August 2012

More easing to come

THE INVESTMENT CLOCK
The Investment Clock approach generates growth and inflation readings based on past trends and
the current momentum of lead indicators. These indicators are updated on a monthly basis to build
an expectation of how the global economy may perform over the coming three to six months.
The growth reading sets the relative weighting of cyclical and defensive assets (North-South axis).
The inflation reading sets the weighting of financial assets versus real assets (East-West axis).

INFLATION RISES

GROWTH MOVES ABOVE TREND

Trevor joined Fidelity in 2006, after 10 years

at Merrill Lynch where he was Director of
Asset Allocation and responsible for
communicating asset allocation strategy
recommendations to the firms worldwide
client base. He holds an MA in Mathematics
from Cambridge University and is a qualified
actuary.

Recovery

Overheat
Yield curve
flattens
Stocks

Commodities

Cyclical
Growth

Cyclical
Value

Bonds

Cash

Defensive
Growth

Defensive
Value

Yield curve
steepens

Reflation

GROWTH MOVES BELOW TREND

Trevor Greetham is Head of Asset Allocation

at Fidelity Worldwide Investment, London,
and has 20 years of investment management
experience. He is responsible for leading the
Tactical Asset Allocation investment process
for the Investment Solutions Group. He is
also Portfolio Manager of a number of
institutional and retail multi asset funds and
currently manages $12bn of client portfolio
assets.

Stagflation

INFLATION FALLS

Source: Fidelity. For illustration only. The red dot marks the current position of the investment clock.

MACROECONOMIC HEADLINES

The investment clock is in Reflation, reflecting weaker economic growth and falling inflation.

A wide range of central banks have started to ease policy and stocks have responded
positively. However, business confidence remains fragile and Europes crisis is in remission
not retreat.

It may take a new sell-off in stocks and a drop in inflation expectations to shock policy makers
into the full-hearted quantitative response that we think will be needed to underpin the next
recovery.

ASSET ALLOCATION HEADLINES

The fundamental environment is against risk-assets, but technical indicators have improved.
Therefore, we have added to equities and commodities and this has partly reduced their
underweight.

Within equities, we maintain our overweight in the US and still prefer it versus the eurozone.
However, we reduced our overweight position in US equities, to increase exposure to UK
equities, which is now our biggest regional overweight. We like the UK based on stocks
valuations, positive company earnings revisions and technical factors.

We also increased our overweight positions in property securities and maintain big overweight
in global government bonds.

Within commodities we are still very underweight. We have a diversified exposure but we have
a bias in Gold.

Global growth
Our global growth scorecard has continued to
weaken. There has been a fall in business
confidence. Economists have downgraded
their GDP growth forecasts. And the OECD
lead indicators have rolled over, which
suggests a slowdown.

GLOBAL GROWTH SCORECARD LEAD INDICATOR AND G7 GDP GROWTH

GLOBAL GROW TH S CORE CARD AND G7 RE AL GDP GROW TH
4

3
4
2
2
1

-1
-2
-2
-4
-3

-4

-6
90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

G7 REAL GDP GROWT H YOY%(R.H.SCALE)

GROWT H SCORE (FW D 6M)
Sourc e: T homs on Reuters Datas tream

Source: DataStream. GDP % to Q2.2012, scorecard projected to Q4 2012 (proprietary calculations). Note: the global growth score is a diffusion index which
level varies between +4 and -4. It takes into account central banks stance, OECD leading indicators, business confidence and consensus GDP forecasts. It is
pushed forward 6 months on this chart. This represents the opinion of the portfolio manager.

Inflation
In July there was a further drop in the inflation
scorecard as consensus CPI fell.

GLOBAL INFLATION SCORECARD LEAD INDICATOR AND G7 HEADLINE CPI

GLOBAL INFLATION S CORE CARD, FORW ARD 6 MONTHS

4

-1

-2

-3

-1

-4

-2
90

91

92

93

94

95

96

97

98

99

00

01

GLOBAL CPI SCORECARD

G7 HEADLINE CPI YOY%(R.H.SCALE)

02

03

04

05

06

07

08

09

10

11

12

Sourc e: T homs on Reuters Datas tream

Source: DataStream. CPI% to Q2 2012, scorecard projected to Q4 2012 (proprietary calculations).Note: the global inflation score is a diffusion index which level
varies from -4 and +4. It takes into account the output gap, the oil price, surveys and consensus CPI forecasts. It is pushed forward 6 months on this chart. CPI:
Consumer Price Index, a measure of inflation. This represents the opinion of the portfolio manager.

Mixed Signals on Risk

The recent improvement in risk asset
momentum could foreshadow a pick up in the
world economy. We responded to this
possibility by reducing our equity underweight
and by adding to our property overweight.

RISK ASSET MOMENTUM AND GLOBAL BUSINESS CONFIDENCE

60

10

8
55
6

50

45

0
-2

40
-4
-6
35
-8
-10

30
98

99

00

01

02

03

04

05

RIS K A S S E T MOME NT UM
GLOB A L B US INE S S CONF(R.H.S CA LE )

06

07

08

09

10

11

12

13

S ourc e: T homs on Reuters Datas tream

Source: Datastream, Datastream, Data to July 2012

However, we remain concerned that markets

could retest their lows. Sub-2% U.S. Treasury
yields and low industrial commodity prices
suggest continued weakness in the US and
China. Business confidence is fragile and
Europes crisis is in remission not retreat with
a commitment to self-defeating austerity
spreading to the larger economies of Spain
and Italy.

US BOND YIELDS AND STOCKS DECOUPLING

6.00

1600

5.50

1500

5.00

1400

4.50

1300

4.00

1200

3.50

1100

3.00

1000

2.50

900

2.00

800

1.50

700

1.00

600
01

02

03

04

05

06

US 10 Y E A R B ond
S & P COMP OS IT E (R.H.S CA LE )

07

08

09

10

11

12

S ourc e: T homs on Reuters Datas tream

Source: Datastream, Aug 2012

We would expect policy makers to react to

further weakness but so far we have only
seen second best moves, with the Fed
extending Operation Twist and the ECB
shaving a quarter of one percent from rates.
It may take a new sell off in risk assets and a
drop in inflation expectations to shock
policymakers into the full-hearted quantitative
easing response we think is needed to
underpin the next Recovery.

TRIGGERS FOR AGGRESSIVE QUANTITATIVE EASE NOT YET IN PLACE

3.50

3.00

BREAKEVEN HIGH

2.50

2.00

1.50

SENTIMENT
NEUTRAL

1.00

-1

-2

QE2
0.50

-3

OT/ECB LTRO

QE1
0

-4
2008

2009

2010

2011

2012

2013

5Y 5Y FORWARD BREAKEVEN
COMPOSITE SENTIMENT INDICATOR(R.H.SCALE)
Source: Thomson Reuters Datastream

Source: Datastream, Data to end July 2012

The investment clock

The growth and inflation readings feed into
the Investment Clock model to determine a
probability for each of the four cycles of the
Clock prevailing in the coming three to six
month period.

THE INVESTMENT CLOCK IS IN THE REFLATION PHASE

Portfolio Positioning Trail

INFLATION MOMENTUM RISING

100%

The Investment Clock is in Reflation.

Recovery follows Reflation but we are
concerned investors are too optimistic on the
degree of ease that will come in the near
term, particularly in the US where stocks
prices are back at cycle highs. High
thresholds to effective action suggest things
may have to get worse before they get better
and it could still take a few months before the
conditions for a new Recovery phase are in
place.

OVERHEAT

RECOVERY

By plotting indicators for growth and inflation

against each other in two dimensions, we
monitor the economic cycle as it evolves.

G
R
O
W
T
H
M
O
M
E
N
T
U
M
R
I
S
I
N
G

50%

REFLATION

STAGFLATION

0%
0%

50%
Rolling 12
months

100%
Latest

Projection

Source: Fidelity. The chart shows growth and inflation indicators plotted against each other over time (each blue dot is a monthly
outcome) with the yellow dot being the most recent Investment Clock outcome. The axes show the probability between 0-100% of being
in a rising inflationary scenario and in a rising growth above long term trend scenario. For illustrative purposes only: this represents the
opinion of the portfolio manager.

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