leadership series 2016 OUTLOOK

Equity Sector Outlook

Opportunities and Risks in 2016
Equity Sector Outlook: Opportunities and Risks in 2016 Exhibit 1 Earnings growth was weaker than expected in most sectors
during 2015, but analysts forecast improved growth in 2016.
Our Perspective
The past year was a fairly challenging one for U.S. equity investors. The S&P 500® Index, a Earnings-Per-Share Growth in the 11 Major U.S. Equity Market Sectors
commonly accepted benchmark for U.S. large-cap stocks, was up 3.5% on a year-to-date basis
through Nov. 27, 2015, below the index’s long-term average. Only four sectors outperformed the
2015 EPS Growth 2015 EPS Growth 2016 EPS Growth
index: consumer discretionary, consumer staples, information technology, and health care. A
number of factors inhibited stock returns during this period, including:
Estimate (Begin) Estimate (End) Estimate
40%
• Mounting concerns about global growth, particularly driven by a growth slowdown in
China and recessionary pressures in other emerging markets
20%
• The growing likelihood of a new Federal Reserve rate-tightening cycle

• A steep decline in commodity prices 0%

In this publication, Fidelity sector portfolio managers outline what they view as compelling
investment opportunities in 2016, along with some key risks. A number of the investment themes –20%
identified may influence returns in multiple sectors. For example:

• Product innovation continues to be a major theme influencing earnings growth and the
–40%
battle for market share among certain industries, especially within the information technology,
health care, and telecom sectors.

• Improving conditions in the U.S. housing and non-residential construction markets may –60%
provide additional growth opportunities for well-positioned companies within the real estate,
industrials, and financial sectors.
–80%
• Given low-cost debt financing, attractive free cash flows, and reasonable valuations, a recent

MSCI USA IMI

Utilities
Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecommunication
Services

Real Estate
uptick in merger activity, corporate restructurings, and shareholder activism in the health care,
real estate, and information technology sectors may accelerate in 2016 as companies look to
grow their businesses.

• The prospect of an interest-rate-tightening cycle by the Federal Reserve may continue

to present headwinds for the utilities and real estate sectors in 2016. On the other hand,
rate-sensitive financials could finally see some margin expansion as rates move higher.

Finally, the relative strength of the U.S. economy compared to other parts of the world continues to
underpin favorable business conditions across many equity sectors. We hope that these research
insights—which reflect the vast capabilities of a global research team following more than 2,700
companies worldwide—provide value to our investors in the coming year.
Sincerely,
EPS: earnings per share. Estimate: Wall Street stock analysts’ consensus. EPS Growth Estimate for
2016 was as of Oct. 31, 2015. The 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014. 2015
EPS Growth Estimate (End) data include reported earnings as of Oct. 31, 2015, combined with EPS
estimates for Q4 2015. Sectors classified in accordance with the Global Industry Classification Standard
(GICS®). MSCI USA Investable Market Index (IMI) represents the investable universe of companies in
the U.S. equity market. Companies of the MSCI USA IMI are classified according to the Global Industry
Classification Standard (GICS®). Source: FactSet, Fidelity Investments, as of Oct. 31, 2015.

Christopher Bartel
Head of Global Equity Research
Fidelity Investments
 Equity Sector Outlook
Opportunities and Risks in 2016

Fidelity sector portfolio managers

Consumer Discretionary 4 Information Technology 16
provide their views on potential Peter Dixon Charlie Chai
investment opportunities and
the major risks in each sector
in 2016. Consumer Staples 6 Materials 18
Robert Lee Tobias Welo

Energy 8 Real Estate 20

John Dowd Steven Buller
Samuel Wald

Financials 10 Telecommunication Services 22

Christopher Lee Matthew Drukker

Health Care 12 Utilities 24

Eddie Yoon Douglas Simmons

Industrials 14 Periodic Table of

Tobias Welo U.S. Equity Sector Returns 26

3
leadership series 2016 OUTLOOK

Consumer Discretionary
Peter Dixon, Sector Leader

There are several positive tailwinds for U.S. consumers
as we approach 2016: low gasoline prices, improving
residential housing conditions, falling unemployment, low
inflation, and low interest rates. At the same time, from
a business cycle standpoint, I would not characterize the
entire consumer discretionary sector as a “fat pitch”—an
investment with greater odds of outperforming based on
historical trends. Consumer discretionary stocks generally
tend to outperform the broader market most often in the
early stages of the business cycle or an economic recovery.
Currently, the U.S. economy is viewed by many economists
as being in the mid-cycle phase, with the prospect of rising
interest rates looming in the near term (though interest
rates are likely to remain very low relative to previous
cycles). The sector’s historical performance during Federal
Reserve rate-tightening cycles is spotty at best. Further, the
economy is now more than six years into a post-recession
recovery, and the performance of consumer discretionary
stocks has been exceptional during this period. As a result,
I believe it’s important to be selective within the sector,
and our consumer research team continues to identify
compelling investment opportunities.
Investment Opportunities
Retail brands with controlled distribution and pricing
With the growth of Internet-based retailing and consumers’ abil-
ity to identify and purchase goods based purely on obtaining the
lowest price, or some additional benefit such as free shipping or
corporate rewards incentives, retail companies with strong cus-
tomer brand allegiances and those that control the distribution
and pricing of their products have looked increasingly attractive.
For example, there are certain manufacturers of innovative
sneakers, women’s lingerie, casual brand apparel, and specialty
coffee that are growing in popularity with consumers. These
manufacturers distribute their products primarily through their
sales growth, as well as the fastest earnings growth potential in
2016 and beyond, provided they are well managed. Conversely, Exhibit 1 Consumer Discretionary sector EPS growth
companies that widely distribute more commoditized products—
Year-over-Year Change
such as packaged snack foods—via Internet-based retailers
20%
or brick-and-mortar box retailers are likely to experience more
18%
headwinds to earnings growth due to increased price competi-
16%
tion or product substitution.
14%
12%
Increased demand for auto parts
The sales and earnings of automobile parts manufacturers and 10%
8%
retailers are likely to benefit from strong demand for new car
6%
sales, as well as consumer preferences for extending the life
4%
of their cars. From a global basis, the unit sales volume of new
2%
autos has been growing. In addition, new auto safety and emis-
0%
sions standards are expected to increase through 2020, both in 2015 Estimate (Begin) 2015 Estimate (End) 2016 Estimate
the U.S. and throughout the world, which will boost demand for
EPS: earnings per share. Estimate: Wall Street stock analysts’ con-
parts makers that are positioned to benefit from these trends. sensus. 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014.
The amount of parts per vehicle—such as bumper sensors, wir- 2015 EPS Growth Estimate (End) includes reported earnings as of
ing, etc.—has been increasing and will likely increase each year Oct. 31, 2015, combined with estimated earnings for the remainder of
2015. Source: FactSet, Fidelity Investments, as of Oct. 31, 2015.
to accommodate new safety and emissions regulations.1
From a used car market perspective, more people tend to own Exhibit 2 U.S. auto drivers have been spending more
their cars longer than they have in the past because cars are time on the roadways
generally made better and last longer.2 Rather than purchasing a
3,500,000 5%
big-ticket item such as a new car, more middle-class consumers
YoY Change 4%
are choosing to spend smaller amounts on replacement parts
3%
and maintenance for a preowned car, which benefits the sales of 3,250,000
2%
after-market parts manufacturers. At the same time, the number
1%
of miles driven by U.S. consumers has increased, which means
3,000,000 0%
consumers are driving their cars more often and therefore are
–1%
likely to require more repair service (Exhibit 2).
–2%
2,750,000
Favorable supply/demand dynamics in hotels & lodging –3%
Vehicle Miles of Travel, U.S.
Demand for hotels and lodging is expected to continue outpac- –4%
(Miles, millions)
ing supply for the next 2-3 years, a trend that should provide 2,500,000 –5%
broad support for earnings growth and stocks in this industry. In

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1999
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2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
own stores, and thus are able to maintain full pricing. My view recent company and industry reports, the average revenue
is that these types of companies offer the potential for the best
Miles travel shown reflects trailing 12 months total. Source: Federal
4 Highway Administration, as of Aug. 31, 2015.
CONSUMER DISCRETIONARY

per available room has risen, reflecting favorable supply/demand which in turn have been a function of the steadily growing U.S.
conditions. In addition, the earnings of certain hotel/lodging economy. Should the economic backdrop take a turn for the Exhibit 3 The sector’s valuation relative to the broader
companies are likely to benefit from monetizing certain real worse into recession, it is likely that consumer discretionary
equity market is slightly above historical average
estate assets at peak prices or spinning off ancillary businesses, stocks would underperform. I don’t see any signs that a reces-
such as time-share operations. Debt reduction, share buybacks, sion is imminent, and investors should also keep in mind that 1.35
and companies that are becoming less capital intensive also the sector’s performance relative to the broader equity market 1.30
have the potential to further boost relative earnings growth, has been quite strong in recent years (Exhibit 3). 1.25 +1 Std.Dev Sector Rel P/E
which should support stock prices. 1.20
Sharply rising interest rates a potential headwind 1.16
1.15
Risks: What to Watch During prior Fed interest rate-tightening cycles in 1994, 1999, 1.14
1.10
U.S. economic recession would dampen demand for and 2004, consumer discretionary stocks underperformed the 1.05
consumer discretionary items broader equity market. The sector’s performance relative to 1.00
Sector Rel P/E Avg.
So far, 2015 has been another good year for consumer discre- the broader market was negative in each scenario during the 0.95 –1 Std.Dev
six-month period following the initial rate hike.4 The Federal 0.90
Recession
tionary stocks.3 Many of the sector’s positive returns have been
driven by the favorable consumer tailwinds described earlier, Reserve’s stated intention to raise rates very gradually could 0.85

Nov-95
Nov-96
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Nov-04
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minimize this headwind relative to previous tightening cycles.

Peter Dixon l Sector Portfolio Manager Std. Dev: standard deviation. Rel P/E: price to earnings ratio relative
to S&P 500 Index P/E ratio. Source: Factset, Fidelity Investments, as
Peter Dixon is a portfolio manager for Fidelity Investments. He currently manages several sector portfolios and of Nov. 13, 2015.
subportfolios, and serves as sector leader of the consumer discretionary and consumer staples research teams.

Fidelity Thought Leadership Vice President Kevin Lavelle provided 2

editorial direction for this article.
The consumer discretionary industries can be significantly af-
fected by the performance of the overall economy, interest rates,
competition, consumer confidence and spending, and changes in
demographics and consumer tastes.
See the glossary at the end of this piece for more information on
any terms.
Endnotes
1
Source: Delphi reports, Fidelity Investments, as of Nov. 15, 2015.
The average age of passenger cars in the U.S. has gradually risen
from 9.1 years in 2000 to 11.4 years in 2014. Source: R.L. Polk &
Company, as of Sept. 30, 2015.
3
YTD through Sep. 30, 2015, consumer discretionary stocks (as
part of the S&P 500 ® Index) were up 4.1%, the top-performing
sector, while the broader equity market (S&P 500 ® Index) fell 5.3%.
Source: FactSet, Fidelity Investments, as of Sep. 30, 2015.
4
Source: Haver Analytics, Fidelity Investments, as of Nov. 13,
2015.

5
leadership series 2016 OUTLOOK

Consumer Staples
Robert Lee, Sector Leader

Consumer staples stocks have held up well relative to the
broader U.S. equity market and other equity sectors during
the past year, despite some challenging global macroeconomic
headwinds. For example, many foreign currencies have depre-
ciated relative to the U.S. dollar, resulting in slower earnings
growth for domestic staples companies that earn some of their
profits overseas. Concerns about slowing growth in China and
reverberating effects in other emerging markets have caused
some turmoil in the equity markets, particularly during the
third quarter. Still, the stocks of consumer staples generally
have held up well because of their stable growth prospects,
high dividend yields, and low volatility. Against this backdrop,
I have positioned the portfolio with a focus on multinational
companies with strong brands that have the ability to raise
prices in emerging markets over time (to help offset the recent
currency depreciation), and on U.S.-based companies that
have reasonable valuations and are growing market share in
their respective categories.
Investment Opportunities
Companies with pricing power in faster-growing
emerging markets
Organic sales growth rates remain stronger in emerging markets
than in developed-country markets, and I continue to believe
that investing in staples companies that sell leading brands and
are growing market share in these faster-growing areas will be
a rewarding long-term strategy. With incomes on the rise for
consumers living in emerging markets such as China, India,
Indonesia, and Brazil, spending on consumer staples items has
grown much faster than the growth rates of their populations
and the growth rates in the U.S. (Exhibit 2). As incomes con-
tinue to increase over the coming decades, the growth potential
historically has more than offset the negative effects of currency
depreciation. Specifically, some staples companies in Brazil Exhibit 1 Consumer Staples sector EPS growth
recently raised prices 10%-20% to help offset the steep cur- Year-over-Year Change
rency depreciation in 2015, and to protect their profit margins. In 9%
my view, the companies I am focusing on have the ability to raise 8%
pricing gradually over time, and the values of their businesses 7%
are not likely to be permanently impaired by the steep currency 6%
depreciation that recently occurred in certain markets (Exhibit 5%
3). In addition, some staples brands in these emerging markets 4%
have few competitors, and customers have demonstrated a 3%
greater interest in owning the leading brand vs. a discount or 2%
store-labeled product. 1%
0%
Lower commodity prices may boost profit margins –1%
Falling commodity prices in 2015 are likely to result in lower 2015 Estimate (Begin) 2015 Estimate (End) 2016 Estimate
manufacturing input costs for many staples companies, provid- EPS: earnings per share. Estimate: Wall Street stock analysts’ con-
sensus. 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014.
ing support for profit margins in the coming year. Commodities 2015 EPS Growth Estimate (End) includes reported earnings as of
such as glass (spirits companies), aluminum (beverage compa- Oct. 31, 2015, combined with estimated earnings for the remainder
nies), grain (cereal companies), and crude oil (plastic bottles) of 2015. Source: FactSet, Fidelity Investments, as of Oct. 31, 2015.
are used as manufacturing inputs for products, packaging, and
transportation by many companies. Staples manufacturers tend Exhibit 2 Sales growth among consumer staples has
to purchase commodities in bulk and use futures and other been stronger in emerging vs. developed markets
hedging strategies, and thus there is often a lag between the Year-over-Year Sales Growth Rate
time commodity prices fall and the time lower-priced commodity 14%
costs flow through to a company’s profit-and-loss statement. 12%
For this reason, the favorable trends in many commodity costs 10%
Emerging Markets
during the past year should provide a favorable environment for 8%
profit margins in 2016. 6%
4%
Risks: What to Watch 2%
Developed Markets
Shifting consumer tastes and spending habits may 0%
erode earnings –2%
In many parts of the developed world, consumer preferences

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Jun-15
for many staples companies in emerging markets remains a
massive opportunity. can change for a variety of reasons, such as the desire to live a
healthier lifestyle or changes in a household’s economic status,
In addition, certain leading companies in these markets have Data shown from a basket of consumer staples manufacturers in
and dampen profitability for certain product categories. each segment. Source: Company filings, as of Sep. 30, 2015. Analy-
demonstrated the ability to boost pricing over time, which sis by Fidelity Investments.

6
CONSUMER STAPLES
For example, in recent years more U.S. consumers have been
moving away from big, mega-brands in some food categories
and purchasing more artisan products instead. This is particu-
larly evident in food consumption, where consumers have been
more willing to purchase fresh, unprocessed (and at times more
costly) food. This trend has coincided with less desire for fully
prepared, mass-produced frozen meals, which have declined in
popularity. Such trends are worth monitoring because they can
alter the earnings growth prospects for some manufacturers.
Unexpected global economic slowdown could
hinder returns
Global recessions can have a negative impact on the earnings
of staples companies, but that’s when the stocks of staples
companies typically tend to outperform the broader equity
Robert Lee l Sector Portfolio Manager
Robert Lee is a portfolio manager for Fidelity Investments. He currently oversees several consumer staples sector portfolios
and subportfolios. He joined Fidelity Investments as a research analyst in 2001.
Fidelity Thought Leadership Vice President Kevin Lavelle provided
editorial direction for this article.
The consumer staples industries can be significantly affected by
demographic and product trends, competitive pricing, food fads,
marketing campaigns, environmental factors, government regulation,
the performance of the overall economy, interest rates, and consumer
confidence.
7
market. During the second half of 2015, the equity markets
experienced episodic periods of heightened volatility, which can Exhibit 3 Despite weakening local currency
be attributed in large part to the ebbs and flows of economic data
values vs. the U.S. dollar, emerging markets
both in the U.S. and abroad, notably in China. Should the global
economy experience an unexpected downturn in 2016, staples have grown sales (U.S. $ terms) rapidly over time
stocks may follow suit, but the sector’s defensive characteristics Cumulative Growth in Consumer Staples Sales by
would likely allow it to hold up well relative to more economically
Country (1997 to 2014)
sensitive equity sectors. In such an environment, the sales and
earnings of multinationals with exposure to emerging markets +600%
could be affected; in certain countries, staples represent a more
+507%
significant portion of the average consumer’s income and thus
may be more likely to be cut out of household budgets. A slower +400%
+262%
economic growth environment also can lead to price wars on
various products, as companies look to maintain market share.
+200% +144%
Such competition tends to reduce corporate earnings. +113%
+48%
0%
India Russia Mexico Brazil USA
Sales growth rates in USD and represent the average across a
basket of the following representative staples categories: beer, soft
drinks, biscuits/cookies, sweet and savoury snacks, toothpaste, and
diapers. Source: Euromonitor, as of Dec. 31, 2014.
leadership series 2016 OUTLOOK
Energy
John Dowd, Sector Portfolio Manager
Falling crude oil prices in 2015 continued to put significant
pressure on corporate profits and stock prices within the
energy sector. The decline in oil prices was exacerbated
in 2015 by unexpected supply growth (about 1.5 million
barrels per day) from the Organization of Petroleum
Exporting Countries (OPEC), making it unprofitable for
many U.S. exploration and production (E&P) companies to
continue drilling, and forcing them to reduce rig counts,
cut back operations, and slash costs. As of the end of
November, there was a massive global inventory overhang
of oil, which is reflected in per-barrel prices and energy
stocks in general. Global demand for the commodity has
been surprisingly better than expected, but not significant
enough to offset the larger increase in supply.
However, nothing fixes low oil prices like low oil prices,
so the self-correcting nature of the oil industry is likely to
result in a rebalancing of the market going forward in 2016,
provided demand continues to increase and OPEC members
refrain from additional production increases (Exhibit 2). In
the final months of 2015, U.S. oil production has stopped
growing, with rig counts having fallen by roughly 60%. This
significant decline in non-OPEC oil production is a positive
development for the sector’s intermediate-term outlook.
Investment Opportunities
Continued focus on capital-efficient, higher-quality
U.S. energy companies
During this challenging period of declining oil prices, I have
focused on those U.S. E&P companies that have been
strategically positioned in the most productive shale oil fields,
such as the Eagle Ford and Permian areas in Texas, and the
Bakken region in North Dakota. During the past few years,
these companies have been growing profits at a faster rate
because it has been more cost-effective for them to extract oil
and natural gas via modern fracturing technologies relative to
other companies operating in less-efficient drilling fields.
8 Nov. 30, 2015.
In the current environment of $40- to $50-per-barrel oil prices,
many E&P companies might not survive, because it is no longer Exhibit 1 Energy sector EPS growth
profitable for them to continue producing oil. However, many of
Year-over-Year Change
the more capital-efficient companies in these aforementioned
0%
shale regions tend to have stronger balance sheets, and
therefore are likely to weather the challenging environment –10%
more effectively if it persists in 2016. Similarly, in the energy –20%
services industry, the leading companies with the strongest cash
–30%
flows, the least amount of debt, lowest costs, and the greatest
economies of scale are likely to persevere in this environment. –40%
–50%
Low valuations typically have been an attractive
entry point –60%
The energy sector’s valuations have fallen to historic lows, based –70%
on a variety of measures, including relative price-to-book ratio 2015 Estimate (Begin) 2015 Estimate (End) 2016 Estimate
(Exhibit 3). The energy sector environment is very challenging EPS: earnings per share. Estimate: Wall Street stock analysts’ consen-
right now, worse than during prior bear markets in energy, such sus. 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014. 2015
as in 1986, in 1998, and in 2008. In fact, the quarterly profits- EPS Growth Estimate (End) includes reported earnings as of Oct. 31,
2015, combined with estimated earnings for the remainder of 2015.
per-barrel of one large integrated energy bellwether recently
Source: FactSet, Fidelity Investments, as of Oct. 31, 2015.
went negative for the first time in at least a generation.
Exhibit 2 Non-OPEC oil supply growth has declined
However, when valuations historically have fallen to these levels,
it has been a good time to own energy stocks because they have
sharply as global demand has held relatively steady
generally rebounded and outperformed the broader market. In Non-OPEC Oil Supply Growth and Global Demand
the past, investors have tended to overreact to near-term supply- 3-Mo. Avg./Year-over-Year Growth (Mbpd)
and-demand imbalances; as we’ve seen during the past several 5
months, stock prices have moved in lockstep with oil prices. 4 Worldwide Demand
3
Going forward, I do believe there is a greater likelihood that 2
1
oil prices will recover rather than decline to significantly lower
0
levels, and I don’t think the broader market—based on current
–1
stock prices—is discounting that possibility. All of the gloom is
–2 Non-OPEC Supply
generally reflected in the historically low valuations for energy –3
stocks as if this environment is permanent, but I don’t believe –4
2010
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2012
2013
2015
1997
1996
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2001
1999
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2002
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2009
2016e
it is. In addition, ongoing geopolitical turmoil in the Middle East
always has the potential to disrupt global supply, which could
Mbpd: millions of barrels of oil per day. Dotted lines represent fore-
push oil prices higher.
casts. Source: Based on International Energy Agency (IEA) data from
OECD/IEA, © IEA Publishing; modified by Fidelity Investments, as of
ENERGY

Risks: What to Watch remain at current low levels, more E&P companies could be
Further increases in OPEC oil production forced out of business. Exhibit 3 Energy stock valuations are at
If OPEC increases crude oil production capacity in 2016, it
would likely put further pressure on per-barrel prices and
Economic shock could curtail demand for energy historical lows
The energy sector has been in a recession during the past Energy Sector Relative Price-to-Book Ratio
delay a recovery in the energy sector. Two scenarios worth
year or more, but the rest of the global economy has fared
monitoring: Iran is likely to boost production once sanctions (1952-2015)
reasonably well, especially developed economies. If the global
are lifted, and Saudi Arabia may seek to grow its market 1.8
economy were to decline due to further weakness in emerging More Expensive
share. Absent any major macroeconomic events (e.g., global 1.6
markets or some unexpected event, then demand growth for
recession), I expect global demand to continue to grow, which
oil (currently about 1.8 mbpd, see Exhibit 2) would likely slow 1.4
would be a positive driver for oil prices, provided supply
sharply. Such an event would lead to even lower oil prices, and 1.2
remains in check. Overall, U.S. E&P companies in aggregate Average
put further pressure on many companies currently fighting to 1.0
are not profitable at current per-barrel prices, so if oil prices
survive. 0.8
0.6
Less Expensive
0.4

1980
1984
1988
1992
1996
2000
2004
2008
2012
2014
1952
1956
1960
1964
1968
1972
1976
John Dowd l Sector Portfolio Manager
Data shown represents price-to-book (P/B) ratio of energy stocks
John Dowd is a portfolio manager for Fidelity Investments. Mr. Dowd currently manages energy sector portfolios and relative to the P/B ratio of the largest 1,500 U.S. stocks, weighted by
subportfolios. He joined Fidelity in 2005 as an equity research analyst. market capitalization. Source: Corporate reports, Empirical Research
Partners, as of Sep 30, 2015.

Fidelity Thought Leadership Vice President Kevin Lavelle provided

editorial direction for this article.
The energy industries can be significantly affected by fluctuations
in energy prices and supply and demand of energy fuels, energy
conservation, the success of exploration projects, and taxes and
government regulations.
The commodities industries can be significantly affected by
commodity prices, world events, import controls, worldwide
competition, government regulations, and economic conditions.
See the glossary at the end of this piece for more information on
any terms.

9
leadership series 2016 OUTLOOK
Financials
Christopher Lee, Sector Leader
It is not unusual to highlight the role of interest rates and
economic health when considering an investment in the
financials sector. However, in 2016 these elements may play
a comparatively larger role. Due to a combination of devel-
opments in U.S. monetary policy, the country’s position in
the business cycle, and global market dynamics—especially
in emerging market countries—the economy is at a notable
juncture. Cases could be made for economic growth to accel-
erate, muddle along, or decelerate. Such an uncertain outlook
will provide an interesting backdrop for investing in the
financials sector, one that will present opportunities involving
the housing market recovery, consumer-centric banks, and
merger-and-acquisition (M&A) targets. Risks include global
disinflationary forces and volatility.
Investment Opportunities
The U.S. housing market recovery remains on course
From a macro perspective, the U.S. economy appears to be
entering a later stage of the business cycle. On the other hand,
housing has recovered more slowly from the financial crisis than
the overall economy has, and this sector is in the mid-stage of
its business cycle. Limited access to credit and tight lending
standards are just two of the reasons the housing recovery has
been more gradual than that of the overall economy. Notably,
both of these headwinds are easing. At this stage, the character-
istics of the housing group paint a favorable picture for the U.S.
housing market and should create opportunities for companies
in industries such as real estate services and housing finance.
U.S. consumer’s improved financial strength
The debt-to-equity positions for consumers have improved
markedly since the financial crisis due to their lower debt
balances and improved savings position (Exhibit 2). Whichever
economic scenario comes to pass in 2016, the U.S. consumer
is in a much better position to withstand it or benefit from it.
This is a favorable customer profile for consumer-centric lenders
and banks, because they stand to benefit from increased
10
consumer spending and borrowing. Credit losses are likely to
remain benign. If rates rise from here, it is probably indicative Exhibit 1 Financials sector EPS growth
of the economy picking up; therefore, the consumer is likely to
Year-over-Year Change
have more economic capacity in the form of wages to make debt
16%
payments. Conversely, if rates remain low, debt payments should
remain manageable. These developments in the consumer 14%
sector are in contrast to those in the corporate sector, where 12%
debt levels have risen—especially in the industrial and energy 10%
areas—and may pose more risks than the consumer sector. 8%
Consolidation may pick up 6%
Typically, as an economy emerges from a financial crisis, the 4%
market experiences bank consolidations. However, this has not 2%
taken place post-2009. As a result, the financials sector’s overall
0%
participation rate in M&A has been below average (Exhibit 3). 2015 Estimate (Begin) 2015 Estimate (End) 2016 Estimate
Regulatory concerns and low interest rates have depressed
EPS: earnings per share. Estimate: Wall Street stock analysts’ con-
valuations, thereby constraining activity as sellers have awaited sensus. 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014.
better conditions. While there have been pockets of consolida- EPS Growth Estimate (End) includes reported earnings as of Oct. 31,
tion—e.g., insurance, exchanges—M&A in the banking group 2015, combined with estimated earnings for the remainder of 2015.
Source: FactSet, Fidelity Investments, as of Oct. 31, 2015.
and asset managers has lagged relative to other areas of the
broader market. As a result, enthusiasm for banks and some
other financial industries has been lackluster. With regulatory Exhibit 2 Historical household debt service ratio
clarity improving for banks, the prospects for consolidation have 14
improved and, at the same time, do not appear to be fully priced Household Debt Service Ratio
into the market. 13 (Seasonally Adjusted, %)
Risks: What to Watch 12
Deflationary pressures
11
While the United States and some European countries are
gaining traction in terms of economic growth, downward pricing 10
pressures emanating from financial weakness in China and an Historical Average
oversupply of oil have raised the specter of deflation. Weaker 9
Chinese demand for commodities has rippled through emerging
markets, leaving many commodities at depressed levels. This 8
Mar-80
Jan-83
Nov-85
Sep-88
Jul-91
May-94
Mar-97
Jan-00
Nov-02
Sep-05
Jul-08
May-11
Mar-14
backdrop was a factor at the Federal Reserve’s September Fed-
eral Open Market Committee meeting, when it decided not to
Source: Haver Analytics, as of June 30, 2015. Debt service ratio
equals cash available to cover current debt obligations.
FINANCIALS

raise the federal funds rate. In addition, the strong appreciation significant headwinds. This dynamic could bolster volatility as
of the U.S. dollar has already tightened financial conditions, investors look to reallocate assets in an attempt to reduce Exhibit 3 Financials sector M&A trend
leaving less need for the Fed to raise rates. In other words, rates portfolio risk.
may be lower for even longer. If the Fed keeps short rates low in Billions
Another potential source of volatility could be the evolving market
the coming years because of global deflationary pressures, bank $1,400 Financials 33%
structure for bond trading—especially in stressed or challenging
earnings may remain pressured. Without the opportunity to Announced M&A % of Total 31%
market environments. Regulations enacted since the financial $1,200
improve income with the help of higher rates, banks could face 29%
stagnant or narrower margins and weaker earnings. crisis have imposed stricter capital requirements on dealers for $1,000
holding and/or hedging asset types deemed to be riskier than 27%
Potential for increase in volatility Treasury securities. As a result, there are fewer intermediaries, $800 25%
After experiencing years of central banks’ easy monetary and those who remain are less active in the capital markets. In $600 23%
policies, the capital markets may be influenced by a period of such an environment, market dislocations can contribute to
21%
greater policy divergence between economies that are growing, pricing that does not reflect accurate valuations, whether mea- $400
19%
such as that of the United States, and those that are facing sured from a fundamental or relative perspective.
$200 17%
$0 15%

2000

2004

2009
2006

2008
2003

2005
2002
1999
1996

2007
1998
1995

2001
1997

2012
2013

2015
2010

2014
2011
Christopher Lee l Sector Portfolio Manager
Christopher Lee is a portfolio manager and research analyst for Fidelity Investments. He currently manages several financials
sector portfolios and subportfolios. Mr. Lee is responsible for covering global investment bank and universal bank stocks Source: Dealogic, as of Oct. 30, 2015.
within the financials sector. He joined Fidelity in 2004.

Sector specialist Michael Griffith, CFA, also contributed to this

article. Fidelity Thought Leadership Vice President Geri Sheehan,
CFA, provided editorial direction.
The financials industries are subject to extensive government
regulation, can be subject to relatively rapid change due to
increasingly blurred distinctions between service segments, and
can be significantly affected by availability and cost of capital funds,
changes in interest rates, the rate of corporate and consumer debt
defaults, and price competition.

11
leadership series 2016 OUTLOOK

Health Care
Edward Yoon, Sector Leader

The health care sector is considered to be defensive in companies that are positioned to compound earnings at
nature, due to the fact that its products and services reasonable valuations are attractive to me. There may be Exhibit 1 Health Care sector EPS growth
are largely essential. Even during economic downturns, fewer opportunities in small- to mid-cap biotech companies Year-over-Year Change
people still require medical attention; therefore, consistent where valuations appear somewhat stretched relative to 18%
demand for goods and services makes health care their potential upside. That said, the exciting idiosyncratic 16%
companies less sensitive to business cycle fluctuations. nature of biotechnology companies means there should be
14%
Given this lack of economic sensitivity, the key drivers of investment opportunities selling at attractive earnings multiples
12%
growth within the sector tend to be longer-term themes. as companies enter different phases of product development,
10%
Looking out to 2016, the investment themes that are likely followed by drug launches. Overall earnings growth in the
to drive outperformance in the sector are similar to those sector, according to consensus estimates, is forecasted to 8%
in 2015, with changes only at the margin. For example, decline modestly relative to 2015 but remain at healthy double- 6%
the vibrant thread of innovation running through the sector digit levels (Exhibit 1). 4%
should continue to present opportunities—particularly in 2%
the areas of biotechnology, medical devices, and health Improving employment picture driving medical service 0%
care information technology (HCIT). In terms of concerns, utilization rates 2015 Estimate (Begin) 2015 Estimate (End) 2016 Estimate

policy risk will take on a new dimension in the presidential
election year—especially with regard to prescription drug
pricing. Having said that, it is unlikely that the economic
structure of the health care market will materially change.
Investment Opportunities
Powerful long-term trends expected to drive
revenue growth
Underpinning performance in the health care sector are
three powerful long-term trends with favorable implications
for revenue growth. First, the global population is aging,
which requires all manner of support from health-care-related
products and services. Second, the emerging middle class in
developing countries is having a growing impact on the market.
This relatively new population tier has more money to spend
on health care. Third, a tremendous innovation wave is
under way across all parts of the sector—particularly in the
biotechnology industry.
As these trends persist, fundamentals and valuations fluctuate.
A declining U.S. unemployment rate is a positive indicator for EPS: earnings per share. Estimate: Wall Street stock analysts’ con-
medical service utilization trends, including doctor visits and sensus. 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014.
2015 EPS Growth Estimate (End) includes reported earnings as of
hospitalization admissions (Exhibit 2). Employed people tend
Oct. 31, 2015, combined with estimated earnings for the remainder of
to visit doctors more often and opt to have elective procedures. 2015. Source: FactSet, Fidelity Investments, as of Oct. 31, 2015.
Another tailwind for utilization is the Affordable Care Act (ACA).
With millions of previously uninsured Americans having access Exhibit 2 Hospital admissions increase when
to health insurance, there should be an increase in health care unemployment decreases
utilization over time. If core utilization increases, it would be
Hospital Admissions vs. Unemployment Rate
positive for industries such as hospitals, medical equipment and
supplies, and pharmaceutical manufacturers and distributors. (Inverted, Lagged Two Years)
Increased core utilization will likely be a headwind for health 6% 0%
maintenance organizations (HMOs), which will have to pay more 4% Total U.S. Hospital 2%
for these services. Admissions Growth
2% 4%
Another possible result of this trend is the development of
0% 6%
deflationary pressures owing to more citizens adapting to the
–2% 8%
new insurance environment. There will likely be acceleration in Unemployment Rate
the adoption of high-deductible health insurance plans ahead 10%
–4%
of the anticipated 2018 “Cadillac Tax”—a tax on employer-
sponsored high-cost health benefits. These plans require  –6% 12%

2007
1980

1983

1986

1989

1992

1995

1998

2001

2004

2010

2013
Looking out to 2016, larger-cap, stable, high-quality growth consumers to pay more out-of-pocket expenses, which could
Source: American Hospital Association (http://www.aha.org/research/
index.shtml) and U.S. Census Bureau, as of 12/31/2014. Shaded areas
12 indicate recessions.
HE ALTH CARE
discourage them from obtaining certain medical services and
motivate them to shop for services on the basis of value.
Pharmaceutical companies likely to benefit from
fewer patent expirations
In 2015, pharmaceutical companies posted dramatic growth
owing in part to the release of new hepatitis C drugs. The
pharmaceutical group should continue to post strong growth
in 2016, but without the benefit of a major product entering
the market, the year-over-year comparison may reflect a
deceleration. On the plus side, pharmaceutical company
revenues should get a boost from fewer expiring patents in
the coming year. Within the sector, specialty-pharmaceutical
companies (vs. large, traditional pharmaceuticals) look like
compelling opportunities. The smaller revenue bases of these
specialty drug makers means that a successful new product
can have a relatively greater impact on sales and earnings.
Eddie Yoon l Sector Portfolio Manager
Eddie Yoon is a portfolio manager and research analyst for Fidelity Investments. Mr. Yoon is responsible for coverage of
health care equipment and supplies stocks, and serves as the health care sector leader.
Fidelity Thought Leadership Vice President Geri Sheehan, CFA,
provided editorial direction for this article.
The health care industries are subject to government regulation and
reimbursement rates, as well as government approval of products
and services, which could have a significant effect on price and
availability, and can be significantly affected by rapid obsolescence
and patent expirations.
13
Innovation among medical equipment companies
heating up
Medical equipment stocks tend to generate slower, single-digit
revenue growth compared with other subsectors of health
care. However, these companies typically are able to leverage
this growth into high-single-digit operating profit increases.
Coupled with a strong return of capital to shareholders, this
provides a stable return profile. Moreover, certain companies
within this category stand to benefit from innovation cycles that
could drive new revenue streams protected from competitive
pressures.
Merger-and-acquisition activity may enhance
shareholder value
Merger-and-acquisition (M&A) activity is likely to remain at
elevated levels. Given the attractive free-cash-flow profile of
the health care sector, effective capital allocation to recharge a
company’s growth prospects or lower costs through synergies
should continue to create investment opportunities. While
M&A shouldn’t be the only reason to own a company, it
can be an accelerator to shareholder value if the underlying
fundamentals of the business are attractive and there is good
capital deployment.
Risks: What to Watch
Election focus on drug pricing
In the lead-up to the U.S. presidential election, there have
been vehement campaign speeches directed toward
pharmaceutical companies and the prices they charge for
prescription drugs. This focus is unlikely to relent through
2016 and will foster a degree of uncertainty when it comes to
discounting government policy risk for drug companies.
In the short-term, such debate will create uncertainty and
could serve as a headwind for stock prices. Sector volatility
could escalate in such an environment, but ultimately the
economics of the sector are unlikely to materially change, and
the volatility could present attractive buying opportunities for
long-term investors.
leadership series 2016 OUTLOOK

Industrials
Tobias Welo, Sector Leader

With lower fuel costs, airline profitability and demand within
the aerospace industry is likely to improve. Budgeted defense
spending is slated to increase as well. The U.S. construction
boom may continue to support the industrials sector broadly
in 2016, especially building products and services such as
construction and engineering. Commercial and professional
services are likely to grow with commercial construction
while retaining a stable base of recurring revenues. Energy
efficiency remains a compelling multiyear theme. Given
China’s slowing growth, the commodities recession may take
some time to correct. Investing in companies with more
exposure to consumer spending and services versus commer-
cial markets in China may help to avoid this slowdown.
Investment Opportunities
Airlines and aerospace steady, defense spending
may pick up
With fuel costs accounting for nearly 35% of airlines’ operating
expenses in recent years,1 airline net income margins tend
to increase when oil prices decline (Exhibit 2). Even with the
global economy in a slow-growth mode, lower energy prices
and competitive discipline may benefit airlines in 2016,
especially those with greater route exposure to the stronger
developed economies. The aerospace industry tends to have
longer revenue cycles relative to other industrials due to heavy
backlogs for new planes and a consistent aftermarket demand
for airplane parts (the replacement cycle is regulated by the
FAA), and net income improvement for airlines may contribute
to incremental gains for aerospace as well. Defense spending
may be turning the corner from previous declines in spending
budgets and industry revenues—the recently approved U.S.
defense budget reverses the trend of automatic spending cuts
U.S. construction still a bright spot
Residential and commercial construction activity in the Exhibit 1 Industrials sector EPS growth
U.S. continued to increase in 2015, and both remain below Year-over-Year Change
long-term average levels, suggesting room to grow even 12%
more. Construction growth tends to benefit many industries
within the industrials sector, but focusing on consumables 10%
(building products) and services (such as construction and
8%
engineering) may be the best investment approach to that
theme for the near term. 6%
Commercial and subscription services may offer 4%
stable growth
2%
Companies providing commercial and subscription services
may be another way to gain exposure to increasing commercial 0%
construction activity, with the potential cushion of a stable 2015 Estimate (Begin) 2015 Estimate (End) 2016 Estimate
revenue base. Services such as fire safety control system
EPS: earnings per share. Estimate: Wall Street stock analysts’ consen-
monitoring, building security, and waste removal all benefit sus. 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014. 2015
when commercial construction rises, but tend to steadily grow EPS Growth Estimate (End) includes reported earnings as of Oct. 31,
revenues even when new construction slows. More esoteric 2015, combined with estimated earnings for the remainder of 2015.
Source: FactSet, Fidelity Investments, as of Oct. 31, 2015.
services, such as credit reporting and data analytics within
certain industries, are often sold by subscription. Because they Exhibit 2 Airline margins and oil prices
are a necessary cost for many businesses, subscriptions can Year-over-Year Change in Oil Price Net Income Margin
supply a base of recurring revenues for these service providers. 100% 5%
Net income margin 4%
up 3x since 2012
Multiyear trend: demand for energy efficiency 3%
60% 2%
Lower energy prices may lengthen the payback period
1%
for upgrading to more efficient products slightly, but not 0%
20%
significantly enough to derail this multiyear trend. New –1%
–2%
energy-efficient jet engines, for example, have been built into
–20% –3%
the designs for aircraft for years to come, so lower jet-fuel Oil price down approx. –4%
prices won’t reverse adoption of the new technology. 50% since 2012 –5%
–60% –6%
Some ongoing transitions are driven by legislation as well as

Sep-15
May-09

May-11

May-13

May-15
May-05

May-07

Jan-12

Jan-14
Jan-04

Jan-06

Jan-08

Jan-10

Sep-14
Sep-10

Sep-12
Sep-04

Sep-06

Sep-08
cost—new U.S. efficiency standards for heating, ventilation,
required by the budget sequestration in 2013 (Exhibit 3), and
and air conditioning (HVAC) systems went into place in
international defense spending has been accelerating as well.
2015, and several countries are using legislation to phase Net Income Margin: the ratio of net profits to revenue. 2015 net
out inefficient incandescent lightbulbs. Makers of more income margin estimated from partial-year data. Oil price: West Texas
Intermediate (U.S.) spot price. Source: International Air Transport
energy-efficient technology may continue to benefit from
Association (margins); Bloomberg Finance L.P. (oil price), Fidelity
replacements and new construction. Investments, as of Oct. 31, 2015.
14
INDUSTRIALS

Risks: What to Watch

Commodities may take time to regain balance
The global economic slowdown has hit the commodities market
especially hard, with secondary effects for many companies in
the industrials sector that serve commodity producers. What
started as mostly an oversupply issue has been exacerbated
by a decrease in demand, particularly from China. Commodity
cycles can be long, and the process of moving toward greater
equilibrium between supply and demand might extend into
2016 and beyond. Industrial manufacturers serving end-
markets with heavy exposure to commodities—builders of
machinery for the energy and mining industries, electrical
equipment, and agricultural equipment, for example—may
continue to face headwinds in the coming year.
China’s end-markets may diverge Exhibit 3 U.S. defense budget vs. predictions
If emerging economies downshift and face recessionary risks,
$ Billions
industrial companies with substantial consumer end-market
exposure in developing countries may experience slower 575
growth, but still do better than peers that are solely focused
on industrial end-markets. In particular, China’s shift toward a 550
consumer society is far from over, and investors with a longer
time horizon may want to focus on companies that help supply
525
a growing middle class with goods such as automobiles, or hot
water heaters and HVAC systems for residential construction.
Providers of professional services that are more closely aligned 500
with the consumer end-market may benefit as well. Historical Budget 2015 Budget Deal
President’s Budget Request Sequester Projection
475

FY08

FY09

FY10

FY11

FY13

FY14

FY15
FY12

FY16

FY17

FY18

FY19
Tobias Welo l Sector Portfolio Manager
FY: fiscal year. President’s Budget Request: Budget allocations from
Tobias Welo is a portfolio manager and research analyst for Fidelity Investments. Mr. Welo, who joined Fidelity in 2005, is the President’s FY 2016 Budget. Sequester Projection: implied budget
responsible for managing multiple portfolios focused on the industrials and materials sectors. He also serves as sector leader following cuts prescribed by U.S. 2013 budget sequestration. Source:
Department of Defense, Fidelity Investments, as of Nov. 20, 2015.
for the industrials and materials sectors.

Fidelity Associate Analyst Eric Thompson also contributed to this

article. Fidelity Thought Leadership Vice President Vic Tulli, CFA,
provided editorial direction.
Industrials industries can be significantly affected by general
economic trends, changes in consumer sentiment and spending,
commodity prices, legislation, government regulation and spending,
import controls, and worldwide competition, and can be subject
to liability for environmental damage, depletion of resources, and
mandated expenditures for safety and pollution control.
Endnotes
1
Source: Company reports, Fidelity Investments, as of Nov. 20,
2015.

15
leadership series 2016 OUTLOOK

Information Technology
Charlie Chai, CFA, Sector Portfolio Manager

Within the information technology sector, investment
opportunities as well as risks illustrate the sector’s
global foundation. The progress of up-and-coming
Asian technology companies should provide a source for
significant investment opportunities over the long term.
Established growth trends should also persist in the
sector. More broadly, for those companies focused on the
consumer market, positive trends continue for entities
delivering social, mobile, and e-commerce applications.
For companies reliant on corporate spending, demand
continues to bolster revenues for entities that provide
major cost-reduction and revenue-enhancement products.
There are also risks to the sector’s outlook, including
macroeconomic factors that could weigh on corporate
spending, as well as the potential for further weakening in
10% earnings growth for the technology sector in 2016 (see
Exhibit 1). Exhibit 1 Information Technology sector EPS growth
Year-over-Year Change
Consolidation and realignments a likely tailwind
12%
Increased merger-and-acquisition (M&A) activity has been a
key sector development in 2015, and should persist in 2016. 10%
This does not come as a surprise, given that debt financing of
acquisitions is inexpensive and valuations remain reasonable. 8%
M&A has also been stimulated by more mature technology
6%
companies in the hardware and semiconductor industries
looking to use consolidation as a way to deliver growth to 4%
shareholders. Even without expanded revenues, the combined
entities’ lower costs should result in higher operating margins. 2%
Companies seeking to gain a foothold in next-generation 0%
strategic solutions of the technology sector are also likely to 2015 Estimate (Begin) 2015 Estimate (End) 2016 Estimate

the Chinese economy. contribute to M&A volumes. EPS: earnings per share. Estimate: Wall Street stock analysts’ consen-
sus. 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014. 2015
Global prospects continue to be favorable—despite a EPS Growth Estimate (End) includes reported earnings as of Oct. 31,
Investment Opportunities
weaker Chinese economy 2015, combined with est. EPS for remainder of 2015. Source: FactSet,
Positive consumer and corporate demand trends Fidelity Investments, as of Oct. 31, 2015.
The ability to uncover investing opportunities within the
Those companies in the services, Internet, and software areas
information technology sector requires a global view—more Exhibit 2 Top-20 tech companies by capitalization
that can meet consumer demand for Internet services and
specifically, researching new technology businesses taking
e-commerce support should continue to experience revenue 2005 Mkt Cap. ($bn) 2015 Mkt Cap. ($bn)
root in Asian emerging markets (Exhibit 2). Within the past 10
growth. These companies stand to benefit from the popularity Microsoft Corp 266 Apple Inc 651
years, Asian emerging-market tech companies that ranked
of social media and mobile communications. In the corporate Intel Corp 148 Google Inc-A 510
in a list of the top-20 technology corporations by market IBM 129 Microsoft Corp 427
market, technology spending will likely remain steady in the
capitalization went from zero to six. Google Inc-A 123 Amazon.com Inc 309
megatrend areas of cloud computing, with companies relying Cisco Systems 121 Facebook Inc-A 305
on remote servers instead of maintaining them on site, and I am mindful that the potential for a weaker Chinese economy Hewlett-Packard 80 Alibaba Grp-Adr 202
software as a service (SaaS), where software applications Nokia Oyj 76 Tencent 187
may further challenge the growth prospects for companies Qualcomm Inc 73 Oracle Corp 170
are centralized on the Internet. Both cloud computing and in this region. However, it is instructive to think about the Oracle Corp 66 Samsung 169
SaaS not only enable companies to remain current with the characteristics of the technology companies in this area eBay Inc 61 Intel Corp 157
latest technology, but also offer ways to reduce costs through Motorola Solutions 56 Cisco Systems 142
of the world—including the sources of demand for their SAP SE 56 IBM 131
lower capital expenditures, improved hardware utilization, and products. These companies fall into two categories: hardware Yahoo! Inc 56 TSMC 109
less required support for IT infrastructure. Big data is also manufacturers and consumer Internet companies. Ericsson Lm-B 55 SAP SE 96
an important growth trend, delivering real-time analytics that Canon Inc 52 Qualcomm Inc 79
The customer base for hardware companies, such as phone Texas Instrument 51 Tata Consultancy 73
help a customer better understand his or her business. In TSMC 47 Baidu Inc-Sp Adr 68
aggregate, Wall Street analysts are forecasting approximately and semiconductor makers, is very global. For example, 60% Apple Inc 44 Texas Instrument 58
Yahoo Japan Corp 35 EMC Corp/Ma 49
EMC Corp/Ma 32 Hewlett-Packard 27
16 Source: Bloomberg Finance L.P., as of Nov. 10, 2015.
INFORMATION TECHNOLOGY

to 70% of all mobile phones are made in China—a country economy was in recession, many of the companies that did Risks: What to Watch
sometimes thought of as the hardware factory of the world. well were those that had incorporated the Internet into their Global macro factors and large-cap valuations
The penetration of these companies across phone brands business model. They benefited from attractive efficiency rates The potential risks that could undermine growth in the
translates into a global customer base. While not immune to that enabled them to increase market share and withstand information technology sector include global macroeconomic
a slowdown in emerging-market economies, they may also recessionary conditions as compared with less efficient, factors that could constrain corporate technology spending,
benefit from growth in healthier developed markets. “offline” companies. Going forward, this could also be the thereby damaging the prospects of IT companies, as well as
case despite weakness in China. Emerging-market companies the continued predominance of a concentrated group of large-
Consumer demand for Internet services should also be that have successfully integrated Internet efficiencies into their capitalization stocks as the most significant driver of IT sector
somewhat resilient despite emerging-market weakness. business will have an advantage competing against less- performance. For now, the group’s fundamentals remain solid.
Consider that during the global financial crisis, when the U.S. efficient, offline companies. However, their valuations have been rising, and my concern
is whether these stocks can maintain their momentum given
these valuations. Careful stock selection will be critical in 2016.
Charlie Chai, CFA l Sector Portfolio Manager
Charlie Chai is a sector portfolio manager for Fidelity Investments. Mr. Chai, a CFA charterholder, joined Fidelity in 1997 as
an equity research analyst, and he has managed multiple technology-related sector and industry portfolios since 2003.

Fidelity Thought Leadership Vice President Geri Sheehan, CFA,

provided editorial direction for this article.
The technology industries can be significantly affected by
obsolescence of existing technology, short product cycles, falling
prices and profits, competition from new market entrants, and
general economic condition.

17
leadership series 2016 OUTLOOK
Materials
Tobias Welo, Sector Leader
Low energy prices will likely create both winners and
losers in the materials sector in 2016. Construction
activity growth in the U.S. is a continuing tailwind for
many industries in the sector, and increases in consumer
spending could benefit many paper and packaging
companies. Low commodity prices are an ongoing
challenge for related industries; prices may recover only
gradually—if at all—through the year. Ongoing appetite
for mergers and acquisitions (M&A) within the sector
may reward acquirers with healthy balance sheets, steady
cash flows, and strong management teams.
Investment Opportunities
Some chemical companies may benefit from
low energy prices
In the materials sector, lower oil prices can be a mixed
bag. For some companies, lower prices mean lower input
costs, which may lead to higher profit margins. However,
many U.S. companies use inexpensive domestic natural
gas instead of oil—both for energy and as a component
“feedstock” to their output products—and may not benefit
as much as some global competitors if oil prices remain
low. For 2016, the market is likely to reward companies with
profit margins that could remain high or increase despite
lower oil prices, but an investor needs to analyze these
situations carefully. For example, U.S. producers of ethylene
(a common chemical used in the production of plastics and
many other chemical compounds) have enjoyed a recent
profitability advantage over Asian producers, because U.S.
producers have been able to make use of a plentiful supply
of inexpensive natural gas over the past five years, while
Asian competitors have tended to use oil-based feedstock.
Industry analysis suggests this advantage (combined with
an advantage from other factors) may erode somewhat but
is not likely to disappear completely, even if oil prices stay
relatively low through 2016 (Exhibit 2), potentially leading to
earnings remaining high for domestic producers.
18
U.S. construction activity growth may help the sector
Construction activity in the U.S. has continued to increase Exhibit 1 Materials sector EPS growth
through 2015, and is likely to continue growing in the Year-over-Year Change
coming year. Companies that produce construction materials 20%
may benefit from ongoing demand growth, including makers
of raw building materials such as aggregate, cement, and 15%
wallboard, as well as manufacturers of finishing materials
10%
such as paint and cleaning supplies. As in 2015, companies
with lower production and distribution costs are likely to 5%
outperform their competitors.
0%
Growth in consumer spending may help drive
–5%
packaging volumes
With consumer spending growth likely to outpace the –10%
increase in industrial spending worldwide, paper and 2015 Estimate (Begin) 2015 Estimate (End) 2016 Estimate
packaging companies that serve consumer end-markets
EPS: earnings per share. Estimate: Wall Street stock analysts’ consen-
may have greater potential upside in the near term. Note sus. 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014. 2015
that even in a “lower-for-longer” growth environment for the EPS Growth Estimate (End) includes reported earnings as of Oct. 31,
world economy, companies that produce the packaging for 2015, combined with estimated earnings for the remainder of 2015.
Source: FactSet, Fidelity Investments, as of Oct. 31, 2015.
consumer staples benefit from some of the countercyclical
stability of the market for these necessary goods. Packaging Exhibit 2 U.S. profitability advantage in ethylene
companies with more exposure to the U.S. and European
production
consumer markets may be less risky than those serving
emerging markets. U.S. Cost Advantage ($/lb produced)
$0.45 From low-cost natural gas $0.41
Risks: What to Watch $0.40
From other factors
Low commodity prices create headwinds $0.35
$0.30
$0.30 Total U.S. $0.26
A global slowdown in demand has exacerbated a cyclical $0.23
$0.25
oversupply in the commodities market, leading to a reces- $0.20 $0.18
$0.17
sion for agriculture, mining, and metals prices (alongside $0.15 $0.11
energy). In U.S. agriculture, the current overabundance of $0.10 $0.06
supply shows signs of having peaked (Exhibit 3)—as supply $0.05 $0.03
in storage dwindles relative to demand, commodity prices $0.00
2002 to 2008 2009 to 2014 2015 to date
tend to recover, and the market for agricultural materials
(such as seeds and fertilizer) gradually returns to growth. Numbers may not sum due to rounding. Profitability advantage of U.S.
ethylene producers over Asian producers, which tend to use oil-based
The mining industry, struggling with excess capacity for
feedstock. Advantage from natural gas estimated using feedstock data
the past several years, has been hit particularly hard by and the spread between Brent crude oil and U.S. natural gas prices.
“Other” is the difference between total advantage and advantage due to
natural gas. Source: Company filings, IHS Energy, Bloomberg Finance
L.P., Fidelity Investments, as of Nov. 13, 2015.
MATERIALS

reduced demand from China and other nations; the industry
may require more than a year to reduce enough capacity
to find equilibrium. Metal manufacturers have been lagging
the market due to serious oversupply, with metal pricing
favoring the lowest-cost global producers. Political efforts to
impose steep tariffs on Asian steel may provide some short-
term relief, but may ultimately be unsustainable protections
for the U.S. steel industry.
M&A may be tricky to predict
Spinoffs (when a company “spins” one part of its business
into a completely separate company) were popular in 2015,
but a steady pace of M&A activity seems likely to continue
in 2016. In the past year, there have been several major Exhibit 3 U.S. corn stocks-to-use ratio
consolidation deals initiated, and a strong appetite for further
M&A activity in the sector may remain. With revenues and U.S. Corn Stocks-to-Use Ratio (monthly)
earnings weakened by the slower global economy—and sev- 25%
eral bankruptcies in 2015 likely to be followed by more—the
Falling Ratio = Positive
largest, most secure companies stand to pick up assets from 20%
Trend for Corn Prices
competitors at bargain prices. A thorough knowledge of a
company’s business, competitive position, and the quality of 15%
its management team may be the key to separating potential
winners from losers in M&A within the sector. 10%
5%

0%

11/1/2005

11/1/2006

11/1/2007

11/1/2008

11/1/2009

11/1/2010

11/1/2011

11/1/2012

11/1/2013

11/1/2014

11/1/2015
Tobias Welo l Sector Portfolio Manager
Tobias Welo is a portfolio manager and research analyst for Fidelity Investments. Mr. Welo, who joined Fidelity in 2005, is
responsible for managing multiple portfolios focused on the industrials and materials sectors. He also serves as sector leader
Stocks-to-use ratio: the ratio of supply in storage to historical
for the industrials and materials sectors. demand. Source: USDA, Fidelity Investments, as of Nov. 1, 2015.

Fidelity Associate Analyst Eric Thompson also contributed to this

article. Fidelity Thought Leadership Vice President Vic Tulli, CFA,
provided editorial direction.
Materials industries can be significantly affected by the level and
volatility of commodity prices, the exchange value of the dollar,
import controls, worldwide competition, liability for environmental
damage, depletion of resources, and mandated expenditures for
safety and pollution control.

19
leadership series 2016 OUTLOOK

Real Estate
Steven Buller, Sector Portfolio Manager
Samuel Wald, Sector Portfolio Manager

In August 2016, two major equity index providers—MSCI
and S&P Dow Jones Indices—will formally carve out real
estate as the 11th equity sector within the Global Industry
Classification Standard (GICS), a widely adopted framework
for categorizing stocks. Currently, real estate is classified as
an industry group within the financials sector. The adoption
combined with tenants being priced-out of expensive CBD
markets, have been supportive of suburban office fundamentals, Exhibit 1 Real Estate sector EPS growth
a trend we expect could continue in the year ahead.
Year-over-Year Change
Strong fundamentals for apartments 16%
The apartment segment has performed well of late, driven 14%

of real estate as a headline sector into the GICS framework by higher demand for rental housing due to declining 12%
is recognition of the unique characteristics of commercial homeownership, demographic/lifestyle trends, and job growth. 10%
real estate companies, and the diversifying portfolio After peaking at 69% in 2006, the homeownership rate in the
U.S. has declined steadily, as the single-family housing crash 8%
value they offer investors. We believe that the carve-out
resulted in a large swath of borrowers being underwater on their 6%
of real estate as a headline sector further validates the
importance of a dedicated allocation to real estate equity mortgages, and in a wave of foreclosures. With the availability of 4%
securities within diversified portfolios. Some of the better credit more scarce, rental housing has been the only option for 2%
opportunities in the sector exist in real estate investment many former and would-be homeowners. The homeownership
0%
trusts (REITs) that own office properties and those owning rate now stands at 63% (Exhibit 2), and might never return to 2015 Estimate (Begin) 2015 Estimate (End) 2016 Estimate
multi-family/apartment buildings. In addition, some stocks the previous peak level. Offering additional support to apartment EPS: earnings per share. Estimate: Wall Street stock analysts’ consen-
across all property types trade at wide discounts to the demand are changes in lifestyle, including delayed marriage and sus. 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014. 2015
child-rearing, and the allure of urban living. These factors have EPS Growth Estimate (End) includes reported earnings as of Oct. 31,
value of their real estate assets, and they could be targets 2015, combined with estimated earnings for the remainder of 2015.
of mergers and acquisitions (M&As), spinoffs, or other fueled demand for rental apartments in major cities where REITs
Source: FTSE/NAREIT All Equity REITs Index, FactSet, Fidelity Invest-
corporate actions, which may reward shareholders. The have significant exposure, and where there are concentrations ments, as of Oct. 31, 2015.
potential for interest rates to rise at a pace faster than the of jobs, entertainment venues, and people. Finally, steadily
improving job growth has allowed millennials to either forgo Exhibit 2 U.S. homeownership has fallen to
market expects remains a short-term risk.
living with roommates or move out of their parents’ homes, and generational lows
Investment Opportunities instead rent their own apartments. These dynamics have served U.S. Homeownership Rate (1990-2015)
Office properties in urban and suburban markets as a tailwind to the apartment segment, and we expect it could
U.S. Homeownership Rate (%)
Investing in REITs that own premier assets in major central continue in the year ahead.
70
business districts (CBDs) may be a rewarding strategy in 2016. 69
Corporate restructuring and shareholder activism
REITs with “trophy” assets in large gateway cities where there 68
While history has shown that, over time, REIT stock prices
are high natural barriers to supply and strengthening demand 67
typically trade near or at the net asset value (NAV) of the REITs’
due to job growth, have maintained high occupancy rates 66
underlying real estate, the dispersion between where REITs trade
and have been able to push rents higher. In addition, foreign 65
today is fairly wide—many trade at a discount, while some trade 64
investors seeking U.S.-dollar-denominated, safe-haven assets
at a premium (Exhibit 3). Companies that trade at a discount 63
view these properties as highly desirable, given their strategic
to their NAV for an extended period of time have an enhanced 62
locations. Elsewhere in the office sector, the suburbs have finally
likelihood of being acquired by another real estate buyer (either 61
started to show signs of life after years of weak occupancy and 60
public or private), or of merging with another REIT, or of spinning
cash flow growth. In some cases, the stocks of these property
1990
1991
1993
1995
1996
1998
2000
2001
2003
2005
2006
2008
2010
2011
2013
2015
off assets to focus more closely on strategic priorities in order
owners are attractively valued. The improvement in job growth,
Seasonally adjusted rates as of Sep. 30, 2015. Source: U.S.
20 Census Bureau.
RE AL ESTATE

to maximize value. Any of these actions could potentially
reward shareholders. Restructuring activity has picked up
in recent years for two reasons: the growth of activist REIT
investors and the relative simplicity of ascertaining the value
of a REIT’s underlying assets. Valuing a collection of buildings
is a comparatively straightforward calculation—far easier than
Rising rates can be a headwind for REIT multiples, as they
are a factor in borrowing costs and function as competition for Exhibit 3 REITS have been trading (on avg.) at a
REIT dividend yields. On the positive side, rising interest rates
discount to the value of their underlying properties
usually reflect strong economic growth, which is good for real
estate fundamentals. Higher interest rates also tend to go hand REIT Premium/Discount to NAV
in hand with inflation, and most commercial real estate leases 40%

Premium
determining the value of a brand name, for instance. include adjustments for inflation. The correlation between REIT 30%
Historical Average
stock returns and short-term interest rates has been unusually 20%
Risks: What to Watch high during the past few years, but historically this correlation 10%
Rising rates could negatively affect REIT stocks has been close to zero. Interest rates may eventually rise, and 0%
Market sentiment as of the end of November indicated an as long as this occurs for the “right” reasons (i.e., economic –10%
increasing likelihood that the Federal Reserve will begin a –20% –8.2%
expansion and modest inflation), REIT business conditions and

Discount
–30%
REIT Price-to-NAV
monetary tightening cycle and raise short-term interest rates. stock prices should weather a rising-rate environment fairly well.
–40%
–50%

1990
1991
1993
1994
1996
1997
1999
2000
2002
2003
2005
2006
2008
2009
2011
2012
2014
2015
Steven Buller l Sector Portfolio Manager
Steven Buller is a portfolio manager at Fidelity Investments. He currently manages several portfolios that invest in REITs and REIT Premium/Discount to NAV reflects the relationship between
other real estate securities, both for U.S. and for foreign investors. REIT prices and the value of the underlying REIT properties or the
net asset value (NAV). Premium—REITs trading above the NAV. Dis-
Samuel Wald l Sector Portfolio Manager count—REITs trading below the NAV. Source: Green Street Advisors,
as of Sep. 30, 2015.
Samuel Wald is a portfolio manager at Fidelity Investments. He currently manages several portfolios and subportfolios that
invest in REITs and other real estate securities.

Andrew Rubin, institutional portfolio manager and a member of
the REIT equity and high income real estate debt teams, also
contributed to this article. Fidelity Thought Leadership Vice President
Kevin Lavelle provided editorial direction.
A REIT issues securities that trade like stock on the major exchanges,
and invests in real estate directly, either through properties or
mortgages. A REIT is required to invest at least 75% of total assets
in real estate and distribute 90% of its taxable income to investors.
Stock markets are volatile and can fluctuate significantly in response
to company, industry, political, regulatory, market, or economic
developments. Investing in stock involves risks, including the loss
of principal. Illiquidity is an inherent risk associated with investing in
real estate and REITs. There is no guarantee the issuer of a REIT will
maintain the secondary market for its shares, and redemptions may be
at a price that is more or less than the original price paid.
Changes in real estate values or economic downturns can have a
significant negative effect on issuers in the real estate industry.
See the glossary at the end of this piece for more information on any
terms.

21
leadership series 2016 OUTLOOK
Telecommunication Services
Matthew Drukker, Sector Portfolio Manager
Wireless carriers continue to compete for customers and
spectrum, contending with each other and with potential
new entrants such as cable companies. Carriers are
increasingly turning to content as a way of differentiating
their services. With demand for data growing, cell towers
are still a key link in the wireless capacity chain. Risks
include a large spectrum auction in 2016 that could
encourage additional spending, and a deceleration in
overall earnings growth from previous accounting changes,
which may require investors to reset their expectations.
Investment Opportunities
Changing competitive dynamics may favor wireless
Competition among wireless carriers and from potential new
services has been growing, and that trend is likely to continue.
For the four major U.S. wireless providers, the key trend to
watch is whether the two challengers can continue to grow
market share at the expense of the two incumbents with the
most subscribers. These challengers are subsidiaries of larger
companies with deep pockets, but so far they have shown
little inclination to support market share gains beyond efforts
that are self-funding. If pricing pressures between carriers
are finally leveling off, this equilibrium could be a positive
catalyst for the industry. At the same time, new phone handset
financing and leasing options are becoming more common.
Without required long-term contracts to make handsets seem
affordable, switching costs for customers are falling, which
could intensify competition. Also, with mobile data as the key
draw for customers, cable companies offering broadband and
WiFi are testing ways to mimic wireless networks, which may
set the stage for new cross-industry partnerships. Carriers
that can adapt to these trends more quickly may have an
advantage in the near term. Conversely, traditional “wireline”
telephone companies may continue to face strong headwinds
from these broad consumer shifts toward data and wireless
services and away from wired voice services (Exhibit 2).
22
Content takes a spotlight
Increasingly, customers are using the Internet to watch video, Exhibit 1 Telecommunication Services EPS growth
and they want to be able to go mobile with their content. With Year-over-Year Change
4G networks now built out and growth in mobile devices on 35%
data plans slowing down, one way wireless providers can
30%
differentiate themselves is by offering access to selected
content through their networks. By making deals directly with 25%
content producers and with content providers for cable and 20%
satellite TV, wireless carriers can try to attract customers with
15%
“bundles” of content such as streaming entertainment or
sporting events, perhaps with no additional data charges. With 10%
the technology for Long-Term Evolution (LTE) multicast nearly 5%
in place, wireless carriers could efficiently broadcast events
0%
using existing capacity (although wider smartphone and tablet 2015 Estimate (Begin) 2015 Estimate (End) 2016 Estimate
adoption of the technology is still needed). This shift will likely EPS: earnings per share. Estimate: Wall Street stock analysts’ consen-
evolve over time, but wireless carriers are investing now for the sus. 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014. 2015
long term, which could potentially benefit content producers EPS Growth Estimate (End) includes reported earnings as of Oct. 31,
2015, combined with estimated earnings for the remainder of 2015.
and providers—as well as the carriers that offer the most Source: FactSet, Fidelity Investments, as of Oct. 31, 2015.
attractive content.
Exhibit 2 Telecom Services U.S. consumer spending
Tower company growth may continue as long as
capacity is still required Voice % of GDP
2.5%
During the past few years, new smartphone and tablet Pay TV % of GDP
adoption has been the main force behind an ever-increasing Broadband % of GDP
2.0%
need for data capacity. Even though that growth in hardware
adoption now shows signs of peaking, demand for larger
1.5%
amounts of mobile data continues unabated. For carriers to
send out even more video, Internet, and voice data over the
networks, they will need to make capital expenditures to build 1.0%
capacity. The companies that own, build, and maintain the cell
towers that transmit that data will likely continue to benefit from 0.5%
this growth in 2016. Because communities typically resist new
tower construction, the incumbent tower operators may reap 0.0%
2Q11
2Q12
2Q13
2Q14
2Q15
2Q00
2Q01
2Q02
2Q03
2Q04
2Q05
2Q06
2Q07
2Q08
2Q09
2Q10
the benefits of strong contracts with the wireless carriers, and
will remain a necessary partner in network upgrades.
GDP: gross domestic product. Broadband includes wireless and wired
broadband access. Figures estimated based on industry and corporate
reports. Source: Bureau of Economic Analysis, Haver Analytics, Fidelity
Investments, as of Jun. 30, 2015.
TELECOMMUNICATION SERVICES

Risks: What to Watch Accounting changes reset earnings expectations

Spectrum auctions could get expensive The majority of wireless subscriptions now use new accounting Exhibit 3 Expenditures on wireless spectrum
Wireless spectrum, which is the set of radio frequencies standards, in which the wireless carrier recognizes revenue
used for wireless data and voice transmission, is regulated from a handset sale in the quarter the sale is made, even Overall Spend for Spectrum Price Paid per Unit of Spectrum
in the U.S. through licenses auctioned by the Federal though the customer typically pays for the phone in monthly $50 B $2.50
Overall Spend
Communications Commission (FCC). Like some natural installments. In 2015, this change tended to boost year-over-
Per-Unit Spend
resources or beachfront property, it is an asset with limited year revenue and EPS growth for carriers (as visible in Exhibit $40 B $2.00
supply, and when licenses to use spectrum frequencies come 1), despite unchanged business fundamentals. With the bulk
to auction, wireless carriers must bid strategically. With the of the conversion done, wireless carriers will experience a $30 B $1.50
changing market dynamics and a larger-than-usual spectrum headwind for revenue and earnings growth in 2016, as fewer
auction in 2015, both the overall spend and the per-unit spend subscriptions will be shifted to the new accounting standards $20 B $1.00
on spectrum hit a 10-year peak (Exhibit 3). The FCC is now upon buying a new handset. However, because actual cash
planning another large auction for 2016, and carriers may flow is unaffected, dividends should remain relatively stable $10 B $0.50
need to dig even deeper to maintain their competitive positions throughout the year, which may give investors a chance to
and lay the groundwork for the next generation of wireless buy dividend yield inexpensively, especially if slower reported $0 B $0.00
networks. This spending could strain their balance sheets. earnings growth depresses valuations.

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015
Matthew Drukker l Sector Portfolio Manager Per-Unit Spend: the average of price paid divided by a standard
measure of the potential reach of the spectrum purchased (spec-
Matthew Drukker is a portfolio manager and research analyst for Fidelity Investments. Mr. Drukker joined Fidelity in 2008 trum megahertz times the population of the area covered). Source:
and is responsible for managing multiple sector and industry portfolios related to telecommunications and multimedia. Company filings, Fidelity Investments, as of Oct. 27, 2015.

Sector Specialist Brian Meagher, CFA, FSA, also contributed to this

article. Fidelity Thought Leadership Vice President Vic Tulli, CFA,
provided editorial direction.
The telecommunication services industries are subject to
government regulation of rates of return and services that may be
offered and can be significantly affected by intense competition.

23
leadership series 2016 OUTLOOK

Utilities
Douglas Simmons, Sector Portfolio Manager

The past year was a challenging one for utilities stocks,
in large part due to the increasing market sentiment that
the Federal Reserve would soon begin a new interest rate
tightening cycle. Historically, utilities stocks have tended to
underperform the broader equity market during the months
can achieve a rapid return on their investment, enabling them to
put more capital to work and potentially increase dividends and Exhibit 1 Utilities sector EPS growth
earnings faster than other utilities.
Year-over-Year Change
Decommissioning coal-fired utilities lowers power 6%

leading up to an initial interest rate hike. Rising rates tend
to dampen enthusiasm for high-yielding utility stocks, as
other income-oriented investments, such as bonds, become
relatively more attractive. Still, the utilities sector may
continue to be an attractive investment option in 2016 for
income-minded investors seeking diversification, given the
growing demand for income from the aging baby boomer
demographic in the U.S., and the need for enhanced
natural gas infrastructure in the United States, specifically
for pipelines and electric transmission lines.
supply and supports power prices
5%
More coal-powered U.S. electric utilities continue to shut
down due to more stringent Environmental Protection Agency 4%
regulations, which may lead to lower electricity supply in some
3%
regions and provide support for higher electricity prices. Power
market analysts have estimated that, by 2020, as much as 2%
8% of the coal-powered electricity supply will come offline, the
most significant shrinkage the industry has seen in many years 1%
(Exhibit 3). As a result, I am focusing on the stocks of certain
0%
power producers that may benefit from this trend. 2015 Estimate (Begin) 2015 Estimate (End) 2016 Estimate

Investment Opportunities
Focus on utilities with higher dividend growth
Dividend yield historically has been one of the most important
drivers of total return for the utilities sector. The utilities sector
currently offers an average dividend yield of roughly 4%, higher
than the current yield on both the S&P 500® Index and the
Barclays U.S. Aggregate Bond Index (Exhibit 2). In terms of the
returns within the utilities sector, dividend growth tends to be a
more important catalyst for stock performance than dividend
yield, and utilities that have generated the highest dividend
growth have tended to be the top performers within the sector
over extended periods.
During the past year, electricity has been viewed through EPS: earnings per share. Estimate: Wall Street stock analysts’ consen-
sus. 2015 EPS Growth Estimate (Begin) was as of Dec. 31, 2014. 2015
the same lens as other declining commodities, but investors
EPS Growth Estimate (End) includes reported earnings as of Oct. 31,
should keep in mind that power is unlike most other cyclical 2015, combined with estimated earnings for the remainder of 2015.
commodities (e.g., copper, crude oil) in that it can’t be stored Source: FactSet, Fidelity Investments, as of Oct. 31, 2015.
and used at a later date. Power demand remains steady in the
Exhibit 2 Utilities yields vs. other major indexes
U.S.; any shortage in supply will put upward pressure on power
prices, and likely on the earnings and dividends for deregulated 7%
power producers that serve roughly 50% of the U.S. population. Barclays U.S. Aggregate
6%
Aging demographics provide a tailwind of demand for 5% Utilities
utilities dividend income
4%
The aging of the baby boomer generation into retirement—
a trend that remains in its early stages—should continue for 3%

several years and provide a secular demand boost for utilities 2%

Companies strategically positioned to benefit from the
stocks. The investment characteristics of utilities tend to be S&P 500
build-out of natural gas infrastructure 1%
attractive to investors who are seeking income and capital
A boom in the production of natural gas from shale rock forma- 0%
preservation. These characteristics include business stability

Nov-05
May-06
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
tions has fueled a need for enhanced natural gas infrastructure
(predictable earnings streams), a defensive-oriented nature
in certain areas within the United States, specifically in natural
(outperformance during economic downturns or “risk-off”
gas pipelines and electric power transmission lines. Natu-
market environments), and relatively low volatility (less Utilities sector dividend yield represents the yield of the S&P 500 ®
ral-gas-powered utilities that are able to build this infrastructure
economic sensitivity). Utilities Index. Please see index definitions for more information about
efficiently—connecting shale gas production to consumers— the S&P 500 ® Index and Barclays U.S. Aggregate Bond Index. Source:
FactSet, as of Oct. 31, 2015.
24
UTILITIES

For example, although 2015 has been a year of negative returns
overall for utilities, the sector was a bright spot during the third
quarter, returning 5.4% while all other sectors had negative
returns, and the broader equity market fell 6.2%. In these “risk-
off” markets, the low performance correlations of utilities stocks
relative to other sectors can help provide diversification benefits
to an equity portfolio. Further, with two major bear markets
and economic recessions in the past 15 years likely still fresh
in the minds of many preretirees and retirees, the defensive
characteristics of the utilities sector may appeal to more aging,
risk-averse investors in the coming years.
Risks: What to Watch
Sharply rising interest rates could lower investor Exhibit 3 Coal-powered generation at risk of
demand for utilities
being shut down
Market expectations and the Federal Reserve’s own recent
statements suggest that increases in policy rates are growing 13.7%
more likely over the near term. Historically, increases in rates
have caused some yield-seeking investors to rotate out of
utilities stocks and into other income-oriented investments. A
sharp increase in rates over a short time frame could cause a
sell-off in utilities, but I believe a slow, measured increase in 4.6%
rates could be less disruptive to stock prices.

Retirement of Retirement of
Total Industry Generation Coal Generation
Douglas Simmons l Sector Portfolio Manager Capacity Capacity
Douglas Simmons is a portfolio manager for Fidelity Investments. Mr. Simmons currently manages several utilities sector
portfolios and subportfolios, and serves as co-manager of diversified equity portfolios. Mr. Simmons joined Fidelity in 2003, Source: SNL Financial, company reports, RBC Capital Markets,
Mar. 28, 2014.
covering the environmental sector, as well as electric and gas utilities.

Fidelity Thought Leadership Vice President Kevin Lavelle provided

editorial direction for this article.
The utilities industries can be significantly affected by government
regulation, financing difficulties, supply and demand for services or
fuel, and natural resource conservation.
See the glossary at the end of this piece for more information on any
terms.

25
 U.S. EQUITY SECTOR PERIODIC TABLE OF ANNUAL TOTAL RETURNS
1992–2015
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Legend

23% 22% 20% 58% 44% 48% 78% 79% 57% 14% 4% 47% 32% 31% 37% 34% -15% 62% 28% 20% 29% 43% 29% 14% Consumer Discretionary

20% 20% 14% 54% 35% 44% 52% 25% 37% 3% -4% 38% 32% 17% 35% 23% -23% 49% 28% 14% 24% 41% 28% 7% Info Tech

16% 19% 10% 42% 35% 41% 44% 25% 26% 3% -5% 37% 24% 12% 24% 19% -29% 41% 27% 13% 20% 41% 25% 5% Health Care

15% 16% 6% 40% 26% 34% 41% 21% 26% -6% -11% 37% 20% 6% 21% 16% -30% 28% 22% 8% 18% 36% 20% 5% Consumer Staples

10% 15% 4% 39% 26% 33% 16% 19% 17% -6% -15% 32% 18% 6% 19% 14% -33% 21% 20% 6% 18% 28% 16% 3% Telecom Services

10% 15% 3% 39% 25% 29% 15% 19% 16% -9% -19% 31% 13% 4% 19% 12% -35% 20% 19% 6% 15% 26% 15% 2% Real Estate

7% 14% -2% 33% 21% 27% 11% 4% 6% -10% -24% 26% 13% 4% 19% 12% -38% 17% 14% 5% 15% 26% 10% -1% Financials

5% 13% -4% 31% 16% 25% 11% -5% -16% -12% -26% 26% 11% 2% 14% 7% -40% 15% 12% 2% 15% 25% 10% -1% Industrials

3% 11% -5% 20% 12% 25% 1% -9% -20% -12% -30% 15% 8% 1% 13% -13% -43% 14% 10% -1% 11% 13% 7% -5% Utilities

2% -4% -8% 20% 6% 20% -6% -11% -39% -26% -34% 12% 3% -6% 8% -16% -46% 12% 5% -10% 5% 11% 3% -5% Materials

-16% -8% -12% 15% 1% 8% -18% -15% -41% -30% -37% 7% 2% -6% 8% -19% -55% 9% 3% -17% 1% 3% -8% -12% Energy

* Indicates YTD performance through October 31, 2015. Sector returns represented by S&P 500® Index sectors, and defined by Global Industry Classification Standard (GICS®), with the exception of real estate,
where returns are represented by the FTSE/NAREIT All Equity REITs Index. The S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group
representation to represent U.S. equity performance. The FTSE National Association of Real Estate Investment Trusts (NAREIT) All Equity REITs Index is a market capitalization-weighted index that is designed to
measure the performance of all tax-qualified REITs listed on the NYSE, the American Stock Exchange, or the NASDAQ National Market List. All sector equity returns in the table reflect total returns for the period stated,
and include reinvestment of dividends and interest income. Past performance is no guarantee of future results. Source: FactSet, Fidelity Investments, as of October 31, 2015.

26
Views expressed are as of the date indicated, based on the information available at that time, and may
change based on market or other conditions. Unless otherwise noted, the opinions provided are those
of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume
any duty to update any of the information.
This piece may contain assumptions that are “forward-looking statements,” which are based on certain
assumptions of future events. Actual events are difficult to predict and may differ from those assumed.
There can be no assurance that forward-looking statements will materialize or that actual returns or
results will not be materially different from those described here.
Past performance and dividend rates are historical and do not guarantee of future results.
Investing involves risk, including risk of loss.
Because of its narrow focus, sector investing tends to be more volatile than investments that diversify
across many sectors and companies. Sector investing is also subject to the additional risks associated
with its particular industry.
Stock markets are volatile and can decline significantly in response to adverse issuer, political,
regulatory, market, or economic developments.Foreign markets can be more volatile than U.S. markets
due to increased risks of adverse issuer, political, market or economic developments, all of which are
magnified in emerging markets. These risks are particularly significant for funds that focus on a single
country or region.
References to specific securities or investment themes are for illustrative purposes only and should
not be construed as recommendations or investment advice. This information must not be relied upon
in making any investment decision. Fidelity cannot be held responsible for any type of loss incurred
by applying any of the information presented. These views must not be relied upon as an indication
of trading intent of any Fidelity fund or Fidelity advisor. Investment decisions should be based on an
individual’s own goals, time horizon, and tolerance for risk.
Index definitions
The S&P 500® Index is a market capitalization–weighted index of 500 common stocks chosen for market
size, liquidity, and industry group representation to represent U.S. equity performance. S&P 500® is a
registered service mark of Standard & Poor’s Financial Services LLC.
The S&P 500® Sector Indices include the standard GICS® sectors that make up the S&P 500® Index. The
market capitalization of all 10 S&P 500® Sector Indices together composes the market capitalization of the
parent S&P 500® Index; all members of the S&P 500® Index are assigned to one (and only one) sector.
The Barclays U.S. Aggregate Bond Index is an unmanaged, market-value-weighted performance
benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed,
and mortgage-backed securities with maturities of at least one year.
FTSE National Association of Real Estate Investment Trusts (NAREIT) All Equity REITs Index is a market
capitalization-weighted index that is designed to measure the performance of all tax-qualified REITs listed
on the NYSE, the American Stock Exchange, or the NASDAQ National Market List.
Glossary
Standard deviation: A measure of the dispersion of a set of data from its mean; calculated as the square
root of variance.
Price-to-book ratio: A ratio used to compare the market value of a stock to its book value, or the market
value of a group of stocks to that group’s collective book value. It is calculated by dividing the current
closing price of the stock by the latest quarter’s book value per share (total assets less total liabilities).
It is not possible to invest directly in an index. All indexes are unmanaged.
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