After three years of underperformance, emerging market investments are starting to outperform the U.S. equity market. Renewed interest in emerging markets is driven by multiple factors, such as rich valuations in some U.S. equity sectors, increased appetite for higher returns and pro-market government policies in several emerging market countries. For example, the recent elections in India resulted in a more than 20% rally.
Fidelity has several excellent emerging markets funds. For investors looking for a diversified investment in the space, the Fidelity Emerging Markets Fund (FEMKX) is a popular choice. The long-term chart shows that FEMKX has not provided steady returns for more than three years, but appears to be turning the corner:
For conservative investors the Fidelity New Markets Income Fund (FNMIX) offers an excellent choice to invest in the international bond market. FNMIX currently yields 4.62%.
The FNMIX chart shows that, in addition to the respectable income, significant capital appreciation can be achieved by investing in the FNMIX, as well. FNMIX has appreciated 4.65% since the April 1 buy signal that was issued by FidelitySignal.com. We think that both the fundamental and the technical factors are in place to support further gains.
The Fidelity Convertible Securities Fund (FCVSX) seeks a high level of total return by investing in convertible and preferred securities. The total return is achieved through a combination of income (the current yield is 2.16%) and capital appreciation.
The chart shows that FCVSX underperformed the broader market from February to mid May. Our expectation is that renewed interest in convertible securities will help FCVSX to resume its uptrend and that FCVSX will prove to be a solid investment in the coming months.
Well, it finally happened. The Fed announced today that it will start reducing its Quantitative Easing (QE3) program by tapering the bond purchases from $85 to $75 billion a month, starting in January 2014. The Fed also reassured investors that it will keep interest rates low for the foreseeable future.
The stock market reacted positively: the Fidelity Spartan 500 Index Fund made a new all-time high today and almost all equity funds closed up. The notable exception is the gold mining sector that continues its bear market.
The announcement pushed the yield on the 10–year treasuries higher, which in turn caused the Fidelity Spartan Long-Term Treasury Bond Fund (FLBIX) to go lower. We would continue to avoid investing in FLBIX until this long-term trend reverses.
The sell-off for equities was broad based today, which is not surprising in light of the almost uninterrupted advance since the October correction.
One troubling sign, however, is that defensive sectors are impacted as much, or even more so, than the more aggressive growth sectors. For example, telecom and energy utilities are regarded as conservative investments, because they can provide dividend income and stable returns. The two charts below show that the corresponding Fidelity Telecommunications and the Utilities Funds rolled over and entered into a declining phase.
On Friday, several Fidelity funds experienced large drops of their net asset values (NAVs). For example, the Fidelity Magellan fund showed a 5.57% drop. Other examples include the Latin America Fund (down 17.79%), the China Region Fund (down 9.2%) and the Select Technology Fund (down 6%).
The explanation is that Friday was the ex. date for the distributions of many Fidelity funds. The pay date for the funds is on Monday, December 9. For investors who chose to reinvest the distributions automatically, the value of their holdings will be adjusted on Monday. For investors who chose not to reinvest, their investment account will be credited by the distribution amounts.
The December dividends and the capital gains distributions for Fidelity funds are available on the following website:
The Fidelity Real Estate Income Fund (FRIFX) is one of the best mutual funds available for investors who want to participate in the U.S. real estate market. Unfortunately, the continued rise of interest rates has weakened the sector (see previous blog post) and FRIFX is not longer an attractive investment, at least until the real estate sector turns around.
High-flying stock market sectors have received a lot of news media attention this year, since the top sectors have produced outsized returns. For example, the Fidelity Select Biotechnology Fund (FBIOX) has gained 62.54% so far in 2013.
Will this performance continue in 2014? History of the stock market tells us that it is unlikely. In fact, we have to go back to 1999 to see similar returns. And we all know what happened in the aftermath of the speculative stock market bubble in 2000.
Looking ahead to 2014 most economist draw a picture of continued economic growth in the U.S. The problem is that this can lead to an early decision by the Fed to taper the QE3 program, which will likely to have a cooling effect on equity markets.
As we consider the best investments for 2014, it is worth taking a closer look at value investing again. Value investing is a risk-averse approach for investors who would like to participate in the equity markets, but are worried about the potential of a large stock market correction in 2014.
Our favorite investment in this space is the Fidelity Value Fund (FDVLX). FDVLX has returned 36.85% since November 30, 2012, when FidelitySignal.com issued the buy signal. The chart below shows that FDVLX has been a solid investment in 2013 and the bullish trend continues to stay uninterrupted.
The Fidelity Select Defense & Aerospace Fund has been an outstanding investment throughout 2013 with an excellent 41.57% year-to-date return. Top holdings include defense companies, such as United Technologies (UTX), Boeing (BA) and Precision Castparts (PCP).
The chart shows that FSDAX has accelerated its momentum and now moved up to the #4 ranked position on the Top 10 Fidelity Mutual Funds list. The next few trading sessions will show how much impact the Iran nuclear deal has on the defense sector and what to expect from FSDAX, as an investment.
U.S. equities have been making new highs almost daily and 2013 is clearly shaping up as one of the strongest bull markets of recent market history. But how dangerous is this market for investors looking to commit new capital?
The chart below shows the 15-year performance of the Fidelity Spartan U.S. Equity Index Fund (FUSEX) using monthly bars. This long-term chart shows that the great bull market of 2013 is still intact and has advanced without any serious interruption since December 2012.
However, a closer look at the RSI indicator (a technical indicator that measures overbought/oversold conditions) on the top of the chart shows an overbought condition. While the bull market can continue its positive momentum for weeks or months, U.S. equities are increasingly vulnerable to a serious correction or even a crash.
The S&P 500 index closed above 1,800 for the first time. The Dow also made a new high today, indicating a very bullish stock market.
The biggest gainer today was the biotechnology sector. The Fidelity Select Biotechnology Fund (FBIOX) was up 3.15% and continues to be the best performer of 2013 with an incredible 60.05% year-to-date gain. FBIOX shows a highly bullish chart pattern, since it broke through the blue resistance line.