December 2011 Learn About Investing Diversification - A tested investment principle The scale of the recent stock market turmoil has certainly taken its toll on investor confidence, leaving many to become extremely hesitant about investing in stock markets. But market volatility is not a new phenomenon and while many crisis events are etched in the minds of the investing public, few will recall that after each crisis markets tend to return to their previous levels within a relatively short period of time. This Learn About Investing provides a timely reminder of the stock market’s return profile over the long term and the importance of adhering to tested principles of successful investment. At a glance caused by terrorist attacks in 2001. Numerous investors are still experiencing the impact of the 2008 credit crunch and global recession. n Market volatility is once again, burning confidence levels among investors, with growing uncertainty over the future of the euro, America’s ability to halt its deficit escalation and China’s ability to withstand these offshore headwinds. Markets do not like uncertainty and often overreact to new developments. The short term-ism that characterises market psychology often means investors react to new developments with a worst-case scenario mindset. Add the herd mentality that also characterises investor behaviour and the result can be a huge disparity between stock market valuations and the net worth of companies they represent. n Crisis situations are not new ideas to the markets. Many have been and gone before and each offered a set of lessons to be learned. Time and time again, investors fail to keep crisis events in perspective. Actually casting the mind a little further beyond the recent history is where many lessons may be learned. As unsettling as dips can be, long-term history has shown that while stock markets have reacted strongly to major events, they have often resumed their upward trend within a very short space of time. Just another market crisis Currency collapses, terrorist attacks, hedge fund failures…there have been numerous crisis events that have affected stock markets over the past century. Many will vividly recall the 1997 Asian Financial Crisis, the 1999 internet bubble and the turmoil Major crisis in global stock market over the past 30 years 00 - 03: Dot com crash 6,000 Aug 98: Bailout of LTCM 5,000 Index 4,000 Aug 82: Mexican sovereign debt crisis 3,000 Aug 90: Gulf War Oct 87: Black Monday 03: SARS outbreak in Asia 97 - 99: Asian financial crisis 94: Mexican currency crisis 2,000 1,000 Aug 98: Russian Debt default Sep 01: Terrorist attacks in US 07 - 09: Global financial crisis 0 1980 1985 1990 1995 2000 Source: MSCI, Fidelity. Performance of the global stock market based on the MSCI World Gross Index (USD) from 1 Jan 80 – 31 Aug 11 2005 2010 December 2011 Diversification - A tested investment principle A portfolio should be diversified across asset classes to reduce risks and smooth returns. Defensive assets such as bonds and cash tend to fare better during periods of high market volatility, while growth investments like property and stocks provide attractive returns when economic conditions are expected to be more favourable. The value of bonds and stocks can often move in opposite directions, but taken together, a portfolio that invests in a range of quality assets should deliver attractive returns with lower risk. Asset class performance 50% Global Equities 40% Global Bonds 30% 20% Global Property 10% 0% -10% -20% Diversification is also important at the company level. During a market crisis, dramatic falls on global stock markets dominate the news headlines and lead readers to assume that every stock has collapsed in value. However, this may not be the case. Certain sectors of the market often perform better than others at different points in the economic cycle. During a downturn, market conditions tend to favour so-called defensive stocks, as these companies are less affected by economic cycles, can maintain earnings and continue paying dividends. Companies like electricity and gas distributors are classic examples. They generally operate under fixed, long term supply contracts and can pass on rising costs directly to the consumers who require energy to power their homes. Stock prices of growth companies tend to outperform as economic conditions improve as their earnings are more sensitive to economic conditions. The tourism industry is often one of the first to benefit from growing incomes and personal wealth as people tend to spend more on leisure travel. -30% -40% -50% -60% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD Source:Bloomberg, MSCI. Performance of asset classes as measured by the Citigroup World Government Bond (USD), MSCI World Gross (USD) and S&P Global Property ($US) indices, respectively. This is not to say that all defensive stocks will outperform during downturns; sometimes a traditionally defensive sector may not be favoured due to a range of other factors such as changing industry trends, government policies and competition from other companies. Given that sector return profiles vary according to a broad range of factors, a well-diversified stock portfolio that invests in a range of industries will generally smooth out the impact of the market’s highs and lows. Annual sector returns - market leadership varies from year to year Sector Returns -10% Consumer -11% Consumer Staples Disc. -14% Health Care 2001 -7% Materials -9% Energy 2002 -5% Consumer Staples -6% Materials -8% Energy -18% Financials -19% Utilities 2003 48% Info Tech 42% Materials 36% Industrials 36% Consumer Disc. 36% Financials 2004 25% Energy 24% Utilities 18% Industrials 16% Materials 15% Financials 2005 26% Energy 17% Materials 10% Industrials 10% Utilities 9% Financials 2006 32% Utilities 28% Telecomm Serv. 26% Materials 21% Financials 2007 2008 31% Materials 27% Energy -17% Industrials -19% -23% Consumer Health Care Disc. 24% Utilities 23% Energy -24% Utilities -26% Telecomm Serv. -30% Info Tech -24% Industrials -30% Telecomm Serv. -39% Info Tech 23% Telecomm Serv. 18% 15% Consumer Health Care Staples 15% Telecomm 14% Consumer 10% Consumer 5% Serv. Disc. Staples Health Care 8% Health Care 19% Consumer 18% Consumer Disc. Staples 16% Consumer 18% Utilities 18% Telecomm Serv. Staples -18% Financials 14% Info Tech -23% -25% Consumer -31% Utilities -36% Telecomm -39% Energy -43% Consumer Health Care Staples Serv. Disc. 4% Info Tech 2% Info Tech 4% Consumer 0% Consumer -12% Telecomm Staples Disc. Serv. 17% Industrials 16% Energy 9% Health Care 9% Info Tech 14% Industrials 2% Health Care -5% Consumer Disc. -11% Financials -44% Industrials -44% Info Tech -51% Materials -56% Financials 19% Consumer 16% Staples Health Care 9% Telecomm Serv. 2% Utilities 2009 58% Materials 51% Info Tech 37% Consumer Disc. 28% Financials 24% Industrials 23% Energy 2010 23% Consumer Disc. 21% Industrials 19% Materials 10% Consumer Staples 10% Energy 10% Info Tech 5% Telecomm Serv. 2% Financials 0% Health Care -5% Utilities YTD 30/9/11 0% Health Care -7% Utilities -9% Info Tech -12% Consumer Disc. -15% Energy -18% Industrials -23% Financials -25% Materials -1% Consumer -7% Telecomm Staples Serv. Source: Bloomberg, MSCI. Performance of sectors in the MSCI World Index (local currency) To know more, visit www.fidelity.com.hk FIL Limited and its subsidiaries are commonly referred to as Fidelity or Fidelity Worldwide Investment. Fidelity only gives information about its products and services. Any person considering an investment should seek independent advice on the suitability or otherwise of the particular investment. Investment involves risks. Past performance is not indicative of future performance. Please refer to the Fidelity Prospectus for Hong Kong Investors for further information including the risk factors. Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited. The material is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Futures Commission (“SFC”).