Q1 2014 MARKET UPDATE | investment insights

Developed-Market Equities Look Attractive Again

For more than a decade, emerging-market (EM) economies have expanded at a higher rate than developed markets (DM). EM equities have outperformed DM stocks as global investors searched for growth opportunities. More recently, however, developed markets are benefiting from cyclical and secular tailwinds. Global investors can take advantage of these trends and the benefits of DM equities: They typically offer lower volatility, greater transparency, and more shareholder-friendly policies. And as the developed world continues to recover from past financial adversity, active in- vestors may discover inexpensive opportunities in companies with a more stable global footprint.

Economic Expansion Firmly Entrenched in Major Developed Markets • The global business cycle continues to indicate a relatively slow but steady upward growth trend. • and the U.S. remain in the mid-cycle stage, and other major European economies are in early-cycle recovery, and China remains in the late cycle despite some downside risks. • The generally improving global business cycle amid high levels of monetary accommodation continues to favor allocations to more economically sensitive assets, such as equities.

For developed economies, we use the classic definition of recession, involving an outright contraction in economic activity. For developing economies, such as China, we have adopted a “growth cycle” definition because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity, and deviation from trend tends to matter most for asset returns. Source: Fidelity Investments (AART) through Dec. 31, 2013. Developed-Market Equities Look Attractive Again

Secular Shift in World Equity Market Performance • Developed markets have outperformed EM equities on a sustained basis, the first such outperformance since 2001. • A broad underlying trend of incremental cyclical improvement in advanced economies has helped economically sensitive assets generate more favorable returns in developed markets. • These regional divergences have created a global environment of generally lower correlations across equity market returns, providing opportunities for active management.

Past performance is no guarantee of future results. Developed Markets represented by MSCI World Index. Emerging Markets represented by MSCI Emerging Markets Index. It is not possible to invest directly in an index. All indices are unmanaged. See index definitions on page 4. Source: FactSet, Fidelity Investments (AART) through Dec. 31, 2013.

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Non-U.S. Stock Valuations Still Below Average • Stocks, especially in Europe, could benefit from early-cycle dynamics and discounted valuations. • Trailing one-year P/E multiples in non-U.S. markets remain below long-term averages. Despite higher prices and multiple expansion, developed-market equities remain relatively attractive. EM equities have struggled and their P/Es remained compressed. • Using five-year peak earnings to calculate a cyclical P/E, non-U.S. developed markets are inexpensive, particularly Europe as it recovers from a severe recession. Many EM nations seem cheap on a cyclical basis amid weakening economies and investor outflows.

Past performance is no guarantee of future results. You cannot invest directly in an index. All indices are unmanaged. Price-to-earnings (P/E) ratio = stock price divided by earnings per share, which indicates how much investors are paying for a company’s earnings power. LEFT: Long-term average P/E for emerging markets includes MSCI EM Index data for 1988 to 2013. Long-term average P/E for non-U.S. developed markets includes MSCI EAFE Index data for 1978 to 2013. See index definitions for MSCI® Europe, Australasia, Far East (EAFE) Index and MSCI Emerging Markets (EM) Index on last page. RIGHT: Five-year peak earnings are adjusted for inflation. MSCI Europe Index is a free float–adjusted, market capitalization–weighted index of equity market performance in 16 countries; MSCI Japan Index is an unmanaged index that reflects the common stock prices of the index companies translated into U.S. dollars. MSCI Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Canada. MSCI Brazil Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Brazil. MSCI Ireland Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Ireland. MSCI Russia Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Russia. MSCI Index is a free float–adjusted, market capitalization– weighted index of equity market performance in Italy. MSCI Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Spain. MSCI Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Poland. MSCI Index is a free float–adjusted, market capitalization–weighted index of equity market performance in the UK. MSCI China Index is a free float–adjusted, market capitalization–weighted index of equity market performance in China. MSCI Korea Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Korea. MSCI Germany Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Germany. MSCI Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Australia. MSCI India Index is a free float–adjusted, market capitalization–weighted index of equity market performance in India. MSCI Mexico Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Mexico. MSCI Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Switzerland. MSCI Philippines Index is a free float–adjusted, market capitalization–weighted index of equity market performance in Philippines. Source: FactSet, country statistical organizations, Haver Analytics, Fidelity Investments (AART) as of Dec. 31, 2013.

3 Developed-Market Equities Look Attractive Again

Portfolio Implications • Decreased correlations may provide more investment opportunities across diverging regions and countries. • From an asset allocation perspective, increased diversity and reduced correlation may favor greater selectivity.

A positive cyclical backdrop and below-average valuations may support better risk-adjusted returns for equities in developed markets over EM equities, while lower correlations between global markets suggest a more favorable environment for active management.

This report is a product of the Asset Allocation Research Team (AART). AART conducts economic, fundamental, and quantitative research to develop asset allocation recommendations for Fidelity’s portfolio managers and investment teams. AART is responsible for analyzing and synthesizing investment perspectives across Fidelity’s asset management unit to generate insights on macroeconomic and financial market trends and their implications for asset allocation. For more information about developed-market equities, please refer to the Quarterly Market Update.

Views expressed are as of the date indicated, based on the Index definitions information available at that time, and may change based on MSCI® World Index is an unmanaged market capitalization– market and other conditions. Unless otherwise noted, the opinions weighted index that covers all investable large- and mid-cap provided are those of the author and not necessarily those of securities across the developed, emerging, and frontier markets Fidelity Investments or its affiliates. Fidelity does not assume any and targets approximately 85% of each market’s free float– duty to update any of the information. adjusted market capitalization. Past performance is no guarantee of future results. MSCI Emerging Markets (EM) Index is an unmanaged market Investment decisions should be based on an individual’s own goals, capitalization–weighted index of over 850 stocks traded in 21 world time horizon, and tolerance for risk. markets. Investing involves risk, including risk of loss. Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC. Neither asset allocation nor diversification ensures a profit or guarantees against a loss. If receiving this piece through your relationship with Fidelity Financial Advisor Solutions (FFAS), this publication is provided to All indexes are unmanaged and performance of the indices investment professionals, plan sponsors, institutional investors, and includes reinvestment of dividends and interest income and, unless individual investors by Fidelity Investments Institutional Services otherwise noted, is not illustrative of any particular investment. An Company, Inc. investment cannot be made in any index. If receiving this piece through your relationship with Fidelity Generally, among asset classes, stocks are more volatile than bonds Personal & Workplace Investing (PWI), Fidelity Family Office or short-term instruments and can decline significantly in response Services (FFOS), or Fidelity Institutional Wealth Services (IWS), this to adverse issuer, political, regulatory, market, or economic publication is provided through Fidelity Brokerage Services LLC, developments. Although the bond market is also volatile, lower- Member NYSE, SIPC. quality debt securities including leveraged loans generally offer higher yields compared to investment-grade securities, but also If receiving this piece through your relationship with National Financial involve greater risk of default or price changes. Foreign markets or Fidelity Capital Markets, this publication is FOR INSTITUTIONAL can be more volatile than U.S. markets due to increased risks of INVESTOR USE ONLY. Clearing and custody services are provided adverse issuer, political, market or economic developments, all of through National Financial Services LLC, Member NYSE, SIPC. which are magnified in emerging markets. 674641.1.0 © 2014 FMR LLC. All rights reserved.

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