for the privilege.

This situation is probably unsustainable in the long term. In the short run, however, it is quite hard to see what the catalyst for a reversal in the bond market might be. Prices are high but they are likely to stay that way as long as governments continue to buy bonds to stimulate economies, as long as interest rates remain pinned to the floor and as long as there is so much for investors to fret about.

It’s not just governments that issue bonds, however. Companies and other entities do too and the pricing of these corporate bonds is slightly different. Because there is a greater risk that companies will default on their payments to investors they have to pay a higher income to compensate them. The riskier the company, the higher the extra yield. At the moment, our fixed income investors believe that the best trade-off between risk and reward lies with the bonds issued by the best-quality companies, so-called investment grade credit.

Important information: Please be aware that the price of bonds is influenced by movements in interest rates, changes in the credit rating of bond issuers, and other factors such as inflation and market dynamics. In general, as interest rates rise the price of a bond will fall. The risk of default is based on the issuer’s ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different government issuers as well as between different corporate issuers.

7

PROPERTY

Rental growth takes over from yield compression

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Dec

-00

Sep-0

1

Jun-

02

Mar-0

3

Dec

-03

Sep-0

4

Jun-

05

Mar-0

6

Dec

-06

Sep-0

7

Jun-

08

Mar-0

9

Dec

-09

Sep-1

0

Jun-

11

Mar-1

2

Dec

-12

Sep-1

3

Jun-

14

Mar-1

5

Dec

-15

Yield Impact Rental Growth

Source: Fidelity International, MSCI UK All Property Monthly Index, 31.3.16

Past performance is not a reliable indicator of future returns.

Commercial property has delivered very good returns in recent years, driven by a wave of investment cash in search of an acceptable income and strong rental growth. This year, expectations remained positive up until the referendum, but sentiment has soured following the Leave vote.

Brexit is a two-edged sword for real estate. To the extent that it leads to a slowdown in activity or the loss of jobs, it will weigh on demand for accommodation and reduce the pace of rental growth. However, property acts as a kind of bond with a roof on so if a slowdown keeps a lid on bond yields then that could provide support. The sharp reduction in the

value of the pound makes UK real estate increasingly cheap to overseas purchasers.

Since the referendum, a number of funds have suspended dealing to avoid being forced into fire sales of assets to meet redemptions. This does not necessarily reflect a downturn in the underlying property market but if managers are obliged to raise cash price falls may follow.

Even before Brexit, this year looked like marking a transition in the real estate market. Investors are likely to focus on capital preservation and see income as the principal driver of total returns. However, this need not signal a reversal; the signs of a market top are still not evident – there is no sign of excessive bank debt being used to finance deals; there is no oversupply; and there remains a material cushion between government bond yields and the income available from the asset class.

In the UK, a shortage of high-quality property should underpin rents. Only the prime central London market has seen much construction. In Europe, the real estate cycle is less advanced than in the UK and there remains a weight of money, especially into Germany. The ECB’s asset purchase programme is creating demand for higher-yielding assets.

Important information: Some funds in the property sector invest in property and land. These can be difficult to sell so you may not be able to cash in this investment when you want to. There may be long delays in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer’s opinion rather than fact.

COMMODITIES

Gold has been a strong performer throughout 2016, rising from a low of around $1,060 an ounce in January to a recent high of over $1,300. This makes it one of the best assets to have owned year to date but the rally needs to be seen in context. Gold had fallen from a high of close to $1,900 an ounce over the previous four years. There are two main reasons for the rally so far this year. Gold is seen as a safe haven in uncertain times and, with political risk at elevated levels, bullion has unsurprisingly looked attractive. Secondly, gold responds positively to the prospect of lower-for-longer interest rates and a weaker dollar.

The other commodity to have performed well so far this year is oil, which bottomed in January at around $26 a barrel and has since more or less doubled. This reflects a growing belief that supply and demand will move better into balance later this year. Demand in a number of key markets like India is rising steadily. Meanwhile, the fall in the oil price since 2014 has forced many producers, especially in the North American Shale fields to cut output.

That is the good news. But no-one should get carried away about the future path of oil. Of all commodities, it is the quickest to switch production on and off and that means that even a modest increase in the oil price will see output rise rapidly.

The least interesting commodity market is industrial metals, which are much slower to respond to changing prices. For low cost producers, it can make sense to keep digging long after a slide in the price of, for example, iron ore. This is one reason why mining is such a cyclical industry, moving from boom to bust and back again over multi-year cycles.

Industrial commodities lag oil and gold

90

April

Brent Crude Oil Gold bullion Copper

May June

140

135

135

135

135

135

135

135

135

135

Source: Thomson Reuters Datastream, as at 30.6.16

Past performance is not a reliable indicator of future returns. For full 5 year performance figures please see page 15.

8

Equities – a regional perspective

UK

The UK referendum has confirmed what we probably knew all along – there are actually two UK stock markets, one of which reflects the British economy and one of which does not. The one that gets all the headlines is the one that tells us least about what is going on at home. The FTSE 100 is a barometer of the global economy; to discover what’s happening on our doorstep you need to look at the FTSE 250.

Between the financial crisis and the start of this year, the FTSE 250 outperformed the blue-chip benchmark by a wide margin. This reflected the underlying resilience of the UK economy and the positive impact seven years of near-zero interest rates has had on it. That relative position switched this year as investor sentiment weakened and, unsurprisingly, the shock victory for the Leave campaign hit the mid-cap index very hard indeed. To an extent that makes sense - the banks, retailers, travel companies and house-builders that account for a large proportion of the index’s constituents face a bleaker future than most investors envisaged.

Recent mid-cap weakness meant that some investors were looking for opportunities ahead of the vote. The bullish case for the UK’s domestic stocks included: a strong labour market; wage growth; rising inflation; reasonable valuations. When the vote went the other way, the market’s innate preference for defensive shares was confirmed and share prices slumped. By contrast, the FTSE 100 has looked like an oasis of calm. The index of Britain’s biggest companies gave up the froth of the week before the referendum but then stabilised. For large cap investors, it looks like a case of Crisis: What Crisis?

So what should investors do now? Until the dust settles on the terms of the UK’s Brexit, it is hard to justify a significant exposure to domestically-focused stocks in the mid- and small-cap indices. Trying to time a bounce in the market after heavy falls is best left to the professionals although the temptation to give it a go is great. As for the blue-chips, this is more of a judgement on the

outlook for the global economy. Yes, that will be impacted by Brexit but arguably it is more about what’s happening in China and the US. The commodities and energy stocks that dominate the FTSE 100 are pretty indifferent to whether the UK falls into recession later this year, as now seems possible.

The other key issue is what happens to the pound. If sterling stays weak, overseas earners (and dividend payers) like the big pharmaceuticals companies will benefit. Businesses buying in overseas markets priced in dollars (retailers and airlines, for example) will struggle. If a weak pound pushes up inflation and forces the Bank of England to raise interest rates in the face of a slowing economy, so much the worse.

Many UK investors are over-exposed to the UK thanks to home bias, the tendency to focus on the domestic stock market. This is a good time to check whether your home bias is the benign sort (weighted to the FTSE 100) or the uglier type (leaning towards mid-and small-caps).

The end of Mid-Cap outperformance?

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

3.00

2.80

2.60

2.40

2.20

2.00

1.80

1.60

1.40

1.20

FTSE 250 relative to FTSE 100

Source: Thomson Reuters Datastream, as at 5.7.16

Past performance is not a reliable indicator of future returns.

9

US

Dollar strength: the US’s main headwind

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 201675

80

85

90

95

100

105

110

US Dollar trade weighted index

Source: Thomson Reuters Datastream, as at 30.6.16

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. For full 5 year performance figures please see page 15.

The US stock market reacted surprisingly negatively to Brexit. Given the self-contained nature of the US economy, I would have expected American shares to have been a bit more sanguine than they were. The S&P 500, whose constituents make more than two thirds of their earnings in the US itself and so might be viewed as pretty insulated from Europe’s problems, fell by more than 5% in two days. They have since rallied to a new record.

The initial slide in US shares was also a bit odd given the expectation that interest rates will stay even lower for longer than people thought before the referendum. Odd too that the US market did not benefit from its safe haven status at a time of great uncertainty across the Atlantic.

There are good reasons to be cautious on the US market, none of which are particularly new to readers of this Outlook. American shares remain among the most highly-rated in the world so they are vulnerable to profit-taking whenever sentiment deteriorates. At today’s valuations, another set of disappointing company results in the second quarter season will be hard for investors to accept.

And then there is political risk. Now Brexit is out of the way, investors are likely to focus more intensely on the forthcoming Presidential election. This is doubly the case now that Britain has set a precedent for an anti-establishment protest vote. Who now would rule out a Trump Presidency?

The key message from the UK’s referendum is that the unthinkable can happen and it pays to be cautiously positioned and prepared for all eventualities. If Donald Trump were to push through even some of the measures he has suggested, the outlook for global growth would be diminished.

Part of the recent sell-off was clearly temporary. With the corporate sector remaining the main buyer of US equities at the moment, at least part of the post-Brexit downturn can be blamed on the regular slowdown in share buybacks that preceded earnings season. That will pass once companies start announcing their results.

In an uncertain world, it is hard to argue against a decent exposure to the US stock market. The American economy is on a recovery track, unemployment is falling to low levels and the key energy sector is on the mend. Monetary policy will remain supportive for the foreseeable future.

The US is exposed to some of the highest-growth sectors in a changing global economy. It has an unassailable lead in the innovation-driven areas of technology and healthcare. The size and sophistication of the US economy is just too great to ignore in a portfolio with a long-term horizon.

The major headwind for US earnings remains the dollar. A strong US currency makes it harder for American companies to compete in the outside world. Despite Janet Yellen’s caution, the dollar remains the only currency in the world likely to appreciate to a material degree.

Yes, there are headwinds for Wall Street. But given the problems elsewhere in the world, I remain positive on the US within a well-diversified portfolio.

10

EUROPE

Diversified salesMSCI Asia Pacific

ex Japan MSCI Europe S&P 500

Asia 17.6%

Americas 28.2%

Europe ex UK 41.2%

UK 12.3%

Asia 82.5%

Americas 10.7%

Europe ex UK 5.1%

UK 1.5%

Asia 14.0%

Americas 68.9%

Europe ex UK 13.6%

UK 3.0%

Source: Fidelity International, FactSet, June 2016

Past performance is not a reliable indicator of what might happen in the future. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment.

European shares were initially hit even harder by Brexit than those in the UK. This reflects the uncertainty Britain’s departure creates for the ongoing European project. There is a deep strain of euro-scepticism in many other European countries so the loss of the bloc’s second biggest economy creates a really unhelpful template. However, just as the knee-jerk reaction in London quickly moderated, it is possible that markets may decide relatively quickly that the economic impact of Brexit is rather less than the

political. The referendum may prove to be much less disruptive than the financial crisis and the consequent sovereign debt crisis.

There remains a pretty strong case for owning European equities. Valuations in the region are not excessive with shares trading on a mid-teens multiple of expected earnings and many companies offering shareholders a decent income in a persistently low, or even negative, interest rate environment. Around two thirds of European countries now have dividend yields higher than their own corporate bond yields.

That will continue to be attractive, not least because European companies are more international in nature than their equivalents in the US and Asia. The region is home to many of the world’s biggest and most defensive brands. They are a play on the ongoing growth in emerging markets and the recovery in America as much as on domestic demand.

As in the UK, Europe could benefit from a weakening of the euro against the dollar, which would make its strong export sector even more competitive. So while it makes sense to be cautious in selecting European investments, and to stick to defensive quality while the dust settles, the region should continue to play a part in a diversified portfolio. Our new Select 50 has a range of growth and income funds and even a fund focused exclusively on the European economic power house, Germany.

JAPAN

Japan’s equity market corrected last summer as investors worried about a slowdown in China. It has not really recovered since, notwithstanding the very recent rally following the Upper House elections. The market has struggled as a risk-off mood has persisted, overseas buyers have lost interest in the country’s shares again and, most importantly, the yen has continued to rise in value against the dollar.

A year ago it took 125 yen to buy a dollar. Today you only need around 100. That is a very significant rise in the value of the Japanese currency, which is a disaster for an economy as dependent on exports as Japan is.

The Japanese currency has been hit by a triple whammy. First, the outlook for US rate rises has weakened. Second, the Japanese authorities have stepped back from further stimulus following an unsuccessful and unpopular move into negative interest rate territory. Finally, the yen has regained its status as the ultimate safe haven asset in a world beset with new worries.

On top of all that, confidence in the Abenomics programme of stimulus and reform has petered out, although victory in the recent Upper House elections undoubtedly strengthens Prime Minister Abe’s ability to push through change.

Japanese shares are attractively valued on a forward multiple of only around 12 or 13 times expected earnings. This is despite the possibility of a rise in corporate earnings in the second half of the year as annual comparisons improve. It shouldn’t be forgotten either that the corporate reforms that constitute

the only really successful part of the third reform arrow of Abenomics are for real. Japanese companies are much better managed now and for the benefit of shareholders.

The main problem with Japan is the lack of interest from overseas investors. With Abenomics proving a very slow burn, it is hard to see foreign buyers returning in big numbers. In a triumph of experience over hope, therefore, I am reducing my weighting in Japan to neutral.

Japanese shares are still cheap

0

10

20

30

40

50

60

70

Apr-98Dec-94 Aug-01 Dec-04 Apr-08 Aug-11 Dec-14

Topix 12-month forward P/E valuations Average

Source: FactSet, June 2016

Past performance is not a reliable indicator of what might happen in the future. When investing in overseas markets, changes in currency exchange rates may also affect the value of an investment.

11

ASIA-PACIFIC EX-JAPAN/EMERGING MARKETS

China: a tale of two economies

40

60

80

100

120

140

160

180

200

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

New economy sectors relative to old economy sectors

Source: Morgan Stanley Research December 2015

Past performance is not a reliable indicator of what might happen in the future. When investing in overseas markets, changes in currency exchange rates may affect the value of an investment. Investments in small and emerging markets can be more volatile than those in other overseas markets.

The outlook for stock markets in the Asia Pacific region continues to be heavily influenced by the outlook for US interest rates, the dollar and the broader global macro-economic outlook. Of these the first looks to be the most supportive in the wake of the Brexit shock.

US interest rates are unlikely to rise much, if at all, this year. These looser financial conditions are a positive for Asian markets, especially those saddled with dollar-denominated debts. Coupled with relatively attractive valuations, which stand at multi-year lows compared with developed markets, they make the region an increasingly attractive destination compared with highly-valued US markets and European bourses under a political cloud.

Unfortunately, the dollar looks set to renew its rising trajectory as investors seek safe havens. And the macro picture is definitely less positive than before the EU referendum. There are pros and cons to investing in Asia but perhaps the greatest positive is the region’s relative insulation from the turmoil in Europe. The emerging market growth story remains intact, with GDP growth standing at levels that the West can only dream of.

The upheavals last month in Europe have made a stronger case than ever for a well-diversified portfolio and Asian equities have an important role to play in a balanced spread of investments.

China’s stock market remains polarised between its fast-growing service sectors like the internet, healthcare, insurance and travel and the slower-growing old-economy areas like steel, coal and banking. Consumption looks to be underpinned by high household savings and a relatively solid property market. This makes it difficult to generalise about Chinese valuations because the market average reflects one set of businesses that is very cheap and another that is quite expensive – but both for good reason.

India provides the best growth story in Asia, although this is to a large extent already priced in by investors. The economy achieved real GDP growth of nearly 8% in the first quarter. Indonesia shares some of India’s reform-focused attractions. It also benefits from signs of improved consumption and a broad stock market that offers investors plenty of opportunities.

Taiwan and Korea look less interesting. Taiwan is stuck in the middle of the technology value chain. Korea is also squeezed from below by China and from above by Japan. Its days of dominating the mid-market for high-speed rail, power generation, cars and electronics may be over.

Among non-Asian emerging markets, the picture is improving for commodity exporters. Although many commodity sectors still suffer from over-supply and too much capacity, the oil market has stabilised well off the lows reached in January. Although oil stocks themselves are already pricing in the better outlook, there are other secondary benefits that higher oil prices have on oil-exporting economies.

It is not all rosy for commodity exporters. Both Russia and Brazil continue to suffer from sizeable economic problems. Sanctions against Russia were recently extended and Brazil’s corruption scandals rumble on. South Africa’s domestic market is held back by political uncertainty.

Asia and emerging markets generally remain a stock-picker’s delight. There are plenty of opportunities out there for investors prepared to roll up their sleeves and do the hard work to find the winners.

12

The new Select 50 – Our experts’ favourite fundsThe funds on the Select 50 are hand picked from the range available on our fund supermarket. For more information on how these funds are selected visit fidelity.co.uk/select. The Select 50 is not advice or a recommendation to buy funds. Equally, if a fund you own is not on the Select 50 (or was on the previous Select List and isn’t on the Select 50), we’re not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances. Please be aware that past performance is not a reliable indicator of what might happen in the future. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. For funds that invest in overseas markets, the returns may increase or decrease as a result of currency fluctuations. Investments in small and emerging markets can be more volatile than other more developed markets. For funds launched less than five years ago full five-year performance figures are not available.

STANDARDISED PERFORMANCE DATA (%) OVER THE PAST FIVE YEARS

% (as at 30th June 2016) 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

Morningstar Fund Rating

ASIA AND EMERGING MARKETS

Fidelity Emerging Markets -11.9 13.1 4.7 9.3 5.8 JJJJJ

Fidelity Funds – Asian Smaller Companies - 31.0 24.2 9.0 22.0 JJJJJ

Stewart Investors Asia Pacific Leaders -2.4 16.3 5.2 15.7 11.6 JJJJJ

Henderson Emerging Markets Opportunities -17.0 6.1 2.8 3.2 12.8 JJJJ

Lazard Emerging Markets -10.5 7.8 6.3 -6.6 7.2 JJJJ

Old Mutual Asia Pacific -8.7 22.6 9.2 10.2 6.9 JJJJJ

BONDS

Fidelity MoneyBuilder Income 8.1 5.9 6.1 5.7 6.8 JJJJ

Fidelity Strategic Bond† 7.4 6.4 8.7 3.2 4.2 JJJJJ

Invesco Perpetual High Yield - - - 2.3 -3.0

JPM Global High Yield Bond 5.8 8.7 9.2 -1.2 -0.4 JJJ

Jupiter Strategic Bond 7.9 9.5 10.1 1.2 4.3 JJJJJ

M&G European High Yield Bond -10.3 20.4 7.2 -12.4 16.9 JJJ

M&G Corporate Bond 10.3 5.4 6.7 4.6 6.7 JJJJ

M&G Optimal Income 8.0 10.0 9.5 0.9 1.2 JJJJ

Royal London UK Government Bond 14.1 -2.8 1.5 6.6 11.6 JJJ

SLI Global Index Linked Bond 9.1 -2.1 3.7 2.5 7.9 JJJ

† The investment policy of Fidelity Strategic Bond Fund means it can be more than 35% invested in government and public securities. These can be issued or guaranteed by other countries and governments. For a full list please refer to the fund’s prospectus.

13

% (as at 30th June 2016) 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

Morningstar Fund Rating

EUROPE

Baring German Growth -24.2 39.1 17.7 2.3 4.7 JJJJJ

BlackRock Continental Europe -16.4 32.9 11.1 8.8 6.1 JJJJJ

Fidelity Funds – European Growth - - - - 6.9

Invesco Perpetual European Equity Income - - - 3.5 -0.3

Jupiter European Special Situations -16.4 32.4 11.1 6.1 3.4 JJJ

JOHCM European Select Values -13.0 31.8 14.7 3.3 13.4 JJJJJ

Threadneedle European Select -7.6 33.3 8.6 8.2 9.5 JJJJJ

GLOBAL

BNY Mellon Long Term Global Equity 0.6 20.6 4.9 10.0 17.5 JJJJ

Fidelity Global Dividend - 25.4 8.5 8.4 23.6 JJJJJ

Invesco Perpetual Global Equity Income - - - 8.5 5.9

Rathbone Global Opportunities -4.1 20.4 11.3 16.7 13.7 JJJJJ

Templeton Growth -16.5 37.3 15.0 8.0 -1.8 JJJ

JAPAN

Aberdeen Japan Equity 3.2 23.0 0.2 18.0 17.6 JJJJJ

Baillie Gifford Japanese -2.3 37.6 3.5 16.4 9.5 JJJJJ

Schroder Tokyo 0.8 22.9 -0.1 21.1 2.9 JJJJJ

NORTH AMERICA

BlackRock US Opportunities -9.2 27.1 16.0 19.2 6.9 JJJ

Fidelity American Special Situations 3.7 32.0 10.4 24.5 17.4 JJJJ

JPM US Equity Income 8.7 27.6 7.7 12.8 20.1 JJJJ

JPM US Select 2.6 30.2 12.7 16.8 13.2 JJJJ

Old Mutual North American Equity 2.7 31.2 14.6 20.5 17.0 JJJJJ

Schroder US Mid Cap -1.1 25.5 11.2 21.3 17.2 JJJJJ

14

% (as at 30th June 2016) 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

Morningstar Fund Rating

UK

Fidelity Enhanced Income 6.0 14.8 11.8 3.3 2.8 JJJJ

Fidelity Special Situations -6.0 36.3 10.9 12.6 -4.1 JJJJ

Franklin UK Smaller Companies -18.2 36.3 21.6 19.1 -10.7 JJ

JOHCM UK Dynamic - - - 9.3 -6.1

JOHCM UK Equity Income - - 16.7 7.5 -9.3 JJ

Jupiter UK Special Situations 5.7 26.0 15.4 5.1 -1.6 JJJJJ

CF Lindsell Train UK Equity 3.4 32.2 15.7 14.1 6.6 JJJJJ

Liontrust UK Growth 3.7 18.0 11.8 6.4 9.1 JJJJJ

Old Mutual UK Smaller Companies -3.7 32.6 17.7 14.7 -1.0 JJJJ

Threadneedle UK Mid 250 -3.0 29.7 13.3 22.0 -10.5 JJJ

OTHER

BlackRock Global Property Securities Equity Tracker - - - - 29.1

Henderson UK Absolute Return -3.2 14.3 9.8 7.2 3.6

Investec Global Gold -19.6 -38.7 10.8 -22.8 86.4 JJJJ

STANDARDISED PERFORMANCE DATA (%) OVER THE PAST FIVE YEARS

Before you invest, please ensure you have read Doing Business with Fidelity and the Key Investor Information Document (KIID) or Fund Specific Information Document (FSI), relevant to your chosen fund(s). These documents give you all the information you need to know about Fidelity, including details of the objective, investment policy, risks, charges and past performance associated with the fund(s). Instructions on how to access these documents can be found at fidelity.co.uk/ importantinformation. If you do not have a computer or access to the internet please call Fidelity on 0800 41 41 61 to request a printed copy of the documents. The Full Prospectus is also available on request from Fidelity.

Source: Morningstar as from 1.7.11 to 30.6.16. Basis: bid to bid with income reinvested net of UK basic-rate tax. Excludes initial charge. For the latest yields please call 0800 41 41 61 or visit fidelity.co.uk

Please note, the performance figures shown here are based on ‘clean’ share classes. For more information about ‘clean’ pricing, please visit fidelity.co.uk/pricing.

15

INVESTMENT VALUATION AT A GLANCEPrice-earnings

ratio 2016E Dividend yield

2015E

Equities %

US 17.7 2.3

Europe 15.0 4.0

UK 16.4 4.4

Japan 12.7 2.6

Asia Pac ex Japan 13.4 3.2

Emerging Market Asia 12.4 2.6

Latin America 15.0 2.9

Central East Europe, Middle East & Africa

10.8 3.6

Redemption Yield

Bonds %

ML Global High Yield 7.1

German 10-Year Bunds -0.2

ML Global Corporates 2.3

UK 10-Year Gilts 0.9

US 10-Year Treasuries 1.4

Market data

Please be aware that past performance is not a reliable indicator of what might happen in the future. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in small and emerging markets can be more volatile than those in other overseas markets.

Source: DataStream, 5.7.16 in local currency terms. Valuations: Source Citigroup Global Equity Strategist – Citi Research, MSCI, Worldscope, FactSet Consensus estimates as at 30.6.16. Bond Yields: Source DataStream as at 30.6.16.

INVESTMENT PERFORMANCE AT A GLANCE% (as at 5th July 2016) 3 m 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

Equities

S&P 500 2.7% 4.5% 22.0% 24.2% 6.8% 2.8%

FTSE All Share 6.1% -2.4% 18.6% 12.2% 1.7% 1.2%

FTSE 100 8.7% -1.8% 16.3% 11.5% -0.6% 3.4%

FTSE 250 -4.9% -5.5% 31.8% 15.4% 12.7% -8.3%

FTSE Small Cap -0.6% -7.1% 33.2% 18.4% 7.3% -3.1%

Euro STOXX 0.1% -15.5% 18.3% 30.6% 8.9% -15.0%

SHANGHAI SE -1.5% -21.9% -8.9% 2.6% 79.1% -18.5%

Shenzhen -2.6% -15.5% 21.7% 9.5% 56.9% -15.8%

MSCI Emerging Markets 3.4% -15.4% -1.2% 19.0% -6.7% -11.3%

Nikkei 225 -0.2% -7.0% 60.8% 9.7% 35.3% -22.3%

MSCI Latin America 7.8% -20.2% -15.1% 11.9% -27.1% -10.4%

MSCI UK Bank -0.1% -17.8% 33.0% -10.9% 0.8% -33.0%

TOPIX -0.9% -10.3% 53.1% 0.0% 28.5% -23.9%

Bonds

US 10-Year Treasuries 4.0% 18.0% -6.6% 3.9% 4.7% 11.7%

UK 10-Year Gilts 6.1% 19.4% -4.7% 1.9% 9.7% 14.5%

German 10-Year Bunds 2.7% 18.5% 0.2% 7.5% 5.7% 11.1%

JPM Emerging Markets Bond Index 6.5% 12.0% 0.2% 10.9% -1.1% 11.0%

ML Global High Yield 5.0% 4.1% 10.6% 13.9% -3.7% 2.5%

ML Global Corporates 2.7% 3.1% 1.8% 10.0% -4.6% 7.1%

Commodities

CRB Commodities Index 14.9% -14.1% -4.2% 9.3% -26.8% -15.4%

Crude Oil (Brent) 27.4% -10.2% 5.4% 1.6% -45.9% -22.5%

Gold Spot 10.2% 5.8% -23.7% 7.9% -11.6% 16.1%

LME Copper 0.1% -19.1% -11.9% 5.6% -19.8% -16.5%

GSCI Soft Commodities 24.2% -24.2% -19.1% 2.9% -26.6% 19.4%

Silver 31.1% -22.5% -33.1% 11.6% -27.4% 26.5%

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Source: Fidelity as at 31.3.16For more information please call

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